I am both a U.S. and Canadian CPA. For over twenty years, I specialized in Canadian taxation, wrote several books and textbooks, was a university lecturer, and co-developed what became, at that time, Canada’s most popular income tax software.
One of the lessons I learned early on from reading tax cases, was that, while your clients may be your best friends, they can quickly become your worst enemies. When the you-know-what hits the fan, a not-uncommon defense ( although rarely upheld in the courtroom) is traditionally “My accountant told me…”
When I lectured to students in professional accounting programs, I always suggested that no fee is worth the loss of one’s license.
Like probably millions of Americans, I read the New York Times recent article on Donald Trump’s tax returns. While I have nothing to go by other than what I read , my opinion is that the authors made a major effort to present a fair picture. For example, they acknowledged that depreciation write-offs on real estate are a legitimate means to reduce income otherwise taxable.
However, I suspect that most accountants would agree that the tax benefits from depreciation write-offs should be used to reduce mortgage debt and, if , instead, these benefits are extracted to support the owner’s lifestyle, whatever funds are taken for that purpose then become taxable income.
The Times authors deal with the issue of consulting fees paid by Trump and deducted from income over the years. Specifically, they question the validity of amounts paid to recipients outside the U.S. and to Trump family members.
Are some of these payments bribes and were some of the other amounts really gifts designed to circumvent gift and (eventually) estate taxes? There is no way to know without access to the details and the various tax-related forms, that are required to be filed. These are designed specifically to disclose payments to independent third parties for consulting services, royalties, attorneys’ fees etc. However, these forms are actually submitted separately from the annual tax returns. Of course, the IRS can correlate these documents with the information on the tax returns and review the rationale for deductibility. It is only if a dispute between Trump and the IRS ever reaches a courtroom, that the contents will likely become publicly available.
The Times article also provides information regarding Trump’s Seven Springs Estate in Westchester County, N.Y. The Times states that it is classified as an investment and that Trump has written off over $2 million in property taxes since 2014.
Here is an excerpt from the article:
“Courts have held that to treat residences as businesses for tax purposes, owners must show that they have “an actual and honest objective of making a profit,” typically by making substantial efforts to rent the property and eventually generating income.
Whether or not Seven Springs fits those criteria, the Trumps have described the property somewhat differently.
In 2014, Eric Trump told Forbes that “this is really our compound.” Growing up, he and his brother Donald Jr. spent many summers there, riding all-terrain vehicles and fishing on a nearby lake. At one point, the brothers took up residence in a carriage house on the property. “It was home base for us for a long, long time,” Eric told Forbes. And the Trump Organization website still describes Seven Springs as a “retreat for the Trump family.”
So, what about the CPAs who prepared Trump’s returns?
Below is a synopsis of both AICPA (American Institute of Certified Public Accountants) and IRS (Internal Revenue Service) guidelines for the preparation of tax returns for clients. Since this is pretty dry reading, you may want to simply concentrate on the words in bold print.
A CPA has the right and responsibility to be an advocate within the scope of the law.
A CPA should not, however, recommend a position unless there is a realistic possibility (one-third) of it being sustained. A client should be advised of the potential penalty consequences if the position is overturned. Realistic possibility requires at least a one-third likelihood of success.
A CPA should make a reasonable effort to obtain appropriate answers to all questions on a tax return before signing as a preparer. The standard is flexible if information is not readily available and if the answer is not material. If an answer is voluminous, it is permissible to indicate on the return that data will be provided upon examination.
A CPA may in good faith rely on information provided by a client without verification, and need not audit, examine, or review books, records, and documents. However, a CPA should not ignore the implications of information furnished and should make reasonable inquiries if the information appears incorrect, incomplete, or inconsistent.
A preparer is subject to an IRS penalty equal to the greater of $1,000 or 50% of his or her fee, if a client’s tax liability is understated due to an undisclosed position taken on the return. The same penalty applies if a refund claim is denied and there is not a reasonable belief that the position would more likely than not be sustained on its merits.
The “more than likely” standard requires a minimum 50% probability, in contrast to the “realistic possibility “standard of one-third.
Before 2011, anyone in the United States could legally engage in the business of preparing a federal tax return. The rules were changed effective January 1, 2011, and as a result of Treasury Department Circular 230, certain requirements are imposed on individuals engaging in the business of preparing U.S. federal tax returns.
Circular 230 contains rules of conduct in preparing tax returns. Persons preparing tax returns must not:
Take a position on a tax return unless there is a realistic possibility of the position being sustained on its merits. Frivolous tax return positions are prohibited.
Tax preparers and advisers who violate Circular 230 may be subject to penalties. These include monetary penalties as well as potential suspension from practice before the IRS. The rules also provide procedures for disciplinary proceedings.
Written tax advice that is considered a “covered opinion” must comply with numerous requirements. These provisions force providers of U.S. federal tax advice to conduct extensive due diligence regarding the facts and assumptions underlying transactions or arrangements (including assumptions as to future events and financial projections), and representations provided; to analyze not only applicable law but “potentially applicable judicial doctrines”; and generally, not to assume the favorable resolution of any U.S. federal tax issue.
