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Jeremy Wells: If you run an accounting firm or if you've worked in an accounting firm, you know the struggle that can come from working with prepared by client books and records. We call this PBC. Pbc Books and Records. They can always present challenges. They can throw wrenches into our workflows. [00:00:30] Sometimes the information is not organized the way we need it to be. It's not in the format we need it to be, or it's just a really low quality and sometimes we just can't use it. A lot of times we have to spend a lot of time and effort going through and reviewing, asking questions, maybe even making corrections, especially if we're trying to use that information to produce some sort of end product, like a tax return [00:01:00] or an audit report or a set of financial statements. Pbc data and reports and financial statements often pose a challenge in accounting firms. So we can try to find ways to capture some value there, maybe even capture some revenue for the firm, such as bookkeeping cleanups. That's something that a lot of smaller firms tend to offer. But doing those during [00:01:30] stressful times, such as tax season, can add a lot of stress and strain, both on the individuals working in the firm as well as the clients, but just on the firm's workflows and processes as well. That can lock up a lot of capacity that is needed. Other places in the firm, such as preparing returns, advising clients and getting other work out the door.
Jeremy Wells: How can we incentivize and facilitate [00:02:00] accurate, up to date books and records while also providing additional value to clients without becoming bookkeepers ourselves? And I'm speaking from the perspective of a tax professional. I run and operate a firm that offers tax services as well as bookkeeping and accounting services. So I'm not saying that our firm doesn't offer bookkeeping and accounting services, but what I'm saying is my primary role is [00:02:30] preparing tax returns and advising clients on tax questions. Time that I spend in a client's bookkeeping file, making corrections, making adjustments, reviewing the way they've categorized things. That's all time and effort that's taken away from my primary focus on tax preparation and tax advisory. If you're in a similar situation, then you understand [00:03:00] that that kind of work, the better quality and the more complete that work is. By the time it gets to your desk, the better off you are and the better off your firm and the client is as well. If you're doing work that isn't necessarily tax, for example, audit work, or maybe you are preparing financial statements, then it's a very similar process where you get that information in it's [00:03:30] relatively low quality or it's not in a format you need. And so then you've got to figure out some way of getting it in shape for what you're actually doing. So the point here is not to devalue the work that bookkeeping and accountant accounting takes. In fact, just the opposite.
Jeremy Wells: We need to recognize the true value of those processes and how they make the downstream work possible, really [00:04:00] by having high quality books and records in place. So in this episode, I want to talk about the actual legal requirements to keep taxpayer books and records in order. And we don't really, I think, fully understand this. A lot of practitioners and especially a lot of firm owners, there are some practices that I see in a lot of firms that don't really take into account the fact that there are legal requirements [00:04:30] for taxpayers to be, uh, keeping accurate and up to date books and records. So I'm going to go over that. We're also going to look at some exceptions to those rules. One in particular that uh, is is pretty widely known out there, but I'm not sure it's, uh, well understood is what's called the Cohan rule going to go into some of the specifics about the Cohan rule and a little bit, and where that can help the taxpayer, but also [00:05:00] how we don't need to rely on it. It really should be the exception to the rule and not the norm. And then finally going to close out by talking about some ways that we can take what we know about clients and their proclivity to bring us inaccurate, incomplete books and records and turn that into some potentially sellable services, even profitable services to help [00:05:30] taxpayers with their record keeping that don't necessarily turn us as tax professionals into bookkeepers.
Jeremy Wells: Again, bookkeepers are great, I love bookkeepers, I run a firm that employs bookkeepers. We do a lot of bookkeeping and accounting work. I, as a tax professional, don't want to spend a lot of time worrying about bookkeeping. I want the books to be good quality, accurate, ready to turn into prepared financial statements [00:06:00] or prepared tax returns. So let's start off with the legal requirements. There is, in fact, a legal requirement written into the tax code for taxpayers to keep and maintain books and records. This is IRC section 6001. Each taxpayer must quote, keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time provide. So it's right there [00:06:30] that taxpayers have a responsibility to keep records, make statements, prepare and file returns in the Treasury regulation for that section. This is 6000 and 11A. Each taxpayer must keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return [00:07:00] of such tax or information. Now, the way I read this is you as a taxpayer. In order to file a tax return, need to have books and records permanently permanent books and records that you can rely on in order to justify and substantiate any amount of gross income, deductions, credits, or anything [00:07:30] else that you're putting into that return.
Jeremy Wells: In other words, you need to have those records. You need to have that bookkeeping. So that's got to be there. It's required both by the code as well as the Treasury regulations that go along with that for both income and deductions as well as credits. Other matters A lot of times we talk about needing to be able to justify expenses that in order to claim a certain amount of an [00:08:00] expense on a return, we need to have the receipts. We need to have the invoices. We need to be able to prove how much we actually spent. And that's true. But it's more than just expenses, the income, the expenses, the credits and any other matters that we're reporting on that tax return, we need to be able to substantiate that. There's also, uh, this idea that a tax return is somehow proof of some of those items [00:08:30] I just mentioned income, expenses, credits. We get this a lot with some of the, uh, third parties that exist out there in the finance world that we help clients work with, especially lenders and mortgage brokers, for example. They want to see tax returns. They want to see k-1s to prove that the taxpayer that our clients, uh, make, the amount of income that they are, [00:09:00] uh, purporting to make when they're applying for these loans. And that's all fine. Those other professions and industries, they're fine to rely on whatever records and documentation they want.
