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Know your tax pro limits; be wary of advertisements
It is time to start thinking about year-end tax planning and preparing for the 2016 filing season. You are going to be flooded with suggestions, lists and ads as to what you should be doing between now and Dec. 31. You are going to get what you need to know from some source. I want to address the issue of who should be the source.
Everything begins with your attitude about the process. As a business owner, taxes are an inescapable fact of your process of doing business. Some of the taxes you pay will be used to study the mating habits of worms. Most of it will go to legitimate government functions. To fight the waste in government, you need to get involved politically, usually through such organizations as the Small Business Association of Michigan, local State and National Chamber of Commerce or The National Small Business Association. If you’re not involved, don't complain. Taxes are just another function of your job, so do the process with the same calm analysis you apply to the rest of your jobs.
If a person is your friend, relative, golf buddy or neighbor, it does not mean they know anything about taxes or finance. Thirty years ago, a client burst into my office in a rage. He had shown his tax return to a friend, and the friend had told him that a small business owner was allowed to deduct the interest expense on their home as an itemized deduction and deduct the same interest as a business expense. I asked him what the person who gave him that tip did for a living. He said that he was a local union officer, and he added you don't get that kind of job if you’re stupid. I don't know about the intellect of the union executive, but I am sure he has not attended any creditable tax course. One of my favorite lines from a 1970s song stated, “You can't get whiskey from a bottle of wine.” You also cannot get knowledge from someone who does not possess it.
So, if you’re not going to listen to friends and relatives, who do you listen to? The simple answer is someone who knows what they are talking about. My knee-jerk response is to hire a CPA. The problem is I have known a few untrustworthy CPAs, and the man I would trust the most is a high school friend who is not a CPA. The dependability of the professional you hire is an individual issue. If you own a business or have a complicated tax return, the education, licensing and experience of the accountant become more important.
The chances of getting positive results increases with the reputation of the firm, education and the licensing of the professional. Using the right firm is critical. Unfortunately, credentials, reputation and billing rate do not guarantee a quality performance. One of the biggest messes I had to deal with was subpar work by an individual whose credentials were outstanding. Everybody is human, and everybody makes mistakes. If something does not look right, do not accept the results until you feel comfortable.
There is the question of using an individual accountant, a local firm or a multi-office large firm. The answer lies in the complexity of your situation. There is a reason hunters don't use a deer rifle to hunt doves. There is an appropriate amount of fire power needed for each job. By fire power I mean expense. You don't need a $300 per hour tax analyst to do a 1040EZ. You better not use a firm for a major corporate reorganization with many stockholders that is not schooled and has no experience in that area. According to Dirty Harry, as played by Clint Eastwood, “A man’s got to know his limitations.” If you feel you have outgrown your accountant, have an honest conversation with your tax person about your concerns. Be honest with your tax advisor. An open dialogue could save you both a lot of trouble.
Make sure your tax advisor is primarily a tax pro. I have seen people use an auditor as a tax preparer. In larger firms, accountants have specialties. You may find yourself paying top dollar for an advisor to whom taxes are a secondary practice. If you have a law firm involved in a tax issue, the same principle applies. The greatest divorce attorney in the world may know nothing about taxes and his billing rate will be the same.
Tax and business issues are a specialty. Here is the worst situation. The attorney you are using is not competent in business law and therefore takes an inordinate amount of time to accomplish the task at hand. CPA firms and law firms measure effectiveness by billable hours. A tax attorney told me years ago that he had a targeted amount of billable hours every day. I asked him the obvious question: What do you do if you do not have enough high value billable work available? He made a comment about the most likely marital status of my parents, and I dropped the subject. You have the right to ask for an explanation when you feel your bill is out of line. In fact, you should ask for a quote before the engagement starts that requires you be informed before a material amount is added to the bill.
You have seen or heard the ads on radio and TV by companies that claim to have almost magical powers when it comes to tax difficulties. Be very wary. They spend a fortune on adverting, and those funds come from what the organization has charged previous customers. You should be paying for the education and experience of your representative not a marketing blitz. West Michigan has a wealth of tax professionals who will perform excellent services regarding tax disputes. Find them through referrals. The best advertising is an excellent reputation, and a lunch is a reasonable expenditure to get what you need.
West Michigan is a great community for small business owners and one of the reasons it's a community of business professionals. In over 40 years of doing business in West Michigan, I was always impressed by our community of advisors. We have some bad apples, but eventually, they get weeded out. Do your search for a tax professional within our area, because what you need is here. You just need to find them.
Paul Hense is the retired president of local accounting firm Hense & Associates and past chairman of the Small Business Association of Michigan.