We have spoken
in the past about clients I would not accept: one with an earned income credit,
for example. The tax Code requires me to go all social worker, obtaining and
reviewing documents to have reasonable confidence that there is a child and said
child lives in given household. There are penalties if I do not.
Not
happening.
Did you know
that I can be penalized for not signing a tax return as a paid professional?
Yep, it is in Section 6694 for the home gamers.
I saw a
penalty recently under Section 6701. That one is a rare bird.
The 6701 penalty
can reach someone who is not a preparer but who “aids,” “assists” or “advises”
with respect to information, knowing that it will be used in a material tax
situation.
Here is an
example: you gift majority control of your (previously) wholly-owned business to
your kids. This would require a valuation, which in turn requires a valuation
expert. That expert is probably not preparing the gift tax return, but the
preparer of the gift tax return is relying – and heavily – on his/her work.
The penalty
is $1,000 for each incident. Pray that you are not advising a corporation, as
then it goes to $10,000 per incident.
The IRS recently
trotted out Section 6701 in Chief Counsel Advice (CCA) 201805001. Think of a
CCA as an IRS attorney advising an IRS employee on what to do.
The
situation here involved a “tax-consultant engineer” who analyzed a taxpayer’s
assets to determine the classification of property for depreciation purposes.
In the
trade, we call this type of work “cost segregation.”
If you have
enough money tied-up in certain types of depreciable assets, a “cost seg” may
be a very good idea.
What drives the
cost seg is an abnormally-long tax life for commercial property: usually 39
years. It is a tax fiction, divorced
from any economic analysis to build or not build or from a bank decision to
lend or not lend.
The grail is
to “carve out” some of that 39-year property into something that can be
depreciated faster. There is room. The parking lot and landscaping, for
example, can be depreciated over 15 years. Upgraded wiring to run equipment can
be depreciated with the equipment. The additional plumbing at a dentist’s office?
Yep, that gets faster depreciation.
But it probably
requires a cost seg. Realistically, an accountant can do only so much. A cost seg
really needs an engineer.
The engineer
in this CCA must have left the plot, as the IRS was nearly out-of-its-mind over
his classification into five-year property. The word they used was “egregious.”
Unfortunately,
we are not told what he “egregiously” misclassified.
We are however
told that he is getting the Section 6701 chop.
What is the math
on this penalty?
Well, his misclassification
affected five years of individual returns. The penalty would be 5 times $1,000 or
$5,000 for each individual client. Hopefully this was a one-off, as $5 grand
should be enough to get his attention.
Can you imagine
if it had been a corporation?
