I am starting a Case Study series where I go through various situations in which we have helped clients over the years. Maybe we helped them save on taxes or helped them with an IRS notice or helped them with a bookkeeping issue. Whatever the case may be, the whole point of this series is to bring light to the various services that we provide our clients and maybe one of these cases can teach you something that you can apply to your own situation.
This first case is about a client that was referred to us a couple years ago. We’ll call this client Bob. Bob had gone to his family’s accountant ever since he began filing his taxes 10 or so years ago. Bob was looking to quit his full time job and start working at his side business full time. Bob’s accountant was looking to retire in the coming years and Bob wanted to find an accountant that was a little younger and could help him grow his business. He got my name through a mutual business associate and we met for coffee. We immediately hit it off and he decided to move his business and personal taxes to us.
The first thing we always do when we get a new client is ask to see their previous year tax return. The main reason we do this is to make sure we have a good understanding of the work that will be involved. This allows us to give an accurate quote and it also helps us make a check list of all the information we need to request from the new client.
A byproduct of doing this is that every once in a while we will find a mistake. This is usually the case when the previous years return was a self-prepared return. Meaning when a taxpayer files their own return. Tax returns can be complicated and it can be easy to miss a deduction or fill out a form wrong when you do your own return. So because Bob used an accountant in the previous year, I didn’t expect to find any of the usual self-prepared mistakes. However, when I was looking at the income and expenses from his side business, something seemed off.
Due to the nature of his business I figured he would have quite a bit of business mileage to deduct. However, when I looked at his schedule C (the schedule that reports business income and expenses) I didn’t see any business mileage being deducted. The actual business miles get reported on the second page of the schedule C and the deductible portion gets carried forward to page one. He had nearly 6,000 miles reported on the second page but nothing was getting deducted on the front page. This was about a $3,400 deduction that Bob was missing out on. This was an important mistake because it was causing his self employment earnings to be overstated and thus paying too much self employment tax.
I informed Bob of my discovery and ran some numbers for him to show the taxes he would save by filing an amended return (a return you can file to correct mistakes made in previous years). In this case between the Federal, State and City tax returns he would save nearly $1,400 in taxes. This was a no brainer for Bob and he decided to have us file the amended returns.
I wish I could start every new client relationship by saving them over $1,000 in taxes right off the bat. However, that’s not usually how it works. The main point of this case is to illustrate the importance of asking questions and knowing what’s going on with your tax return. Even the best accountants are human and make mistakes. Tax returns can be confusing but sometimes obvious mistakes can be spotted by just looking it over. If your return is complicated or there’s something you don’t understand, ask your accountant to go over it with you.