Jeremy Wells: But when it comes to how we practice tax and accounting, tax returns are not proof. In fact, this is something that the Tax Court has said in some of its rulings. There's in particular [00:09:30] a case this is, uh, wiki v Commissioner. This is a tax court memorandum. Opinion 20 2143 tax returns are, quote, merely statements of claims and are not considered evidence of the claims themselves. The evidence for those claims is the taxpayer's books and records, not the return itself. You can look at a return and yes, that return has been signed by the taxpayer, or at least the authorization [00:10:00] to file it has been signed by the taxpayer. If it was professionally prepared, it was also signed by the preparer. That doesn't mean anything if there isn't substantiation in the taxpayer's books and records to support what was claimed on that return, then it doesn't really matter. The return itself is not evidence of anything claimed on that return. So what's the stick here? Right. You know, we always talk about carrots and sticks when it comes to trying to encourage the kind [00:10:30] of behavior we want. What's the stick when it comes to not having accurate books and records? What happens to a taxpayer if they make a claim on a return? And we can't support that. The 20% accuracy related penalty under section 6662 applies to an underpayment of tax that's attributable to negligence, or disregard of rules or regulations. This is really one of the worst civil penalties [00:11:00] for a taxpayer that's in the code.
Jeremy Wells: You really don't want to be in a situation where you are faced with the accuracy related penalty. This is 20% of the tax that wasn't properly claimed on that return, that 20% accuracy related penalty. So negligence and disregard of rules or regulations. So in the regulations we have negligence defined [00:11:30] as any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Laws, or to exercise ordinary and reasonable care in the preparation of a tax return, or any failure by the taxpayer to keep adequate books and records, or to substantiate items properly. So right there we can have negligence which invokes that 6662 accuracy related penalty if [00:12:00] the tax claimed on a return is off due to the taxpayer not being able to substantiate what they've claimed on that return because of not having adequate books and records. And then a willful failure to pay tax or estimated tax, file or return, keep records or supply information is a misdemeanor and carries a penalty [00:12:30] of up to $25,000 or $100,000 for a corporation, along with up to a year in prison, all of which comes in addition to other penalties provided by law. And this is under IRC section 7203. Now this is a completely different penalty. This is just a failure to keep records. Uh, criminal penalty here. One of the things about the Internal Revenue Code that once you start looking at the, uh, [00:13:00] the penalties that taxpayers and even tax return preparers can face is that there are two sets of penalties.
Jeremy Wells: The first set comes in the 6000 sections, and those are the civil penalties. Those are the ones that you don't want to face if you don't have to. But those are civil penalties. They're generally a little bit less stringent, uh, a little bit less costly, although they can be expensive. Then in the 7000 sections you have the criminal penalties. [00:13:30] These are the penalties that monetarily can be pretty severe. They also can potentially come with jail time. So in terms of keeping accurate records in books, we're not only just talking about civil penalties, those are there the actual related penalty. We've also got criminal penalties potentially. So if the taxpayer is just willfully negligent, refusing to file tax returns to pay tax and keep records, then [00:14:00] that can lead to invoking not just civil but also criminal penalties. Now, granted, if you've got a client that isn't keeping good books, they're they're just using the shoebox method of record keeping. They're keeping receipts, invoices, maybe print it out, maybe keeping them in a file somewhere, but not really keeping accurate books and records. I don't think you'd have to worry about pretty severe penalties. Probably not going to have to worry about [00:14:30] prison time. That seems a little, um, a little excessive here. But if you're working with a client that you know is in a situation where there's a potential for some pretty severe penalties being assessed by IRS, then you might want to look at the potential for both civil and criminal penalties.
Jeremy Wells: And in this case, if you are a CPA or an EA, an enrolled agent, this is probably going to be way out of your league. Um, not because [00:15:00] you're not experienced or you don't have the ability to help these kinds of taxpayers. But once we get into the realm of criminal penalties, we're really talking about a legal situation here. And it's at this point where you might want to try to find a good tax attorney, someone who has experience with these kinds of penalties. At this point, there's probably going to be a lot more to this taxpayer story than just not keeping good books and records. Um, but it's important [00:15:30] to understand that throughout the code, We have not only the 6001, uh, section that is imposing this requirement to keep books and records, but we also have the 6662 civil penalty for failure to keep good books and records. And now, on top of that, we also have a criminal penalty under section 7203. So this is important. It's not just [00:16:00] a choice. It's not just a nice to have. It's not just we should encourage our clients to keep books and records throughout the tax code. We actually have several sections now that make it a full blown requirement. And that requirement comes with some potentially strict penalties if the taxpayer fails to do so.
