Discussion:Employee bonus-client mishandled

I know in WA state the L&I department and Employment Security department just love to discover these type of issues in an audit.

Here is something about penalties you might be worried about http://www.usatoday.com/money/perfi/taxes/2006-06-21-irs-usat_x.htm

I have fired clients for inappropriate dealings and not telling me the truth, trust me when I say I am much better for it. My practice has not suffered one bit. In fact in all the years I have been in business my practice has increased each and every year. I am busier than I ever could have imagined.

Don't make me call Aunt Emmy and have her whip out a copy of American Airlines, Inc. v. U.S. (204 F3d 1103)

Sea-tax, Please send me any of your clients that paid $300 to employees for the holidays and refuse to reclassify as you request. I will be happy to deal with them.

§132(e)(1) and the reg's define as a fringe benefit as something whose value is so small that accounting for it is unreaasonable and unpracticable. The issue in American Airlines is that the gift cards where "cash like" and the value of the cards were easily accountable. It doesn't make a difference if the benefit was paid in check, prepaid credit/debit card, green backs, or Bolivian pesos. There is other supporting case law and IRS posistions.

If you can't account for the value of $300 in cash...

DZCPA I am a little surprised that you are willing to suffer potential penalties so that a client which in this case is going through all of this to save what $275.4 of FICA taxes. 3600*.0765 and maybe some state disability and employment taxes. The rest comes from the employee. I personally have a hard time rationalizing why breaking the law for so little makes economic sense to the client or the preparer. I personally try to stay above board on everything, hypothetically though if I where to be involved in helping a client perpetuate a wrong it would have to be at the least economically viable. Sorry a $1000 dollar return just is not enough money for me to compromise my reputation.

Maybe I am just that dense!

AS far as all the discussion concerning firing the client-do you all have perfect clients??? I find it hard to believe that all your clients do everything exactly as you tell them. I deal with a lot of small businesses and i talk till i'm blue in the face about substantiating meals & entertainment, auto expense and so forth. However i'm sure they push the envelope at times. I try to make sure all my bases are covered, that i have adequately documented discussions with clients and recorded transactions as they have been represented to me. I tell them to call me before making decisions that impact on the financial statements (obviously this client did not listen). From reading the post on this board over the years it seems that others run into this same situation with small businesses-they are not perfect. If I fired every client over immaterial infractions i would have no clients left. As much as i would like it is not a perfect world.

The change in the criteria for preparer penalties is a concern. It seems to place us in the role as police. However my understanding is that we do not have to audit our client records. As long as they have represented to us that they have followed the rules regarding documentation we can accept that. In this instance the client obviously did not follow the rules however given the relatively small amounts involved i think i will just leave it in payroll and move on.

The fact is that I have the law and the tax code on my side supporting my position you on the other hand have your opinions. While I respect your opinions and certainly disagree with your advice I can see your point. That being said I would much prefer to error on the side of caution and be prepared to back up my position with fact and not assumption. My question is where do you all draw the line?

When I got in this business I was taught that there is a right way and wrong way to do things and it takes just as much time to do things the wrong way as it does to do it the right way. So why not do it right, I personally would not want my name on anything that was done incorrectly I would find that to be embarrassing.

Lastly I do not intend for this to be a slight to anyone here simply my point of view I truly respect all of your opinions and feel the difference in opinions allow for us to help educate each other.

If that was the biggest mess created by any of my clients - I would have complete serenity.

On the other hand, it's a no brainer of how to handle those that flagrantly disregard the rules and expect us to fix their mess after the fact.

Personally, I would inform the client of the right way to do it, explain the exposure that their way causes, and tell them how it's to be handled in the future if they remain unswayed - document it of course.

Although there is an issue of a few $$ in FICA, it's a small price to pay 'forego/forgive' now to insure that you will have it done the right way in the future... because now you have educated your client. If we all turn away our 'minor infraction' clients they will go elsewhere and the client might always get away with the 'minor infractions' and become a flagrant abuser.

We all have a threshold of the 'sins' we allow.

It's becoming apparent that the fear/threat of the new preparer penalties are putting us in the position of possibly penalizing our clients. Why penalize a client a legitimate deduction because of his failure to address a follow-thru requirement related to the deduction. In and of itself, the bonus was a legitimate deduction. Where in Sec. 162 does it say that the deduction would not be allowed?

To others I simply don't understand this situation as you do. The client that she speaks of has basically paid there employees "under the table". Last time I checked this was not allowed under any federal or state statute that I am aware of. Please educate me if you can show me any federal code, regulation, rev proc, etc. that makes including "under the table" payroll legally a deductible expense. It is not only Theresa's client who is comitting an illegal act according to the tax code but he/she is also telling there employees to under report there income as well.

You can change the facts and provide any opinion you want but it does not change the code. The right thing and the legal thing to do is amend the 4th qrt 941 and w-2's. This happens all the time and is really an easy fix.

Lastly it has been a wonderful discussion and I really appreciate the banter. Gotta love this stuff.

Who said anything about telling employees not to report the $300?

Get an engagement letter and move on.

I am from LI too by the way.

SP

And as to staplers no but upon audit I could easily amend to section 179 and the IRS is no worse off. I did not evade taxes, in fact the tax change is zero. I don't think the two situations are comparible they are basically apples and oranges both fruit but they don't taste the same.

Another argument is that staplers by inlarge are deminimus is nature with regrad to being a capital asset and it is a generally accepted principal to deduct then and not depreciate. What does a stapler cost maybe $20 beter be one fancy stapler.

Again I ask you, provide me some IRS source that says it is ok, tax court case, code, rev proc, summary opinion, anything. Give me anything that supports your position, because under audit that is what you would have to provide.

While I can understand and even apreciate this kind of thinking, but it's a corruption by inches. At some point you'd have to draw the line, and it's easier sooner then later.

I mean $5,000,000 executive employee compensation is immaterial to a $500,000,000 company, so why not run it through an offshore employee leasing corp.

And yes, I'm still taking 20% of my SwingLine each year.

On the tax return, we would report this as a separate item within payroll expenses. I was never comfortable with this, but we documented our advice to the client with regard to changing their policies, and made them aware of the potential consequences. I'm sure some of you would have dismissed the client. We have a long-standing relationship with this firm and it was a tough call to make.

Again, you can lead a horse to water . . .

Now I feel bad for making my client stop paying for his wife & kids car insurance, gas & repairs through his company. $10M+ in gross sales. What's an extra $14K of expenses gonna matter to anyone?

RG this is basically what I have been writing the whole time. The fix is soooooooo simple , why cut corners , just make the changes and off ya go.

Infact I spoke with one of my staff bookkeepers she said for a company with this many employees she could have the w2's and 941 amended and everything above board in less than a hour.

Get What? That it is OK to circumvent the law.

Your right on this issue I will never hold that opinion.

The client does want to amend the payroll because the w-2s have been issued. The OP isn't the one that prepared the payroll, so now what? You can't end run the client and contact the payroll service.

I'm not making light of the fact that letting it slide let's some inc & SE tax slip through the cracks. But the lesson to be taken here is that our clients need to be educated about what they do and that our services are not 'after the fact' considerations. Once educated, it should not be a problem in following years.

I would press the client about the amended though. They probably don't want to PO their employees since they already have their W2s. Another lesson, do not issue W2s until you have time to review the books.

This guys 12 employees have no clue that what they are doing is wrong . They are basically going to be left in the dark. Not right.