Bookkeeping, Tax & Financial Services

BENEFITS OF TAX RETURNS BASED ON PROFESSIONALLY PREPARED ACCOUNTING  
VS. IN-HOUSE BOOKKEEPING 
By Dean Q. Wynn, CPA, PhD 

The most frequently asked question we get is:   “Can you prepare our tax returns based on our self-prepared bookkeeping?”  The short answer is NO. 

The long answer is that a tax professional who prepares your tax returns based on your in-house or self-prepared bookkeeping is like a doctor who prescribes you medicine based on your self-diagnosis., which is universally regarded as a medical malpractice.  On the other hand, tax returns based on the accounting reports that are professionally prepared by your tax advisor and/or his team can provide at least two (2) major benefits: 

1. CONSIDERATION FOR DIFFERENT ACCOUNTING SYSTEMS: 

1. GAAP:  In-House accounting (via Quick Books, Peachtree, Oracle, etc.) is prepared under the Generally Accepted Accounting Principles (GAAP) for daily operations.  This is important for keeping track of cash balances, inventory, Accounts Receivables, Accounts Payables, loan/mortgage balances, and payroll (we’d recommend ADP or PayChex instead), etc. but not for tax purposes.  Worse, most taxpayers do not even follow GAAP. 

2. TAX ACCOUNTING:  The IRS does not follow GAAP. 

1. Most people think that the difference is in the depreciation but that’s just a minor issue that can easily be fixed or reconciled. 

2. One major difference is in the documentation for what people consider as inter-company transfers but the IRS considers it as commingling of funds, such that they can tax the same funds multiple times as it moves from one entity to another.  That’s because the IRS considers all incoming funds as revenues and all outgoing funds must be proven as legitimate business expenses before they can be deducted. 

3. The U.S. income tax law is perhaps the most complex set of laws on the planet that stumps even the most seasoned tax professionals so if you or your employee only dabbles in it sometimes (while busy running your business, maintaining inventory, paying bills or calling clients, etc.), consider this:   Even the IRS commissioner doesn’t file his own taxes.  https://thehill.com/blogs/blog-briefing-room/news/58370-irs-commissioner-doesnt-file-his-own-taxes/ 

4. The real difference is that business deductions must meet the “Ordinary and Necessary documentation requirement.”   An experienced tax professional can help you with: 

1. The correct corporate structure.  

2. The correct deductions to take. 

3. How to maximize your deductions to minimize your tax liabilities. 

4. How to minimize your risks of an audit and/or investigation. 

5. In the case of an audit/investigation, how to respond to the authorities for your best protection. 

2. REASONABLE CLAUSE PROTECTION:  Your best protection in the case of an audit or investigation (by the IRS, FBI, USDOJ or any government agency) is the reasonable cause where you “RELY ON YOUR TAX ADVISOR.” 

1. The chance of your preparing your own bookkeeping and filing your own taxes correctly is slim.  That’s because the tax code is over 76,000 pages long and only 6% of all tax preparers, who has IRS audit experience, would know the practical tax accounting in a way that’s different from the tax accounting theory that’s taught in school – That may explain why we have tax attorneys, CPA’s, former IRS employees, other tax preparers, and even some of our competitors as our clients  (Interestingly, the IRS auditors are not the best tax preparers either.  That’s because “A food critic is not necessarily the best chef”).   Accordingly, by far, the single most important issue to consider is the Reasonable Cause protection:   

2. When you hand over your own accounting reports to your tax preparer, then the opposite would be true where Your Tax advisor Relies on You so if an audit or investigation comes up and the accounting is erroneous/fraudulent, YOU are responsible to explain these erroneous/fraudulent transactions.   Gross errors are civil issues that entails monetary fines, but frauds can entail both monetary fines and imprisonment time. 

1. Similarly, if you entrust your employee(s) to prepare the accounting reports and/or the tax returns, then you’re responsible for the work of these employees.  The IRS/Criminal investigators can easily claim that it was you who instructed the employee(s) to prepare the fraudulent reports and hold you accountable…  especially when it’s you who sign on the dotted line under the penalties of perjury. 

3. On the other hand, if your tax preparer is in charge of the tax accounting from scratch to finish and prepares the tax returns based on his own reports, then you can safely say “I RELIED ON MY TAX ADVISOR” provided that: 

1. The tax advisor is qualified with knowledge and experience. 

2. The tax advisor actually gives advices.   

3. You actually heed his advices. 

1. Note:  If your tax advisors only takes instructions from you, then you’d not be able to claim that you rely on his advices