I sometimes get calls right on the filing deadline. I thought I would share the following hyperbolic reenactment. While this fictitious account is a touch exaggerated and meant to be amusing, it is based on an odd observation of my client’s reactions to their tax returns. In many cases, even if information entered on the return had no impact on their tax liability; people viewed a return favorably if superfluous information was included on the return anyway. They felt at least I made an effort to ensure they get all the deductions that are available.
It was not my intention to provide such dazzling customer service; it was a side effect of the way we run the workflow. I do not do the actual data entry for tax returns. Staff people enter the data from source documents and are instructed to enter all data we are given by the client. Unless it is obviously inappropriate or non-deductible it is inputted into the software. Any unusual or questionable items are given to partners for review. It would be a waste of a client’s money for me to do data entry for what I have to bill per hour. I review for accuracy and make sure we have contemplated any tax positions that could reduce liability. Alas – some taxpayers get carried away…
Conversations on April 14th…..or October 14th
Client: Hi, this is Mr. X I hope I did not catch you at a bad time-
Overworked Tax Professional: Hello Mr. X, I am glad you called. I hope you have reviewed that PDF of your 1040 I sent you three weeks ago – tomorrow is the filing deadline, and I really need to get your approval to finalize the return.
Client: Uh, Yea. About that – it says I owe tax.
OTP: Yes it does, do you have any questions?
Client: Why do I owe tax?
OTP: Why…let’s see…ah it’s here in my notes… you did not withhold enough and did not pay any estimated taxes. We did go over this in November at our tax projection meeting.
Client: Are you sure I owe? I am not sure I gave you all my business deductions; I do not see a deduction for my business expenses on Schedule A. I see a number for unreimbursed employee expenses— but a zero on the line that you add up for the total deductions.
OTP: Well as you remember during our yearly tax projection meeting in November, I explained the expenses have to exceed 2% of your AGI, when we made an estimate of your business expenses – I let you know I did not think we would meet that threshold. I believe according to my notes, I sent you an email recommending you ask your employer to withhold a bit more federal tax or make an estimated payment if you wanted to be safe.
Client: Yea I understand, and I remember the email. But I am thinking maybe I missed some expenses… I just want to make sure I included everything before we file the return.
OTP: I understand, let me know what you find.
Client: I sent you a fax with some additional expenses from a business trip I took in September.
OTP: You mean the receipt for $3.57 from Walgreens for a tube of toothpaste purchased in Seattle Washington on September 16th at 7:35pm.
Client: Yea I got the hotel and realized I forgot my toothpaste. I was lucky I found a drugstore that was not too far away.
OTP: I am not sure the IRS is going to accept this as a deduction and besides…
Client: But I have to have the extra whitening formula, I have to smile a lot during meetings and if I don’t have this toothpaste I cannot be certain my teeth are white. I am expected to make presentations and I need to look my best. Can’t you explain to the IRS that it is necessary?
OTP: So you want me to take a tax position on the deductibility of a tube of toothpaste, I really-
Client: Yea, can’t you do that. Ya know, just explain why it was ordinary and necessary… or whatever
OTP: It is for $3.57 and it’s a personal expense – I can’t really justi-
Client: I have more deductions to include and every bit adds up. Could you please include everything?
OTP: I think it is a waste of time; it is not going to make a difference.
OTP: If you really insist,
Client: I do, small amounts add up and I have more expenses, I just need to find my receipts.
OTP: Okay, I can’t believe I am saying this but I think I could make the case for the purchase but I don’t see the point and it may be disallowed if audited but here goes.
Okay I am in the return… let’s see, hmm… okay – disclosures schedule 2106. Taxpayer asserts that his purchase of a tube of toothpaste of $3.57 made while during travel overnight as required by his employer should be considered a deductible expense pursuant IRC section 162 (a), IRC section 274(d) and IRC section 212(1). The taxpayer needed a particular formula of toothpaste which he maintains is crucial due to its superior teeth whitening ability, which is necessary for the taxpayer to perform his duties in a manner his employer expects as a condition of employment. Although it would normally be a personal expense, upon arriving at his destination the taxpayer realized he did not have the toothpaste which he normally uses to ensure his appearance is acceptable. As stated in Welch v. Helvering (see full citation following) Justice Benjamin N. Cardozo stated expenses merely needed to be appropriate and helpful in the development of the taxpayer’s business.” Therefore the taxpayer asserts the expense was ordinary and necessary as defined by IRS Publication 529, Miscellaneous Deductions, Treasury Regulation 1.183-2 and held in Welch v. Helvering, 290 U.S. 111 (1933),and Jenkins v. Commissioner, T.C. Memo 1983-667. Amount of deduction listed is $4.