Jeremy Wells: Now, I mentioned earlier that there are some exceptions here. In Cohan v Commissioner, a [00:16:30] 1930 30 court case in the Second Circuit Court of Appeals. The court found that in some circumstances, a taxpayer can rely on good faith estimates in order to prepare and file a tax return. This has become known as the Cohan Rule. The Cohan Rule allows a taxpayer to deduct a reasonable estimate of [00:17:00] the amount of a verifiable trade or business expense if the exact figure is unavailable. What happened in this case was Cohan ran an entertainment business, uh, along the lines of, uh, theater or circus. It was some some sort of performing arts, uh, business. And he liked to have a lot of parties for all of the entertainers and all of the sponsors, and he did not keep good records [00:17:30] of what all happened with these parties, with the shows, with the performances and so on. His tax returns, he just kind of roughly estimated the cost of all of this activity. This made it up to the Circuit Court of Appeals when IRS wanted to, uh, throw out all of the deductions. The courts ultimately found that it's it's okay to claim a [00:18:00] reasonable estimate, but that reasonable estimate has to be based on something. It can't just be made up numbers. It can't just be guesstimates. It has to be a reasonable estimate only when the exact figure is unavailable.
Jeremy Wells: I think this is now almost 100 years later. Uh, it tended to be taken out of context. I've heard, uh, between bad tax advice [00:18:30] on social media and some practitioners who haven't really read the court case, the court's opinion really understand what the meaning of the Cohan rule is. Uh, say, well, that's okay. If the client doesn't know how much, we'll just we'll just fill in a number and and we'll appeal to the Cohan rule in order to justify that expense. That's not quite the way it works. There needs to be some reasonable basis for coming up with that estimate of that expense. [00:19:00] In fact, in general, the courts take a conservative approach when they either see an estimate from the taxpayer that doesn't seem reasonable, or when the court is in a position to where it has to provide the estimate. In Barrios v Commissioner, a Tax Court memorandum opinion from 2023, the court held that in making the estimate under [00:19:30] the rule, quote, the court bears heavily against the taxpayer, who failed to more precisely substantiate the expense. In other words, you, as the taxpayer, might estimate your undocumented office expense at a certain amount. The courts probably aren't going to give you that amount just because you think that's how much you should get for office expense. The courts are probably going to discount that quite a bit. In fact, this [00:20:00] isn't necessarily a penalty, but the court is going to take into account the lack of record keeping, the lack of substantiation, and come up with an estimate that, in the court's opinion, is more reasonable, which is going to mean probably significantly less than you had hoped for.
Jeremy Wells: So it's important to take that into account. The courts have sometimes [00:20:30] even refused to apply the Cohen rule when the taxpayer, despite having a legitimate claim to an expense, offered no reasonable basis on which to estimate the amount of that expense. So you can't just put in a number and assume the court will accept that number just because you say, oh, well, I use the Cohen rule to come up with that estimate. There needs to be an actual reason behind [00:21:00] that estimate. You can't just say, hey, this amount of money seems fine for office expense for this year. What is that estimate based on? Is it based on any prior years? Is it based on a certain percentage of revenue that matches up with your prior years, or matches up with some of your competitors? Is there any reasonable basis for coming up with that estimate? If not, courts have been willing to just completely throw those estimates out. And there are several court cases, both [00:21:30] from district and appellate courts in the federal system, as well as the tax court, that show where courts have just thrown these estimates out when there was no actual reasonable basis for making them. So the point here is, the Cohan rule is not a license to just make up numbers to put in a tax return, even if those made up numbers seem reasonable.
Jeremy Wells: There still needs to be some sort of basis for claiming that [00:22:00] amount of an expense on a tax return. A court quote may not be compelled to guess or estimate for. The basic requirement is that there be sufficient evidence to satisfy the Trier, the court, that the least the amount allowed in the estimate was in fact spent or incurred for the stated purpose. Until the court has that assurance from the record, relief to the taxpayer would be unguided [00:22:30] largesse. And that is a US District Court in Williams v US in 1957. So and this this quote from the court's opinion has popped up, uh, as cited in other federal courts and tax Court opinions, where the taxpayer just relied overrelied on the Cohan rule in order to come up with an estimate of an expense. But there really was no basis for that [00:23:00] estimate. In other words, you're just asking the court to take that amount at face value with really no reason to do so. So either that estimate needs to be reasonable and therefore probably a lot lower than you would want it to be, or hope for it to be as considered reasonable by the courts. Or you need to have some good records and books to support that amount of a deduction. And then, of course, there are certain types of expenses where [00:23:30] Cohen just does not apply at all.
