I received a phone call recently from the married
daughter of a client. I spoke with the couple – mostly the son-in-law – about needing
an accountant. They had bought property, converted property to rental status
and were selling property the following (that is, this) year.
It sounds like a lot. It really isn’t. It was clear during
our conversation that they were well-versed in the tax issues.
I told them: “you don’t need me.”
They were surprised to hear this.
Why would I say that?
They knew more than they gave themselves credit for. Why
pay me? Let them put the money to better use.
Let’s take an aside before continuing our story.
We - like many firms - are facing staffing pressure. The
profession has brought much of this upon itself – public accounting has a
blemished past – and today’s graduates appear to be aware of the sweatshop mentality
that has preceded them. Lose a talented accountant. Experience futility in
hiring new talent. Ask those who remain to work even harder to make up the
shortfall. Be surprised when they eventually leave because of overwork. Unchecked,
this problem can be a death spiral for a firm.
Firms are addressing this in different ways. Many
firms are dismissing clients or not accepting new ones. Many (if not most) have
increased minimum fees for new clients. Some have released entire lines of
business. There is a firm nearby, for example, which has released all or nearly
all of its fiduciary tax practice.
We too are taking steps, one of which is to increase
our minimum fee for new individual tax clients.
Back to the young couple.
I explained that I did not want to charge them that
minimum fee, especially since it appeared they could prepare their return as
well as I could.
They explained they wanted certainty that it was done
right.
Yeah, I want that for them too. We will work something
out.
But I think there is a larger issue here.
The tax Code keeps becoming increasingly complex. That
is fine if we are talking about Apple or Microsoft, as they can afford to hire teams
of accountants and attorneys. It is not fine for ordinary people, hopefully
experiencing some success in life, but unable – or fearful - to prepare their
own returns. Couple this with an overburdened accounting profession, a sclerotic
IRS, and a Congress that may be brewing a toxic stew with its never-ending disfigurement
of the tax Code to solve all perceived ills since the days of Hammurabi.
How are people supposed to know that they do not know?
Let’s look at the Lucas case.
Robert Lucas was a software engineer who lost his job
in 2017. He was assisting his son and daughter, and he withdrew approximately
$20 grand from his 401(k) toward that end.
Problem: Lucas was not age 59 ½.
Generally speaking, that means one has taxable income.
One may also have a penalty for early distribution.
While that may seem like double jeopardy, such is the law.
Sure enough, the plan administrator issued a Form 1099
showing the distribution as taxable to Lucas with no known penalty exception.
Lucas should have paid the tax and penalty. He did
not, which is why we are talking about this.
The IRS computers caught the omission, of course, and
off to Tax Court they went.
Lucas argued that he had been diagnosed with diabetes
a couple of years earlier. He had read on a website that diabetes would make
the distribution nontaxable.
Sigh. He had misread – or someone had written
something wildly inaccurate about – being “unable to engage in any substantial
gainful activity.”
That is a no.
Since he thought the distribution nontaxable, he also
thought the early distribution penalty would not apply.
No … again.
Lucas tried.
He thought he knew, but he did not know.
He could have used a competent tax preparer.
But how was he to know that?
Our case this time was Robert B. Lucas v Commissioner
T.C.M. 2023-009.
