Everyone dreads tax season, aggregating all their information and paying the IRS.
Some just sign off, and others, like me, go through the whole return.
Most CPAs prepare the 1040s for clients but must also be aware of strategies for minimizing their clients' tax bills.
This is where basic knowledge helps; you must know if they are doing the job right.
A CPA is the extension of your business and finances; you should treat it like this.
Let’s dive into two mistakes that happened to me months ago.
2 Mistakes I Caught Saved Me $81,000
If you have multiple investments, the October deadline is the time to complete your return.
Sponsors (syndicators) don’t know the tax law, so they depend on some firms to be correct.
I cross-checked my draft tax return with all the statements I provided to the CPA.
This is a great way to ensure everything is included and input correctly.
I noticed my CPA missed over ~120k of capital losses, not even on the return.
This was about 36k in tax I would have owed.
I also provided a real estate K-1 to my CPA, after it was delivered late.
Next, I realized I would owe tax on an extra ~150k profit.
The apartment building was already sold, showing I had 150k left in the capital account.
The sponsor should have corrected the K-1, but I had the CPA write it off.
Here was about 45k of taxes this would cost me.
So, check every item on return to make sure the information is correct, and double-check the K-1s you receive; many have errors.
Imagine that every year.
Checklist - 10 Items for Double-Checking CPAs Mistakes:
- 1) Income Accuracy: Match reported income on your tax return with your W-2s, 1099s, and other income documents. Ensure every income source is accounted for.
- 2) Deduction Documentation: Confirm that all deductions listed on your return are supported by proper documentation. Keep organized records for easy access.
- 3) Tax Credit Checks: Verify that you're claiming all eligible tax credits and that they're accurately reflected in your return.
- 4) Mathematical Correctness: Double-check the calculations on your return to catch any potential mathematical errors.
- 5) Filing Status: Ensure the filing status selected is the most beneficial for your situation. If unsure, discuss the options with your CPA.
- 6) Typos and Transpositions: Look out for and correct typos or transposed numbers, which can significantly impact your return.
- 7) Investment Income Review: Cross-check investment income and losses with your brokerage statements for consistency.
- 8) Self-Employment Scrutiny: If self-employed, ensure that income, expenses, and deductions are accurately calculated and reported.
- 9) Cryptocurrency and Foreign Income: For those with cryptocurrency transactions or foreign income, ensure proper tracking and reporting as per the latest tax laws. Check off the box at the top of 1040.
- 10) State and Local Taxes: Confirm that any state and local taxes paid are correctly reported, especially if you've paid estimated taxes or had withholdings
Outside Consultation
When you have multiple investments, retirement accounts, and partnerships, it is best to get specialized advice.
For example, if you are into real estate, you should find a third-party CPA and lawyer specializing in RE tax.
Then, pay them to review the last few years of returns to ensure your CPA is accurate.
Most of the time, you will find that this minimal cost will save you more than the cost.
Attending tax conferences can give you the tools to determine if you are optimized.
Many CPAs are only experienced in some retirement account options, which can cost tax dollars.
You may be planning to have an exit of assets or a business.
Planning with a specialist ahead of time will allow a tax-optimized exit.
Conclusion
Don’t just trust the return your CPA puts in front of you.
Go through and check everything, including any returns from partnerships.
Hire specialists in areas of your investments to minimize short- and long-term taxes.
Many AI software applications will be introduced in the next few years, making this easier.