Jeremy Wells: The Cohen ruling was in 1930. Since then, the tax code now includes section 274. Section 274 puts some requirements for substantiating certain expenses, certain types of expenses on taxpayers. Because of that, those specific types of expenses that code [00:24:00] section 274 overrides Cohen. So if the type of expense that you're trying to claim a deduction for on a return is mentioned in 274, then you can't appeal to Cohen in order to justify taking a certain amount of deduction for that. These are considered expenses that have explicit substantiation requirements, and they include travel, entertainment, [00:24:30] business gifts and listed property, listed property being, uh, those kinds of expenses that have both business and personal use. The most common example of this is business use of an automobile. Substantiation for these expenses has to include the time, the place, the amount, and the business purpose of the expense or the business relationship, [00:25:00] and that has to be kept in a contemporaneous log. This is the strict substantiation requirement. And for those who are working with small business owners and advising small business owners, we're pretty used to telling taxpayers that they need to, for example, keep a mileage log, because if there's any business use of a vehicle, whether that vehicle is supposedly owned by the business or still just owned by the individual, [00:25:30] and they sometimes use this personal vehicle for business uses, there still needs to be a mileage log. And that mileage log needs to be contemporaneous means it needs to be kept in the moment as those trips happen.
Jeremy Wells: There have been tax court and federal court cases where the mileage log was simply thrown out and no deductions were allowed because the taxpayer attempted to recreate [00:26:00] that log after the fact, sometimes years after the fact. Sometimes it's obvious that the taxpayer made no effort to keep that log as those trips were actually happening. That log also has to be written or in the 21st century in a digital format. In our firm, we regularly, uh, recommend that our clients use some sort of mile tracking app on a smartphone so that those [00:26:30] trips are automatically logged. What those apps will do if you haven't used one, is it will pick up on the GPS signals. It'll pick up on the speed and recognize that because of the way how far this trip was and how quickly, uh, you made this trip, you probably drove. You probably didn't run or bike this trip. You probably drove it. And so it will track that [00:27:00] trip and make an entry into your log for you. Now, it's still up to you to go into that app and tell the app that this trip was, in fact, a business trip. You were going to meet a client as opposed to a personal trip you were just going to pick up groceries, for example. So you still have to do some work, but that log of all of those trips will be there.
Jeremy Wells: And then all you need to do is go back and mark which ones are actually business. This is your contemporaneous [00:27:30] log, uh, of your of your business trips. Along with that, you'll know the times, the locations and the actual distances traveled. But now it's not just mileage that we need to be doing this for the code. Section 274 also includes travel, entertainment, and business gifts. So for any of these kinds of specific expense types, we need to be tracking [00:28:00] the actual business purpose and the amount of these these types of expenses. In the setup for this episode, I mentioned relying on PBC information prepared by client, uh, information. Where is the practitioner? The tax return preparer? The tax advisor when it comes to accepting prepared by client [00:28:30] records. This is an ethical question. In fact, looking at circular 230, which is the publication of the Department of Treasury, that for uh, almost 100 years now has maintained the ethical and practices and best practices for tax practitioners. In section 10.34 D, we're told that practitioners can rely on information [00:29:00] furnished by taxpayers. However, we quote must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption. Or incomplete? I've had situations where clients will send me information. They'll send me business income and expenses in a spreadsheet, or they'll tell me that they spent [00:29:30] a certain amount on a certain kind of expense in their business, or they'll send me, uh, numbers when I ask them what their business mileage is, where, and they'll just tell me a flat number that has 3 or 4 zeros at the end of it.
Jeremy Wells: That's their business mileage for the year. As soon as I see that information, I already know, just in my gut looking at that information, [00:30:00] whether it appears to be incorrect, inconsistent or incomplete, and in fact, those those are those are the three I's. Eyes. And when I teach about this, I tell my the the audiences that I'm teaching. These are the three eyes. Remember them. If it feels incorrect, inconsistent or incomplete, then you've triggered this ethical principle. You need to ask the client follow up questions. You need to push the client. You need to tell the taxpayer, [00:30:30] this doesn't seem quite right. Can you help me understand this? Can you help me by providing some substantiation for what you're claiming here? Because if the client sends me business mileage and it's a number that ends with 3 or 4 zeros, I need them to show me their mileage log. Now, normally I don't need to see the mileage log. It's not my job to audit the taxpayer. It's not my job to audit [00:31:00] their mileage log. A lot of my clients, they just upload the mileage log. Usually it's a printout that they get from the mileage tracking app they use. But if they send me round numbers, I'm going to have to ask them for that.
Jeremy Wells: And nine times out of ten, they're going to tell me they didn't actually keep up with one. Now it's up to me to figure out how to handle this situation. And that usually involves a conversation with the client where I explain to them what the substantiation requirements are, even though I've already done that [00:31:30] before, because we always do that with our clients, we we explain to them when we're asking for the information, when we're advising them throughout the year that they need to be keeping that mileage log, for example. But sometimes they just don't get that. And so then we have to have a conversation. But when you are faced with client information that appears to be incorrect, inconsistent or incomplete, you have to ask more questions. And sometimes that's [00:32:00] difficult. Sometimes you're in a rush to get the return done. Sometimes the client doesn't want to provide more information. Sometimes the client says, hey, you can trust me. It's fine. What I've given you is the truth. It's at those points where we have to fall back on our ethical principles and decide whether we want to accept that information, whether we want to push further, or whether we just want to stop working with that taxpayer. Now, it might be a tough decision to stop working with taxpayer because they want to claim a certain [00:32:30] amount of miles, and that doesn't seem quite right. But there are situations where the amounts that we're getting from the client seem so far off.
