Taxes are hard

Cardinals’ Rolle Billed by IRS for $2.2 Million

rolle.jpgFootball is a tough sport. Not the physical demands mind you, it appears to be more of a challenge to stay out of trouble.

Today’s ne’er-do-well is Antrel Rolle of the Arizona Cardinals. The IRS is claiming that the all-pro safety understated his taxable income by 50% in 2005 and 2006 and they sent him a bill for $2.2 million in order to get him back in the Service’s good graces.
Rolle, who does not dispute the claims, does complain that the Service, “violated the Taxpayer Bill of Rights, denied him due process and failed to treat him in a ‘fair, professional and courteous manner.'” Perhaps he was unaware that the IRS is not really known for its good etiquette.


Congeniality aside, it’d be one thing if Rolle had made some mistakes using TurboTax or something (you don’t have to tell Doug Shulman that this shit is complicated) but he seems to have been just ramming onto his Schedule C without prejudice.
Forbes:

Drawing particular IRS attention was Rolle’s report of a Schedule C “sole proprietorship” involving “management and consulting” that he said he operated both years. Over that period he listed $557,000 in revenue and $1.9 million in expenses. The IRS disallowed all but $71,000 of the expenses, which included $254,000 for “advertising” and $372,000 classified as “rent or lease–vehicles.” Rolle said his business was located at an address in Chandler, Ariz., a Phoenix suburb. But “correspondence mailed to that address was returned indicating ‘no such number,’ and electronic research turned up the same result,” the IRS agent wrote.

So you claim over $1 mil in expenses, the IRS takes a look and says that only $71k is actually legit? Hopefully he fired his CPA.
IRS Hits Cardinals’ Antrel Rolle With $2.2 Million Bill [Forbes via TaxProf]

SHOCKER: People Make Mistakes Preparing Tax Returns

When the “Government Accountability Office” reported that 68 percent of S corporation returns had errors, a few people who don’t prepare returns for a living were astonished:

By the way, these S Corporation shareholders are mostly comprised of the “small businessmen” that the right-wing anti-tax crowd constantly claims is overtaxed. Hmmmm. Looks like the bigger issue with this group is noncompliance, not overtaxation. We need to increase enforcement efforts, especially focused on the particular items that have tended to be misreported in S corporation returns.

The reaction from tax pros is more like, “you mean 32% of S corporation returns have no activity?”


Breaking news: this stuff is hard. The tax return for an S corporation of any size starts with thousands of transactions that have to be properly recorded – thousands of opportunities for mistakes. Then you start to apply the tax law. You have to find all of the meals and entertainment expenses, and you have to see which ones fail to qualify. Did the S corporation properly include health insurance on the W-2s (probably not)? What about for the owner’s nephew who has a job at the loading dock? Did every fixed asset get capitalized properly? What about the expenses of acquiring it? Can Section 179 apply? Is it new equipment that qualifies for the bonus depreciation rules? Oh, did they apply the Section 263A inventory capitalization rules properly? Did the Section 199 information get properly recorded for all of the shareholders? Interest? Dividends? Are they qualifying dividends? Are there Capital gains? Section 1231 gains – and what about unrecognized Section 1250 gain? Oh, don’t double them up – that Section 1250 number is part of that 1231 number, not an addition to it!

You get the picture. And if you have a multistate return, your fun is just beginning.

Once you think you have taxable income right, then you have to apply it correctly to the K-1 for the shareholders. Then the shareholders have to apply it correctly to their own tax return, even though the IRS-designed K-1 omits crucial information that the taxpayer or his preparer needs – the shareholder’s basis in the tax return, whether the taxpayer is “at-risk” for basis, and the level of the taxpayers involvement in the business.

If 32% of the returns are reported correctly, it’s shocking all right – it’s amazing that so many are
correct
. I’d like to see some law professor, or Congresscritter, try do a tough 1120-S perfectly on a deadline and a budget.

Anybody who has prepared returns for very long has had a “doh!” moment along the way – “holy crap, I’ve been doing that wrong!” It’s not because tax preparers or taxpayers are lazy or evil. It’s just hard.

Joe Kristan is a tax shareholder for Roth & Company, a Des Moines, Iowa CPA firm, where he works with closely-held businesses and their owners. Prior to helping start Roth & Company, he worked for two of what are now the Final Four CPA firms. He writes the Tax Update Blog and is available for seminars, first communions, Bar Mitzvahs, etc. You can see his previous posts for GC here.