Wednesday, April 1, 2009

Now It's Kathleen Sebelius's Turn...

It's hard to be surprised anymore....even as a professional tax preparer!

This time, Kathleen Sebelius has admitted to errors on her tax return and has repaid over $7000 to the IRS for the past three years. Here is a summary of the statement she submitted:

In her letter to Baucus and Grassley, Sebelius wrote that the accountant [hired to "scrub" her returns] discovered these errors:

--Charitable contributions over $250 are supposed to include an acknowledgment letter from the charity in order for a deduction to be taken. Out of 49 charitable contributions made, three letters couldn't be found.

--Sebelius and her husband took deductions for mortgage interest that they weren't entitled to. The couple sold their home in 2006 for less than what they owed on the mortgage. They continued to make payments on the mortgage, including interest. But since they no longer owned the home they weren't entitled to take deductions for the interest. The same thing happened with a home improvement loan. Sebelius said they "mistakenly believed" the payments were still deductible.

--Insufficient documentation was found for some business expense deductions.

Perhaps she should have hired this new accountant for the first go-around.

Let's take a look at these three matters individually.

(1) As a recognized tax professional myself, if a client comes to me and says, "I made a contribution of [insert dollar amount here] to [insert charity or church here], but I do not have documentation of it," here's what I tell them: "I can only include this on your Schedule A if you have documentation of the gift." I would then inquire if they had (or could get) a canceled check, receipt, or other documentation besides a formal statement. If they said they could, I would include the gift on the return...and remind them that they needed to track down and secure that documentation.

But notice—I take the word of the client in this case, and do as the client instructs.

(2) If a client came to me with a mortgage interest statement [Form 1098] for their own home (which can be lawfully deducted), another for a home they didn't live in, and at least one more for a home equity line of credit, I would be asking some questions. I might not think, however, to ask if the client still owned the home. It is not uncommon for people to own two homes, and mortgage interest can be deducted for one's principal dwelling and one other (assuming other conditions are met).

But again notice—It would be expected that the client would share the relevant facts with the tax preparer.

(3) This is a no-brainer. No document, no deduct. While I might include a deduction on a Schedule C if the client did not physically show me receipts, I would be doing it on the client's word that the documentation exists.

And at the end of the interview with the client, I would tactfully emphasize the importance of proper documentation of all these things, and remind the client that these documents (which you tell me you have) need to be kept in the event the client is audited.

Or nominated to an Obama cabinet post.

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