Jeremy Wells: And for a few years, year after year, we've reminded them of the importance of good record keeping and what those substantiation requirements are. And they keep ignoring us and they keep refusing to take our advice on these points. At that point, we might have to reconsider the relationship. [00:33:00] But it's actually really important from the taxpayers perspective, and I mentioned the stick earlier being the penalties, but there's actually a carrot here too. It's actually really important to push taxpayers to keep good records, not just to avoid penalties and not even just to make our lives as the tax return preparers and tax advisers, not to make our lives easier. It might actually help the taxpayer, if they ever are involved in a [00:33:30] audit or an examination by the IRS, and not just in terms of being able to substantiate the expenses. We know from case law, and this has been true for a long time, that when it comes to disagreements between a taxpayer and the IRS over something that was reported on a tax return, the IRS always is assumed to be correct and [00:34:00] the burden of proof is on the taxpayer. This comes from a almost 100 year old Supreme Court case. Now Welch v Helvering 1933, where the court said. The Supreme Court said generally, the commissioner's determinations, the IRS commissioner's determinations have a presumption of correctness while the taxpayer [00:34:30] bears the burden of proving the IRS positions wrong.
Jeremy Wells: In other words, the taxpayer has the burden of proof in court. So if a taxpayer files a tax return, an IRS disagrees with something reported on that return. It is now up to the taxpayer to prove the IRS wrong. And that can be a tough hill to climb, especially for a taxpayer, especially for a taxpayer that has not kept good books and records. However, [00:35:00] back to the code IRC section 7491 actually flips that burden of proof around. The burden of proof shifts from the taxpayer to the IRS in any court proceeding. Federal court. Tax court. If the taxpayer does, the following introduces credible evidence supporting a position taken on a return. Complies [00:35:30] with the substantiation requirements in the IRC and the Treasury regulations. Like I mentioned section 274 before and maintains records as required by the IRC and regulations. And really, if the taxpayer is maintaining good records, then they've covered the substantiation requirements and those records would be the credible evidence. If there were receipts and invoices and good bookkeeping that made sense and was easy to follow. Then [00:36:00] the taxpayer should have no problem being able to use IRC section 7491, in order to flip that burden of proof around to the IRS, to the point at which the IRS knows this. And IRS auditors aren't dumb here in this case. So if a taxpayer shows up to an examination or an audit with good books and records, then the auditor would [00:36:30] know that under code section 7091, now it's on the IRS to prove that the taxpayer is wrong.
Jeremy Wells: In an article in Tax Notes today titled Credible Evidence Shifts Burden of Proof. This is back from 2003. The authors claim that appeals officers give more weight to the section 7491 burden of proof than do IRS litigators or tax court judges. In other words, [00:37:00] even if the rest of the IRS hasn't caught on to this yet, the auditors know. And so where it's plausible to believe that section 7491 can help the taxpayer in the event of a trial, that possibility is useful in creating a more positive settlement climate. In other words, if an IRS auditor can reach a settlement against a taxpayer that has good books and records and would have a good chance of being able to use section 7091 in court, that auditor is [00:37:30] probably going to work harder at reaching a settlement than letting the case go beyond the IRS into the court system, so taxpayers might not only be able to beat the IRS in court with good books and records, they might be able to avoid court entirely and reach a better settlement with the IRS. And I'm talking about a situation where the taxpayer might have taken a technically incorrect position, but at least the taxpayer has the books and records to back up why she [00:38:00] took that position. So even in a case where a taxpayer might be, quote unquote, losing, if the taxpayer can show that she had good reason based on sound books and records to take that position, that can even create a more favorable result for the taxpayer.
Jeremy Wells: Now, again, where do we come in as the practitioner? We can we know this. We should know this. Taxpayers generally don't. They don't understand [00:38:30] that the taxpayer has the burden of proof against the IRS. Unless a taxpayer has good books and records. And in that case, the IRS has the burden of proof. So it's on us to educate and inform our clients and taxpayers of this and encourage them to keep those good books and records. Now this is, um, this is a different way to think about it as well, but I wanted [00:39:00] to bring this up also because, uh, we've got more and more each year, uh, natural disasters and federal disasters. In a prior episode, episode ten, I talked about casualty losses. If you haven't listened to that episode, go back and listen to that one. But one of the, uh, results from a tax perspective of a natural disaster is a postponement. [00:39:30] And those postponements are based on whether the taxpayer qualifies, uh, for that postponement under that disaster declaration. So in a federally declared disaster, a postponement gives qualified taxpayers more time to file returns, make payments and claim refunds, and to avoid any potential late penalties if they missed any deadlines that were postponed. The [00:40:00] definition of a qualified taxpayer includes any taxpayer who has a principal residence or a place of business in a disaster area, or whose records are maintained in a disaster area.
