This is an interesting Tax Court case, if for no other reason, it illustrates the importance of a taxpayer working with an experienced and ethical tax professional. For all those taxpayers who are looking for a CPA and their first question is “How much do you charge to prepare a tax return?” rather than inquiring about the experience and expertise of the tax preparer, here is what you may get.
The CPA (Sam D. Kilpatrick v. Commissioner of Internal Revenue U.S. Tax Court, Dkt. No. 17242-13, TC Memo. 2016-166, August 29, 2016) was audited by the IRS, was denied deductions he had claimed on his personal tax return and was assessed accuracy-related penalties, and decided to represent himself in Tax Court. Perhaps Mr. Kilpatrick never heard of the saying “An attorney who represents himself in court has a fool for a client.” Undoubtedly, this also applies to CPAs who decide to represent themselves.
Mr. Kilpatrick conducted his CPA practice primarily out of his home but also sometimes met his clients in their homes. He claimed a home office for the one room in his home devoted to his business which the IRS denied in full. The audit exam revealed that Mr. Kilpatrick maintained one checking account and one credit card account and he comingled his business and personal expenses. Perhaps he missed Accounting 101 where it states that business activities must be separated from personal activities. He obviously had no clue that his 2009 personal tax return would attract the interest of the IRS. For example, he reported $3,000 of income and business expenses of $38,628. Business expenses included $22,331 for auto (he claimed he drove 40,601 miles for his business); $3,429 for office expenses; $4,908 for supplies; $575 for meals and entertainment; and $4,466 of other expenses. His business improved in 2010 as he reported $3,100 of income and business expenses of $29,336.
Since auto expenses stand out in this return, let’s focus on that expense. To deduct auto expenses, a taxpayer is required to maintain a contemporaneous mileage log book showing the odometer reading at the beginning and end of the calendar year, the mileage for each business trip, and the business purpose of each trip. The IRS would not accept Kilpatrick’s calendar and MapQuest directions which had been prepared at least a year after the CPA used his car for business travel. Therefore, neither item was an adequate record of the amount of business mileage, the date of use, or the business purpose of the vehicle’s use. Since the individual failed to adequately substantiate his alleged automobile expenses, he was not entitled to an automobile expense deduction in excess of the amount determined by the IRS ($398). In addition, he was not entitled to deduct various purchases from an office supply vendor, internet service, and expenses related to attending an educational conference for CPAs. The individual was not entitled to deduct as “other expenses” amounts paid for postage or his cell phone (as he failed to substantiate the business use of his cell phone).
For his lack of documentation and substantiation, as well as for his negligence and disregard of IRS rules, Kilpatrick paid over $4,000 in accuracy related penalties. And with respect to Kilpatrick representing himself in Tax Court, the court stated that “In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.”
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.