WILL YOU BE WORKING with a CPA to file your tax return? For eight years, I was one of the folks on the other side of this annual ordeal. Want to make life easier both for yourself and for us green-shade types? Here are 22 insights:
1. Time is money. CPAs sell expertise by the hour. They track everything they do, all day long, in six-minute increments—or perhaps 15. For the business to survive, it must convert time into revenue. It helps to look at the next 21 insights through that lens.
2. Buying insurance. CPAs envy investment advisors, who get paid by drawing a fee right out of your investment account, with no action required on your part. It hurts more to open a bill and write a check. Working with a CPA is like carrying insurance. Most of the time, it won’t feel like it’s worth it—until it does, and then it’ll feel like a steal.
3. Go team. At least two people will likely work on your account—a signer with more experience and a preparer with less. It’s necessary for the propagation of the profession. Embrace the team approach and consider yourself a part of it.
4. Help wanted. Don’t forget there’s another member of the team—the IRS. A lack of funds and staff, antiquated technology and too many responsibilities have left the IRS heading into the 2022 tax season with a backlog of 24 million returns. You will feel this, and your CPA will, too.
5. Working the papers. Your CPA wants to use your tax documents to create workpapers. A complete set should coherently tell the tax return’s story to someone with no prior knowledge—like an IRS auditor, for instance. Provide clear documentation, and you can help your team reach the workpaper promised land sooner.
6. Email etiquette. When your CPA emails a list of questions, remember that he or she is just trying to speed the progress to the promised land. If you can reply with complete answers, you help create the workpapers—saving your CPA time and saving you money. Hint: It takes more time to transcribe phone messages.
7. Call when it’s complicated. It’s better to discuss complex matters on the phone. Your CPA’s tax season challenge is balancing communication time with enough quiet, focused time to get the job done by the deadline. Scheduled phone calls are more efficient than impromptu calls.
8. It’s a marathon—and a sprint. We’re talking 60-hour weeks, tracked in six-minute increments, that last for three consecutive months. Humans can’t do that with a uniform level of focus and production. You may notice fluctuations.
9. Get organized. Group and order your tax documents when submitting them to your CPA. For example, try something like this: W-2s, brokerage account 1099s, retirement account withdrawal 1099-Rs, summary of rental income and expenses, mortgage interest 1098, charitable donation letters.
10. Provide a summary. Create a simple lead sheet that summarizes all documents. Keep the same format each year and highlight any new or unusual items. For accountants, it’s incredibly helpful to see the big picture at a glance, so they can compare it to the prior year and check the tax return for completeness.
11. Send everything. Include every page of the tax documents you receive—even the pages that might seem unnecessary. If you leave one out, your CPA will have to ask you for it.
12. Answer the questions. Complete your CPA’s pesky questionnaire the best you can. Even though you’re already sending all the tax documents you know about, this list is designed to catch those easily overlooked details that are pertinent for tax compliance. Besides, the firm’s professional liability carrier makes the firm do it.
13. One and done. Don’t send in your tax documents until you have everything—or, at least, almost everything. Multiple piecemeal submissions take up extra time and increase the chances of leaving something off the return by mistake.
14. No oversharing. Yes, supply complete tax information, but use discretion and don’t overshare. Do you really want to pay your CPA to do the sorting and summations that you can do on your own? Use the deduction categories from Schedule C or E to create summaries of business or rental income and expenses.
15. Favor simplicity. If you have brokerage accounts with multiple investment custodians, consider consolidating everything at one firm. It’ll reduce the volume of 1099s, making tax compliance more efficient and, as an added bonus, simplifying your portfolio management.
16. Extending the agony. You can request a six-month tax-filing extension, but that doesn’t change the payment deadline. That means your CPA must do enough work before the April deadline to calculate an accurate tax liability.
17. Schedule K-1. If you own an interest in a partnership, limited liability company or S corporation, you can’t file your tax return until you have the K-1 that reports your share of the flow-through income, deductions and other tax info. If the entity extends, then you must, too—and, in the meantime, use the best available estimates to calculate your tax liability. When the K-1 eventually arrives, your CPA will have to revisit the work that resulted in the initial tax estimate and integrate the new details.
18. Private pain. Over the past decade, private equity firms have made a push downstream from institutional investors to individuals. If there weren’t enough reasons to be wary already, don’t invest unless you’re willing to accept the extra complication and cost of tax compliance for these limited partnership interests.
Compared to the straightforward 1099 reporting of a mutual fund or exchange-traded fund, your CPA must parse far greater detail to properly report the multiple types of income, deductions, gains, losses, and supplemental information included in these private equity K-1s. Extra compliance tasks include applying passive loss limitations, preparing tax basis schedules, calculating the qualified business income deduction, evaluating potential state filing requirements, and working through onerous foreign informational reporting mandates which ramp up to a new level of scrutiny in 2022 with the introduction of the Schedule K-3.
19. Master limited partnerships. Energy infrastructure MLPs are often touted as a great source of yield. Just know they’re also a great source of tax headaches. Yes, they’re traded on an exchange, but they are classified as publicly traded partnerships. That means they report on a K-1, triggering most of the same issues as private equity, but with even more restrictive passive loss limitations.
20. In them you trust. Do your homework to choose a CPA you can trust—and then trust him or her. Questions asked in a spirit of collaboration will enhance the relationship. But if you constantly press your CPA to defend his or her decisions, your accountant won’t enjoy working with you.
21. Matters of judgment. Your CPA signs his or her name to your tax return—putting professional credibility on the line. The tax code is complicated and sometimes gray. Expect your CPA to exercise professional judgment and take this responsibility seriously.
22. Be kind. Enjoy getting to know your CPA. Ask about family and interests. He or she will want to know about yours. Any self-respecting CPA won’t charge you for this chat time. And you’ll get better service. We all want to look after our friends.
Matt Christopher White is a CPA and CFP® who writes about money and apprenticeship to Jesus. You can get his book “How to Love Money: Four Paradoxes that Breathe Life Into Your Finances” at MattChristopherWhite.com. Follow Matt on Twitter @WriteMattWhite and check out his earlier articles.