Many CPAs enter the tax profession and cite the variety of work as the primary benefit. Every tax return is a little different and many involve substantial opportunities to help taxpayers avert expensive and stressful trouble with the IRS. Accounting students seeking careers utilizing a diverse range of knowledge from their CPA exam courses should give serious consideration to the tax field.
When first learning about income tax, the subject can seem overwhelming. Even the IRS Commissioner called the tax code “a monstrosity.” But, understanding tax issues becomes easier with practice. Soon, the tax details in CPA study material appear elementary relative to the deeper scope of situations encountered in tax return preparation work.
The attention and interest of both accountants and the IRS are most drawn to tax situations where supporting records are important. CPAs initially master accurate tax reporting from evaluation of example scenarios described in sample CPA exam questions. The practice of tax accounting entails an identical process – except sometimes taxpayers don’t possess detailed records.
A CPA isn’t required to audit the records of taxpayers before preparing tax forms. However, a CPA should conduct reasonable inquiry to assure understanding of taxpayer circumstances. This is where the work gets interesting. For instance, different industries have distinctive tax accounting categories. This explains why some CPAs specialize in specific industries.
An additional feature of interest to tax accountants is the variety in quality of taxpayer records. Cases of sloppy record keeping necessitate considerable action by CPAs. In fact, a CPA faced with careless taxpayer records must attempt to assemble the data into a format consistent with examples from CPA exam review. When that isn’t possible, completion of the tax return leads to trouble.
A perfect storm of record keeping difficulty is the tax case of Martin Olive, who was the owner of a medical marijuana dispensary in San Francisco called The Vapor Room Herbal Center. For starters, Olive had poor records to substantiate his cost of goods sold and overhead expenses. After a little poking around, the IRS determined that Olive had also underreported his gross receipts. Both complications led to an assessment of $1.9 million in back taxes.
Clearly, Olive could have avoided a lot of difficulty if he had consulted with a CPA. Because he did not, the Tax Court assessed an accuracy related penalty of $320,000. Several unusual facts from CPA review courses are applicable to Olive’s situation. First, no deduction of business expenses is allowed under federal law against the income from an illegal activity. However, Olive is entitled to deduct the cost of goods sold that he can substantiate with his records. Of course, Olive’s activity is only illegal on the federal level. Presumably, deduction of ordinary and necessary expenses is allowed on his income tax return for the state of California, where medial marijuana is legal.
CPA candidates who like tales of the weird such as this will definitely find interesting careers helping people avoid tax trouble and implement tax-saving record keeping procedures. They should stick with audit if ordeals like Olive’s case are just too overpowering.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.