Okay – that had no effect on you tax liability whatsoever, but I included it.
Client: I know – but I am certain I have more expenses and I want to get every deduction I can – I will fax them when I find them.
OTP: Okay, I will be on the lookout.
OTP: Hi Mr. X, I have a receipt for $35.92 for pizza-
Client: That was ordered during a meeting so we could keep working.
OTP: Well that seems justified; I will add that to Meals and Entertainment. Is that all you want to add.
Client: No I think I am still missing something – I want to check with my wife.
OTP: Okay I won’t finalize the return until I hear from you.
Client: Okay. Now I feel confident I sent you all my expenses and I have not missed anything.
OTP: Great, glad to hear it – let’s see what you faxed over – two receipts from Office Max – $32.79 for printer ink and $21.16 for paper and a presentation folder. Okay…
Client: that was for my home office
OTP: Receipts for $47.93, $29.85 and $19.17 for dry cleaning your suits.
Client: uh huh
OTP: K- and $5,827.68 for the purchase of a hot tub – okay this is a business expense because…?
Client: Well I take business use of home on my return because I telecommute and the corporate office is in another city –
OTP: Yes… go on
Client: Since the hot tub is part of the house and I sometimes take business calls while in the hot tub.
OTP: I have explained frivolous tax positions to you before right?
OTP: There is no way this will fly with the IRS. Absolutely…no…way
Client: Well I thought I would give it a shot. So what do I owe now?
OTP: Hmmm- once we add in all these expenses and account for the threshold of 2% of AGI – you owe exactly the same amount as before, no change in liability.
Client: (heavy sigh) I guess I gotta pay the tax – Sheesh, I can’t believe I have to pay.
OTP: Yep, you sure do. I will send you a new PDF with the changes and I need you to send me a signed copy of form 8879 by tomorrow, so I can e-file and the return will be filed on time. My assistant will let you know when the return is accepted by the IRS. I have filed an extension as a precaution but you must pay the tax owed by the deadline to avoid late penalties and interest. Also, I would like a copy of the check for my file – make sure Mrs. X signs as well and that she reviews the return.
As I have stated before – this is why we meet in November so there will be no surprises at filing time.
Client: I know, I know. I was sure I paid more than enough in this year. Thanks for trying anyway; I appreciate you making the effort.
OTP: Well, that is why you pay me $250 dollars an hour for tax advice.
Client: Okay. Uh – who do I write this check out to again?
OTP: Make the check payable to the United States Treasury and include both you and Mrs. X’s Social Security numbers in the memo. You can use the payment voucher that is included with the return. Send the payment to the address listed.
Client: Oh and I forgot – what is the amount of tax I owe?
OTP: $168 – See you again in November Mr. X.
Disclaimer – the above is not intended to be actual tax advice.
I know many of you are saying, OMG! EVERYONE knows Section 262(a) disallows deductions for personal, living, or family expenses. In instances where both section 162(a) and section 262(a) may be applicable, section 262 takes precedence, are you a moron? Clearly section 262(a) applies haven’t you heard of Heineman v. Commissioner, 82 T.C. 538 542 (1984)? What a loser!
To which I can only reply – Oh yeah… haven’t you heard of incidentals? Oh and why not cite Feldman v. Commissioner, 86 T.C. at 464 Mr. /Ms. Smartypants? “Where there is a mixture of personal or family considerations and business considerations for an expenditure, special care is required in determining which considerations predominate, and whether any part of the expenditure may qualify for deduction under the dichotomy of section 162 and section 262.” Wouldn’t that be a better case?
Oh and it was explicitly stated this was not a complete and accurate portrayal of factual events – haven’t you heard of ARTISTIC LICENSE? Lighten up, gee whiz. It is supposed to be comical, granted it might not be even slightly humorous but that is the intent. Substance over form doctrine – learn it, live it.
(It is probably a good thing no reads this blog)