Tax is not a Team Sport
Eileen Reppenhagen, Certified QuickBooks ProAdvisor
With the Grey Cup weekend behind us, it is time to start thinking about individuals rather than teams. Even though individuals can form economic units (or teams), when it comes to tax time, each of us stands alone in front of the tax man. We may be able to split income within certain parameters, but when it comes to reporting on our income or claiming our credits, it’s every man, woman and child for themselves.
Typically, there is one person in the economic unit who takes it upon (or has it thrust upon, like in my household), his or herself to handle the tax return preparation.
As accountants, we must deal with each person or their legal representative (someone who has a written notarized power of attorney) in order to protect ourselves. Before you prepare tax returns for your clients’ spouses, children, parents or nannies, consider whether or not the person you are dealing with has the right to act for the taxpayer whose return they are attempting to file.
As accountants we face ethical challenges all the time. Take a quick ethics quiz with me... Would you ever….
- Claim deductions on a tax return that were not true, or exaggerate expense claims? What me, never…
- Copy and use software on your computer that you did not buy? Quick intake of breath…
- Pay someone in cash for a discounted price so they could avoid taxes? Think no one will know about the locksmith…
- File a tax return for someone without reviewing the return with them or ever meeting them? Hmmm, never thought about it until now, but let me see, there was this one time…
See if you find any of these scenarios familiar…
Client has a business and claims the spouse works for him as a self-employed contractor for $30,000 a year and also works full-time for someone else. Oh yes, and they haven’t lived together for long enough to qualify as common law, so file a claim for the child on the spouse. Of course they both have the same address as last year…
Client says let me take that and I’ll get my spouse to sign it and send it in. One of these days when it’s too wet for us to golf together you will have to meet my spouse.
A few months later, you get a phone call from the spouse of this client asking why they are getting notices of assessment after being told by the client that the tax would be paid, not to worry, this was being filed this way just to reduce taxes. So why is there still tax owing?
Spouse says they are splitting up and wants to know why you prepared the return with the child as an eligible dependent when they have been living common law for 5 years. Not only did spouse rescue your client from bankruptcy 5-years ago, they co-signed all of the credit cards, mortgage, and other debts in the ensuing 5-years.
Not feeling so well?
Client shows up February 28 and requests T4 preparation services for last year’s salary of spouse. Client provides proof of lump sums for a few thousand dollars paid erratically during the previous year, the total of which is $30,000. Client says wife’s work was worth about $20,000, probably just enough to get them below the next marginal rate increase threshold. You prepare the T4.
Four years later an auditor wants to see time sheets, job descriptions, calculations of regular payroll and remittances. Spouse refuses to provide such mundane evidence. After all isn’t a university degree sufficient proof of worth $25 an hour? What do you mean which hours on which days did I work? I am always working…
Not feeling so well?
Client shows up with a T4 prepared for nanny and asks you to prepare the tax return. Client takes the tax return away to have the nanny sign it. Client never shows it to the nanny, just mails it in with a cheque for the tax owing.
The real story. Client paid the parents of the nanny to bring her to Canada. The nanny gets an allowance for spending money, works pretty much 24/7 and is none the wiser. One day, another nanny enlightens the client’s nanny to employment standards laws. Nanny sues for 4 years of back wages totaling $100,000 and wins. Accountant called up on the witness stand to testify about how client asked him to prepare the return and how the nanny had never made the accountant’s acquaintance. Accountant fined thousands of dollars by two professional associations.
By now you get the idea. You should meet and discuss each taxpayer’s tax return with them individually. Spouses do not know the same things. Children do not know about their parents. Parents do not necessarily know about their children. Think about your own family and those close to you. Do people ever really know each other all that well? Each has a slightly different point of view and their own take on their financial affairs. I love the ones who argue about whether or not there is a tenant in the basement suite.
I do a role play in my seminars on personal tax credits where I ask the participants to get into groups of 3, an accountant and two spouses. After 15 minutes of interviewing them about their family affairs, using my 10 questions and a family tree for determining personal tax credits, the one comment I get back every time is… Spouses don’t know much about each other, do they?
Even though these participants don’t actually know each other, this exercise highlights that every person has their own point of view. You need to hear each client’s point of view in order to file their tax return fairly.
You would not want to be the accountant if I was the common law spouse who found out that my tax return had been filed with information I did not know about or consent to or understand. One major lawsuit coming right up. What is that saying? “Hell hath no fury like…”
I was told recently that apparently it is common practice for accountants in Canada to prepare tax returns based on information provided by the family spokesperson. Here are my recommendations about how to protect yourself, as the tax preparer, from being on the wrong end of a relationship gone bad.
Insist on an initial meeting with each taxpayer whose tax return you are going to prepare in order to ascertain net worth and cash flow. Ask to see bank statements and credit card statements, an auditor will if you don’t... Who needs the nasty surprise of your clients not telling you the whole story because you didn’t ask the right questions? It is a bit of a shock to find out that the collector of rare artifacts you’ve had as a client for 10 years has actually been steadily selling off a few pieces for thousands of dollars every year.
Insist on reviewing the final return with each taxpayer to ascertain whether or not they agree with your findings. If that will not work, employ alternative strategies. Insist on a power of attorney duly notarized or arrange a teleconference with a fax of important schedules and summaries to the taxpayer. Go to the retirement home or nursing home to review the return with the taxpayer. You might get quite a surprise.
Ensure each taxpayer is competent or check to see if committeeship should be arranged in order to ensure the protection of that person. You might find that the person has a disability or infirmity that no one thought to tell you about because you did not ask the right questions. It might even completely wipe out their tax payable. You might find yourself dealing with the public trustee to protect your client. Consider the conflict of interest guidelines to ensure that you are in fact not in a conflict of interest.
Keep a photocopy of the taxpayer’s picture ID as required under the Proceeds of Crime legislation. It is amazing how many seniors have no identification and if the bank loses their signature card, they would be hooped. Many seniors have not set foot in their bank for years. The Bank Wagon comes to the care facility so they can withdraw cash. Do you really know who you are dealing with? How long have you known them? How did you meet? Ever hear the story about the lawyer who sold the house while the owner was out of the country for a year? The tenant was never seen again. Only in BC you say?
Ask to see all of the documentation required for payroll transfer of wages between related family members, including proof of payment, time sheets, and job descriptions, proof that hourly rates are reasonable in the circumstances. Why? Because an auditor will ask that question. Require your clients to obtain a ruling from payroll regarding self-employed contractors who do not show visible proof that they are truly self-employed.
Have all clients sign an engagement letter before working on their tax return. Include a paragraph in the engagement letter that gives you permission to discuss their financial affairs with any other persons that they expect you to confer with about their affairs, be it a parent, child, spouse or other person.
Have all clients sign a representation letter at the end of the engagement that states you reviewed the return with them and they accept what it says.
Lack of documentation is what triggers Indirect Verification of Income or IVI Audits. Why would you want to trigger such an event? I have said it before and I will say it again: Practice Safe Tax.
Eileen Reppenhagen writes and speaks about personal tax credits and surviving an IVI tax audit. She is also a volunteer on the Disability Advisory Committee to advise the Minister of National Revenue.
Eileen is the originator and contributing author of Section 800 of the CGA Canada Public Practice Manual "Future Oriented Financial Information" (1999), and a participant in CGA Canada's Video: Taking Care of Business (2000). If you have concerns about disability tax administration or IVI Audits, Eileen would love to hear about them and many be contacted at : 1 604 943-7414 or by email: email@example.com.