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Wall Street Steward Blog

Case Study: Hire A CPA

It was just another Tuesday, until my assistant called me and said “Mrs. Rice is on the phone, and she said she needs you to help them with an issue. It sounds bad. Normally, they let me assist them, but this time she only wants to talk to you.”

Buh bye normal Tuesday.

“Matt, we need your help. We just received a letter from the IRS saying that we owe $141,000 in taxes because our data did not match the data that your firm sent them.”

Her voice did not indicate anger, but mostly fear.

“Mrs. Rice. The first thing I need you to do is to sit down and take a deep breath. I know getting a letter from the IRS is a scary thing, but it is very likely that the IRS letter is incorrect, so please do not jump to any conclusions. I do not prepare taxes for a living and do not give tax advice, but I have an accounting degree, and I would say that my knowledge of the tax code is above average…especially when it comes to taxation of investments. THE FIRST THING I NEED IS A COPY OF THE LETTER.”

Reviewed the letter. The IRS, citing 1099 statements sent by my firm and the Rice’s previous firm, claimed that investments totaling $141,000 had been sold throughout the year. True.

This is very different than saying that the Rice family OWED $141k. See how easy it is to misunderstand when you apply some IRS pressure to a situation?

They sold $141k worth of investments. Check.

However, because no cost basis had been supplied to them, the IRS assumed a zero cost basis.  This meant that they had assumed that the Rice family had paid ZERO for all of those investments. Imagine Mike Tyson’s whiny voice uttering this next phrase This is ludicrous!

How would someone have a zero cost basis? Even if a gifted investment has appreciated, the receiver of the gift gets the same cost basis of the donor. Like this:

Investor A: buys 100 shares of XYZ stock for $5,000
XYZ appreciates, and is now worth $10,000
Investor A gives the shares to Investor B.
Investor B has a cost basis of $5,000.

So, even if the shares are given to you, your cost basis is still not ZERO. I am unaware of any situation where a cost basis would be zero, so it makes perfect sense that the IRS, in their infinite wisdom, chose to make the DEFAULT scenario a zero cost basis.

The problem was relatively easy to solve. The client had failed to file a Schedule D (capital gains/losses). After crunching the numbers, not only did they not owe the IRS a penny, but are instead due a refund of around $750.

“What did you claim on your Schedule D?”

Puzzled look. Uh oh.

“We didn’t file a Schedule D because our computer software didn’t have that form listed anywhere.”

Shaking my head.

“How did you forget to file a Schedule D? That should be filed every year if you have any capital gains or losses. Trust me, the IRS doesn’t care what forms are offered in your software package.”

“Well, we always used :insert prominent Rock Hill CPA: to do our taxes, but this year we decided to save the $500 and do it ourselves.”

Ahh, there we have it. I bet the Rock Hill CPA, or the Fort Mill CPA, or the B.F.E. CPA would not have forgotten to file a Schedule D. Even this Rock Hill Financial Advisor would never forget to tell a client that they need to file a Schedule D. But, I don’t do taxes, remember?

If you have a simple tax return, and wish to save a few bucks, then by all means prepare your own tax return. However, if you have several hundred thousand dollars, or have a complicated tax situation, please hire a CPA.

Consider this: if you got a speeding ticket, and elected to go to court, would you defend yourself or hire an expensive attorney? What if the FBI showed up at your office, arrested you, and said you were being charged with a double homicide…defend yourself/call an attorney?

Most would defend themselves for a minor infraction, but would ask for help for anything major. To me, taxes are the same way. If your situation is simple, do it yourself. If not, let the professional advisor do it.

Furthermore, the more money you have, think of the more serious crime analogy. If you have a little, any errors will likely be small. If you have a boatload, your alleged error could be $141,000 like the Rice family. Please don’t be cheap…hire a CPA.