Letting My Hair Grow Back: DIY is Not Always Better

Me, back when I thought a shaved head would save me big bucks.
Me, back when I thought a shaved head would save me big bucks.

In June 2013, I decided to shave my head. My logic was, why should I pay someone $10 or $15 each month just to cut my hair?

I’ll just shave it off and be done with it. No more haircuts, no need for shampoo. I felt like I had made a brilliant decision.

About 6 weeks ago, I scrapped the whole “shaved head thing.” I’m growing my hair back and will be paying someone else to trim it every now and then.

Why?

Because the cost savings associated with doing it myself DIDN’T EXIST.

In fact, I believe I spent MORE MONEY shaving my head than I did on paying someone else to cut it.

I ran through razor blades more quickly. I used far more shaving cream. Since I shaved my head in the shower, showers took twice as long, resulting in more water usage.

Those are true dollars-and-cents costs.

What’s the point of this personal anecdote (or “Oprah Crap” as one reader calls my personal stories)?

The point is: DIY is not always better. Paying a professional to help you is not always bad.

With tax preparation, I tell people the following: if you feel comfortable doing it yourself, you know what you’re doing and you have time to do it, then certainly you should try doing it yourself. But know your limitations and know the value of your time.

With business bookkeeping and accounting: at first, it will make sense to keep the books yourself. But as your business grows, you’ll feel the crunch of time, and keeping the books yourself will be a major drag.

DIY is great sometimes, but it’s not always the most efficient or most cost-effective strategy.

The IRS Says I’m Not Authorized to Speak On My Own Behalf

IRS Notice 9-23-14Filed under “dumb but true things the IRS does.”

A few months ago, I received a letter from the IRS, in which the IRS disputed which payroll form my company should be filing. Without going into all the details, the short version is: I think I’m supposed to file a Form 941; the IRS thinks it should be a Form 944.

In August, I wrote a letter to the IRS, asking them to please update their records to show that I am to use Form 941 as my reporting form.

Last week, I got the following letter back from the IRS.

This is in response to the inquiry of August 12, 2014, from your accountant. We have no record that you authorized him to act for you in this matter. Please notify him that we have replied directly to you. If you wish to authorize a third party to represent you, please complete Form 2848, Power of Attorney and Declaration of Representative.

Where to even begin?

The first page of the letter is attached as an image to this blog post. As you can see, after the IRS tells me that I am not authorized to speak on my own behalf, they go into excruciating detail about the history of payroll forms. The rambling details continue onto a second page.

Here are the thing that stand out to me:

  • A human at the IRS must have looked at the letter I sent in August. This human then made a conscious decision to send me this letter in response. How could this human not make the connection between my company and me? I even signed the letter as “President, Dinesen Tax & Accounting, P.C.”
  • Once the mind-numbing detail of the history of payroll forms is over, the letter apologizes to me for any inconvenience the IRS may have caused, and then the best part of all….
  • The IRS says they are sending a copy of the letter to my authorized representative — meaning, a second copy of the letter was included in the mailing I received.

So to recap:

  1. The IRS says I am not my own authorized representative so they can’t make the changes I requested
  2. The IRS sent me a duplicate copy of their letter because I am my authorized representative

Or at least, this is my interpretation of things.

This isn’t 850 days of incompetence like with the identity theft saga I helped a client deal with, but it’s awfully crazy.

Things Tax Preparers Say: S-Corporation Compensation (Again!)

ID-100264846This really should be filed under “Things Tax Preparers DIDN’T Say”.

And again it’s about S-corporation compensation.

SCENARIO:

S-corporation owner hasn’t been paying himself a salary despite having large corporate net income, and despite taking large withdrawals of money from the corporation. Those withdrawals had always been called “shareholder distributions.”

On the owner’s personal return, all of the corporate net income was reported as ordinary income. He also makes contributions into an IRA.

PROBLEM:

The salary issue is the obvious problem here. But it’s not the only problem.

Normally, contributions into a traditional (pre-tax) IRA are deductible on your personal tax return. But that’s only if you have “earned income.”

Pass-through income from an S-corp is not considered earned income.

He had nothing else happening on his tax return other than the S-corp and IRA parts.

Because he had no earned income, his deposits into the IRA were not deductible.

Worse yet, because he had no earned income, he also owed an excise tax on those IRA contributions because he made “excess contributions” into an IRA.

So to recap: he was working in his S-corp “earning” all of the income the corporation generated. He was reporting this income as ordinary income on his personal tax return. But because he wasn’t paying himself a salary, he had no “earned income” under tax law, so he was reporting all of this income on his tax return, not getting the deductions for the IRA contributions, and paying an excise tax on the IRA contributions as well!

And his accountant had never said a word to him about the need to pay himself a salary or the issue with the IRA.

Things like this don’t shock me anymore.

It would be one thing if the accountant had brought these issues up but the client decided to just keep doing things the same way (this does happen).