Jeremy Wells: So for taxpayer, this might be two separate locations their principal residence and where they maintain their records that are necessary for preparing tax returns. For example, a lot of times taxpayers rely on [00:40:30] their bookkeepers or their tax advisers in order to have or maintain those records for them. So maintaining client records might help a client qualify for a disaster postponement. So even if the taxpayer isn't directly affected by a disaster, it's possible that that taxpayers, tax preparer or bookkeeper is affected by that disaster. Now relief is not automatic. [00:41:00] And I've seen some tax preparers say my client automatically qualifies for a postponement because I'm preparing the tax return and I'm in a disaster area. It doesn't work that way. If the tax preparer lives or works in an affected area, that might allow that individual to qualify for a postponement, but it doesn't necessarily qualify that tax that that tax advisers client [00:41:30] to qualify. It has to be spelled out specifically in the guidance issued by IRS. And there has to be stated specific relief based on the location of tax return preparers. But it is possible for a taxpayer to get relief indirectly because her tax return preparer was affected by a disaster. Now, obviously, this is not a good situation [00:42:00] for anybody that's actually truly affected by a disaster, but it might be helpful to a client in order to qualify for a postponement by virtue of working with a taxpayer who is maintaining those books and records in a disaster area.
Jeremy Wells: This is all from IRC section 7508 cap a D2. So again, you have to look at the specific guidance issued by IRS with respect to the particular natural disaster and [00:42:30] see if it includes tax preparers. And if it does, that might be a way to help your clients get a postponement as well. Now, this has been a lot of thinking about the tax focused reasoning for keeping good books and records. But we shouldn't let the tax tail wag the financial dog. I think that weakens the perceived value of bookkeeping and accounting. I think it also is [00:43:00] a tougher sell. We should not just be encouraging taxpayers to keep better books and records to make preparing their tax returns easier. We already have a lot of taxpayers, business owners, who think that the purpose of bookkeeping is just to be able to get as many deductions as they can on a tax return. And I'm not suggesting that that's the reasoning for keeping good books and records. It's a reason taxpayers should be able [00:43:30] to claim all of the legitimate deductible expenses that they can. However, that shouldn't be the only reason. In fact, I would argue that shouldn't even be the primary reason for keeping good books and records. The primary reason, right? Should be the best interest of the client and the small business.
Jeremy Wells: If we're talking about bookkeeping or that client's financial information, if we're talking about, uh, [00:44:00] record keeping, financial record keeping, ultimately we want to help them avoid any sort of legal or financial issues down the line. And that's what good record keeping and bookkeeping can help out with in the future. But in the meantime, our clients are likely going to need cash flow analysis, profitability analysis, be able to apply for credit and mortgages and loans, and the better [00:44:30] the quality of the record keeping in the bookkeeping now, the easier all of that will be. So how can we encourage that? And again, without having tax preparers and tax professionals having to do a lot of bookkeeping work. Again, if your firm offers bookkeeping, if you offer bookkeeping, that's great. My firm does. I've offered bookkeeping, uh, a lot. However, [00:45:00] as someone focused on tax, I may or may not want to do a lot of bookkeeping. And when I'm focusing on tax work, I don't want to have to spend a lot of time in the weeds of a small business owner's bookkeeping, making a lot of corrections, adjustments, that sort of thing. So what are some ways that we can encourage clients to have better record keeping, have better bookkeeping without having to just do the work ourselves? [00:45:30] Unless you want to do that? Well, one way that I've come up with in my firm, and I've seen other firms use this successfully is what I call a bookkeeping review Service, so it can provide a similar result if you choose to remain unaffiliated with any particular bookkeeper.
Jeremy Wells: Right. Uh, or if you don't want to offer bookkeeping yourself. Now, the point here is that you should not be doing [00:46:00] actual bookkeeping work yourself. Rather, every so often you take a deep dive into the client's accounting or general ledger system and provide suggestions, warnings, point out red flags, and recommend changes the client. And if the client has a separate bookkeeper, they remain solely responsible for implementing any [00:46:30] of the changes you recommend. But the point is to go through that bookkeeping file and point out any transactions, maybe. And really substantial transactions. We're probably not going to look through a lot of five, ten, $20. Office expenses. But we might look through some expenses that are 4 or 5 six figures. And recognize that some of them might have been miscategorized. Some were categorized as an expense when they should have been capitalized on [00:47:00] the balance sheet. Maybe some deposits were categorized as revenue when they should have been categorized as either loans or as contributions of equity. We can find those mistakes throughout the year, and without having to do the work of fixing the bookkeeping ourselves, we can recommend those changes back to the client and perhaps the client's bookkeeper without having to get into the weeds ourselves. And [00:47:30] this can be a profitable service because you're not actually doing the work of bookkeeping.