Neither the Times nor almost anyone else can require Trump’s CPAs to comment on his taxes because of confidentiality protections. However , IRS inquiries, court orders and subpoenas trump (Sorry ; couldn’t resist) general confidentiality rules.
For now, however, we must live in suspense.
Will Donald Trump try to foist at least some responsibility for questionable tax positions onto the shoulders of his accountants?
If called upon by the IRS or the courts to defend their work, how will the accountants respond?
Some day will there be a movie or, better yet, a made-for – television serial about all this, and, if so, will the revenue exceed what was taken in by the producers of “The Apprentice”?
Time will tell.
I intend this as a serious question. What if an accountant is presented with false information by the client? I’ve see some cases like Manafort’s where some pretty obvious cutting and pasting was done on some mortgage applications but faking bank statements and other stuff would these days be pretty easy to do for someone determined to make them look like the real deal. Basically, a modern version of the old-timey practice of keeping two different “ledgers” with one being the real stuff and the other will false transaction/figures cleverly done enough to pass muster if presented to authorities. I suppose it comes down to the due dilligence you mentioned. However, by spreading different work around to different consultants in the end only one accountant (Alan Weisselberg perhaps) might have their name on tax returns as the “preparer.” Bribing or coercing only one would seem to this layperson as possible. I’d imagine it goes on in certain businesses like high end real estate more than people realize. But the bottom line question is whether an accountant is presented what seem to be legitimate financial documents but they are fake, especially if they are working on only ONE PART of the overall tax return.
Enjoyed this article. Reminded me of years before I retired when I used to be one state’s environmental agency’s expert in performing “Ability to Pay” and “Economic Benefit” analyses when a violator corporation claimed they could not afford to correct an environmental problem or pay a civil penalty for serious environmental violations. Came across all sorts of people, including con men that remind me of Trump who pulled the financial strings of corporations. Obtaining the CEO’s signed permission to request copies of signed tax returns from IRS was always the first step in asking for proof of ability to pay from cash flow solvency. Tax returns were then run through EPA Models developed by a contractor. Became really good at recognizing red flags and patterns and asking the correct questions and for additional documents and eventually taught courses internally on how to do this. Once I uncovered blatant tax fraud that was so obvious the CPA should have had their license yanked immediately. Approximately one half the time the company’s CPAs and CFOs would withdraw their ability to pay argument during confidential settlement negotiations after I “found” sources of money that could be used without having to cause the corporation to file for bankruptcy protection. Once every few years we would come across CEOs exactly like Trump who refused to provide financial documents, would stall/litigate for years forcing a judge to decide. Those types would make us go the extra mile to attempt to “pierce the corporate veil”, shred documents rather than disclose them as required by discovery law, drain assets illegally while held up in litigation, or just hope that I retired or state witnesses or resources dried up and the State would eventually drop the case. Some sued us personally to attempt to quash the case. Others went the political route and attempted to get a Senator involved to stop the enforcement action. Each time the politician would back off when we showed them photo-documentation of serious pigging up of the environment & they realized it was not good for their careers supporting environmental felons. Sometimes we were one of many state and federal agencies going after the same corporation and their principals for a wide spectrum of civil and criminal offenses and we would join together in our litigation actions. If there were tax fraud issues, they always overshadowed and “trumped” the environmental issues in terms of dollar amounts involved. Found the CPAs, Comptrollers and CFOs had more scruples than the Trump-like con men CEO. Once again, enjoyed reading your CPA perspective article on the evidence and laws relating to this matter now in the news.
this article is full of inuendos not backed up by fact. without a real return to look at you are just like the New York, I hate trump, Times.
Where did you ever get the idea the depreciation could only be used to reduce mortgage principle? Yes. there are issues of concern but all of them are based on the NYT comments. One reason I don’t trust the NYT comments was when they stated his debt comes due soon. No where on a form 1040 does this information exist. Proof to me that the NYT made it up as they went along.
While payments to family members are suspect do you really think they listed as consultants the individuals paid on the 1040 return?
Glad you did not also attack taking a legitimate Net operating loss, or complain about finding a legitimate way to reduce taxes as being nefarious.
I never said depreciation tax benefits have to be used to pay down mortgages, although I believe they should. However if the owner uses cash flow for personal drawings, this usually will attract tax.
A tax return provides the addresses of rental property and theTimes points out that the Seven Springs Estate, on which expenses were claimed, was described as the family compound by one of Trump’s sons.
The Times points out that a consulting fee paid happens to match identical income reported by Ivanka.
I cannot determine if the accountants violated AICPA and/ or IRS guidelines. All I can do is summarize the rules and allow readers to draw their own conclusions.
There is obviously a tax dispute between Trump ands the IRS.
I pointed out that, if the IRS wants to allege tax fraud , it may behoove Trump to try to pass blame on to his accountants.
My original title was “Will Trump Throw His Accountants under the Bus?” but the editor changed it. I don’t approve of this change for several reasons , not the least of which is that I have been an atheist for over 60 years and I would never refer to a (non-existent) God.Sadly, I have no control over this.
Henry Zimmer