But in this case the conversation had never, ever happened.

And since I’m on a roll, I’ll continue with my rant even though the word count on this post indicates I should stop.

HERE’S A BONUS PROBLEM:

The bonus problem is: the propensity that we tax folks have for saying the following: “Oh well. The client gave us financials that showed $0 of compensation. We prepared the return based on that information. Our engagement letter states that we will prepare the return based on the information the client provides, without review or audit. If tax advising is desired it will be given under a separate engagement agreement. If the client doesn’t ask for help on the S-corp salary or IRA issue, it’s not our problem.”

Sure, that’s what our insurance providers make us say in our engagement letters. But I don’t think that absolves us from at least MENTIONING the salary issue, and bringing the IRA issue to the client’s attention.

But I suppose this is a topic best addressed in its own blog post.

Image courtesy of Stuart Miles / freedigitalphotos.net

Entrepreneurial Maturity

I wish I could take credit for the term “entrepreneurial maturity” but I can’t. Credit goes to Jason Jones, a licensed public accountant who offers CFO services to businesses. In writing about his challenges in working with businesses, Jason says:

(T)he challenge I immediately discovered was in finding small business clients who had the entrepreneurial maturity to realize what they needed to know financially in order for their business to thrive and survive, and who had a strong awareness of their own conscious incompetence accordingly.

All too often, I got referrals from professionals and inquiries from prospective clients, only to engage in power struggles with the client in formulating business/financial strategies, which were often rooted in a combination of unconscious incompetence (they don’t know that they don’t know) and “Founder’s Syndrome” (since they’re the founder/owner, they know everything about the company they need to – they often hire “yes men” to help reinforce their flawed way of thinking). But I digress.

In other words, a business owner who has entrepreneurial maturity knows what they don’t know.

The challenges Jason writes about in his blog post are the same challenges I have faced in working with some small businesses. Here’s an example of a real conversation that took place with a business owner who’s business was always struggling with cash flow in its first couple of years of existence. The owner had been complaining that his advisers weren’t asking the right questions, so I was trying to be proactive:

Me: “Let’s look at where the money is coming from and where it’s going and start setting up strategies.”

Business owner: “Well, a growing business consumes resources. No business in its first few years has a big profit margin. That’s just the way it is.”

Period. Conversation over.

No review of finances was done.

ID-100260221This owner would go on to periodically complain about how hard it was to run a business, and how no one was helping him.

That’s an example of an owner who hasn’t matured enough to realize that he was talking to a knowledgeable professional who was trying to help him. Instead, the owner made a declaration that indicated he knew all about it and nothing further needed said. Yet, this same business owner still complains that the professionals around him aren’t giving good advice.

This scenario happens far more than it should.

As a professional, it’s hard to deal with.

I like working with startups, especially the people who started like me — on the side, from scratch — and have grown. But logically, these are the folks who have the least entrepreneurial maturity.

Sometimes I catch myself lacking in entrepreneurial maturity too.

I’m not sure what the solution is.

Time. Experience. A realistic view of the struggles of running a business.

And an acknowledgment that as business owners, there are things we won’t know.

Image courtesy of Stuart Miles / freedigitalphotos.net

Will Software Really Replace Accountants?

carlsbad-226250_1280In July, an article in AccountingWeb caught my attention: “Can Software Really Replace Accountants?” Around the same time, the Don’t Mess with Taxes blog published a story saying that a recent study indicates that tax preparers have a 99% probability of being replaced by robots someday.

I think the 99% figure is over-dramatic.

If I ran a tax-preparation business that relied on preparing a high volume of simple tax returns, I would be worried. In fact, when people ask if they should start a tax preparation business, I respond by saying no, unless you can find specializations and take on more complex work.

The day is coming when a person with just a W-2 will be able to take a picture of the W-2 with their phone, upload it to an app, and send it off to the government.

But there will ALWAYS be a need for tax preparers and accountants.

Plugging numbers into a computer doesn’t mean you’ve done it right. Anyone can prepare their own taxes. Businesses can, too. The software will accept whatever the user puts into it … but it doesn’t mean it’s done correctly.

The AccountingWeb article seems to be geared more towards software replacing accountants for bookkeeping and financial statement services. On that front, again, business owners can keep their own books but it doesn’t mean they’re doing it right.

There’s also the time factor. The owner keeping his own books makes sense for a startup. But as the business grows, so will the time constraints.

On the web, software providers like QuickBooks and Xero show faces of smiling business owners happily keeping their own books. It’s all so easy and fast!

The reality is, once a business reaches a certain size, keeping the books will become a big drag on the owner. No software solution can overcome the crunch of time.

My opinion on all of this is: technology will certainly change the way we do business but it won’t eliminate our industry. The accounting industry is not like a stagecoach service at the dawn of the automobile.

Image courtesy of Martin Str on Pixabay.com