Jeremy Wells: You're not having to hire a bookkeeper, although you might have. An experienced bookkeeper or accountant working for you. Who's doing these reviews for you? Or you can do them yourself, and they're relatively quick. They don't take nearly as much time as actual bookkeeping does. They don't even they really shouldn't even take as much time as a monthly close does. But it could be a good way to find some mistakes, find some errors, [00:48:00] maybe even find some opportunities to advise the client on how to better manage their expenses. Maybe you find some expenses that seem unnecessary. Maybe you find some, uh, some moves that might help free up some cash flow. For example, maybe looking at the balance sheet, you notice some invoices that have gone uncollected for a while. Just whatever comes up, you can provide some value back to that client [00:48:30] without actually having to do all the bookkeeping yourself. A next step beyond that might be to actually have a one on one check in with the client's bookkeeper. Now, obviously, you would need to get some authorization from the client to be able to do this, such as, uh, 7216 authorization. But this could be a great way to point out any sort of bookkeeping or accounting issues you see, talk directly with the bookkeeper and free up the [00:49:00] client from having to be the middleman in that conversation. This allows you to proactively address questions before tax time. A lot of times we're answering as tax professionals.
Jeremy Wells: We're answering questions that are actually raised by the bookkeeper. The bookkeeper is asking if certain expenses are deductible or not or how for tax purposes, we would like to see certain things categorized or whether certain expenditures should be capitalized on the [00:49:30] balance sheet or expensed on the profit and loss statement. It might be easier to just talk directly with the bookkeeper to answer those questions, so we could set up a quick automated email asking about categorization questions, journal entries, new or disposed assets, changes in ownership, all of those sorts of things we need to know at tax time. Perhaps quarterly, that automatically gets sent to the bookkeeper and maybe copy the client on it. But [00:50:00] we get the answer directly from the bookkeeper. Now, I want to be clear. What I'm talking about here is not a pro bono service. This should not be free. This should not be just included. You should not just start doing this out of the goodness of your heart. This should be part of your firm's pricing. So either this needs to be included in your actual tax preparation fee. That, along with preparing the tax return, you will offer a [00:50:30] one year's worth of bookkeeping review or bookkeeper check ins, or it needs to be part of your monthly subscription, but it should not be a free pro bono sort of service. Then you can actually talk to the bookkeeper, and if there's ever a question in the client's mind about whether this is working out or not, you can get the temperature of the bookkeeper as far as the relationship [00:51:00] and ask that bookkeeper to help remind your client how important this relationship is, how helpful having this review has been, how much quicker it's made it to get the tax returns prepared and done because you're getting good information back from the bookkeeper, and how the client doesn't have to be involved in getting answers and moving information back and forth between you and the bookkeeper.
Jeremy Wells: You [00:51:30] can also come up with a list of what I like to call preferred partners. Those preferred partnerships can facilitate communication, reduce frustration, and ultimately create a better experience for everyone involved. The bookkeeper and you should obviously be part of that. There could be others involved as well attorneys, financial advisors, insurance agents, fractional CFOs, bankers, loan officers. All of [00:52:00] these individuals should be involved in this relationship to some degree or another. And at the end of the day, you as the tax advisor, should be the one that is assembling and running this group. Now, I'm not saying you should be meeting with all of these people all the time, but whenever a question comes up that the client needs an answer to that is not necessarily a tax question. There might be tax implications, but it's [00:52:30] not directly a tax question. Maybe it's an insurance question or a legal question or an investment question. You can be the one making sure the right professional knows about that question, and you can be the one that's creating the value for the client in terms of getting the answers and getting the information the client needs.
Jeremy Wells: But in the meantime, you can build up that referral network and start insisting that your client, if they need [00:53:00] one of these types of advisors, you can insist that the client work with one of them. I know some firm owners, especially solo firm owners who work with small business owners and insist that their clients work with one of a handful of vetted bookkeepers, and that individual will not prepare a tax return based [00:53:30] off information unless it was provided by one of those vetted bookkeepers. That might seem excessive. It might seem extreme, but that particular homeowner is never going to have to worry about chasing down the client, because numbers in the financial statements don't make sense. They're never going to have to worry about how things are categorized on a PNL, and how to translate that into the tax return. They're never going to have to worry about whether [00:54:00] a deposit was really revenue or contribution of equity or new line of credit, because they trust the bookkeeper to have taken care of that already. So that's some of the value that you can get and that you can provide for your client by putting together this network of preferred partners. If you're going to do, uh, any of these kinds of services, then how you price them is going to depend on how you provide [00:54:30] them.
Jeremy Wells: So the first thing to think about is what is the frequency? What's the frequency of the communication? What's the frequency of the check ins? What's the frequency of the bookkeeping reviews? Are you going to do that annually? Quarterly. Monthly. For bookkeeping reviews I like quarterly monthly. That's that's too often. That's like doing actual bookkeeping. And most small business owners, even if they're getting monthly financial statements, the review doesn't necessarily need to happen monthly, but quarterly [00:55:00] seems to be a good, uh, good frequency semiannually or annually. Too much can happen in those amounts of time. Quarterly, you can usually catch mistakes and fix them. Or you can see that a big change was potentially made and ask questions before too much time has passed by. You need to consider whether you're going to be focusing purely on the bookkeeping issues, or whether [00:55:30] you're also going to be including business advice. So are you only going to be looking at how things are categorized in the general ledger, or are you also going to be looking at potential cash flow issues, or maybe advising on accounts receivable and accounts payable? If you are, the price should be different than if you're strictly looking at the general ledger. Are you going to be advising any on technology and applications used in the business? You're going to see the subscription expenses and the general ledger. [00:56:00]
Jeremy Wells: You're also going to know what kind of bookkeeping software, based on the financial statements that are provided to you. After a while, you start to recognize what kinds of software are producing, what kinds of statements. You can look at a PNL or a balance sheet and know which bookkeeping software produced it. So maybe you have suggestions about that, or maybe there are other issues affecting that business, such as how they're running payroll or how they're managing expenses. And maybe you've got ideas [00:56:30] about some software. They could try to help manage those other business functions. If you're going to include that kind of technology and application advisory, that should be reflected in the pricing as well. One reason to do all of this, from the tax professionals perspective, is to have better data, not just to prepare the tax return, but throughout the year in order to plan for taxes. So are you going to include any tax projections, [00:57:00] tax strategy, tax planning along with this? At minimum, you should probably be providing at least one tax projection per year, meaning you're going to calculate based on the information up to a certain date mid-year. You're going to provide a calculation of what you think the taxpayer's tax liability for the year is going to be. Compare that to how much you think they're going to have paid in [00:57:30] between withholding and estimated payments, and find out what the difference is. And in that case, we work in our firm with a lot of small business owners.
Jeremy Wells: Usually they're going to have some balance due from the pass through business income. So we recommend estimated payments to them for the year. Is that going to be part of the service here? Because if the books are in better order and in better shape throughout the year, then you can provide more accurate projections and therefore give them a better idea of how much they need to pay in for estimated payments [00:58:00] in order to avoid penalties. And then, of course, there's any other relevant advice that might go along with all of that. So a couple of different ways to think about pricing this, but also getting paid for it is you could offer a discount or apply a portion of the fee toward the customer's next tax return. Turn, so you might charge for it on the current tax return that you're preparing and filing. But maybe to encourage the client to sign up for this service, you then [00:58:30] roll that into a discount on the next tax return. That might be a little bit more encouragement for a client that's not quite sure about whether they really need these extra services throughout the year, because if they're used to just paying you to prepare a tax return, they might not be understanding why signing up for these additional services would be necessary. So perhaps a discount or a credit toward the next tax return could help resolve some of that uncertainty. [00:59:00]
Jeremy Wells: One more option here is to provide a digital library of helpful content. So maybe you don't want to be actively doing this work throughout the year, but you do still want to help your client. This is the most scalable opportunity to help your customers. So you could create templates and share those via something like Google Drive or Dropbox or SharePoint. You create some explanatory videos and post them to YouTube or Vimeo. You could offer [00:59:30] courses on Gumroad, teachable, or Kajabi, and you could automatically sign up your clients for these. Or if a client comes to you with a question that you've answered in some of this content, then you could share that content with them. Each time a client asks you a question, you know others have that same question. So produce some some content, whether that's in the form of a YouTube video or maybe a short course where you answer those questions. I [01:00:00] like using screen capture tools, especially if we're talking about, for example, bookkeeping issues. I can use a tool called loom to capture my screen while I am solving that particular bookkeeping question for another client, and then I can save that video and share it with other clients to show them how to solve that same problem for themselves. Now, obviously, you would want to make sure that whatever is shared on the screen is either anonymized or that any, [01:00:30] uh, personally identifiable information is redacted from that. But there are ways to do that.
Jeremy Wells: Um, and they're built into a lot of these tools. So instead of writing out an email to a client to explain to them how to do something in QuickBooks, or to explain to them how to fill out a form for a new employer. For example, you could just send a link to your video where you've already done this right. This simplifies your response. It saves you time. It demonstrates your expertise and relevance to your client. [01:01:00] And that's ultimately the goal here. So here these are a few options of ways that you can provide more value to your clients. That you can help encourage them to be better stewards of their financial information without you having to be the one taking care of it for them. And in the meantime, you are building up your relationship with your clients. You're providing more value to them. You might even be creating services that are generating additional revenue [01:01:30] for your firm. And at the end of the day, this is going to create business opportunities for you and your clients, as well as any other preferred partners you might bring into the fold as well. So these are could be some good, easy ways. Relatively easy once you've built them up to incorporate some additional ways to provide value for your clients. So I hope this has been helpful. Um, again, the idea here is to just keep generating value for clients without adding a lot of additional [01:02:00] work to what we're already doing in our firms.