Income Tax Preparation Tips and Advice: Scottsdale, Phoenix, AZ





WALLY and Winnie Winner became clients of my CPA and CFP firm after suffering a shock when they found out that they owed over $300,000 in income taxes for the previous year.   Their story is similar to many clients we have helped over the years although most of the clients have saved thousands of dollars in income taxes through the legal tax loopholes that I will be teaching you to use with a knowledgeable and experienced CPA tax professional.

Part of the blame is due to Winners’ mistaken belief  that they could just get an extension and it would give them more time to pay their income taxes.

Ed, their former CPA shares part of the blame too because Ed did not warn them that they would not only owe the tax but the additional late filing and late payment penalties by not paying in 100% they owed before the deadline.  If the Winners’ did not have the money, they should have at least filed the return with a down payment check against the taxes due along with a Form 966 installment agreement or a note to the IRS with the amount they could definitely pay each month.


By taking this action, the late filing penalty of 5% per month would be avoided.


However, like most people, the Winners’ did not know the rules and were going to face major stress.

So besides owing the large taxes of over $300,000, they would owe 5% late filing penalty per month up to 25%. 25% of $300,000 equals $75,000.  The $75,000 payment uses up cash but is not deductible so it pushes the Winners’ further in a hole!


At the same time, my thoughts drifted to my previous clients Looie and Louise Loser who had enthusiastically become clients about exactly 1 year before. Looie was always busy “putting out fires”. He was always in urgent mode. He and his partner wanted to reduce taxes in the worst way but never followed our action plan.

Unfortunately, there are many Looies’ in this world who make a lot of money but are always in debt.

I was hoping that WALLY and Winnie  were not going to be just like Looie and Louise Loser.



Paraphrased from Wikipedia:

“In the tale called the Little Red Hen,  the little red hen finds a grain of wheat, and asks for help from the other farmyard animals.

The little red hen before the harvest, threshing, milling the wheat into flour, and baking the flour into bread, the hen again asks for help from the other animals, but again she gets no assistance.

Finally, the hen has completed her task, and asks who will help her eat the bread. This time, all the previous non-participants eagerly volunteer. She declines their help, stating that no one aided her in the preparation work. Thus, the hen eats it with her chicks leaving none for anyone else”

The lesson to me is that when it comes to money, like taxes, we need a team that will responsively work together to reach the goal of paying lower taxes. 


Just like in the Little Red Hen, Looie and Louise thought that they just by hiring a CPA and wishing that their taxes owed would vanish without work, they will not enjoy the “tax savings harvest”.


But the Winners’ were willing to work. They had worked hard all of their life and understood that the time they put into learning the secrets of savings would result in plentiful harvests for the next 30+ years of their lives!


Now back to the Winners.  WALLY and Winnie’s feelings  changed from  anger to terrible fear.  Their reptilian brains wanted to fight or flee!  Sometimes they would “freeze” feeling similar to a deer who is stuck in the middle of the road while the ongoing SUV with headlights barrels down the road.


All they had in their business and personal bank accounts was $32,241.   How could this have happened??

Over the past 5 years, they had trusted  Ed, their CPA.    Their businesses  had been only moderately successful in the past and they never owed more than $3,000 in taxes each year.


What went wrong this year for 2014?


This year WALLY’ s restaurants and Winnie’s dental practice had outstanding years.  Winnie also had the knack of selling Essential Oils that helped her friends and associates health.  Winnie signed up “associates” who would bring on other “associates”.  The future looked bright indeed!

They thought nothing of the increases in cash flow in their business and personal bank accounts.   Instead they found ways to spend the money as their business and personal bank account balances grew.

“We have been waiting to buy a new house and then remodel it to our liking” said WALLY.

“I just closed on buying a plot of land to build a big professional office building for my dental practice and  rent out to other  medical professionals”  said Winnie.


WALLY and Winnie took cash out of their businesses and along with their banker Bob’s financing, they started investing in these real estate transactions.

WALLY and Winnie discussed how their businesses would keep on generating cash and they felt a sense of security.

Then the floor fell from under them in one phone call!

Their CPA got back to them on April 1stth (April Fools Day) with the bad news.  Just two days before on March 30th,  WALLY and Winnie had just signed an agreement with the remodeling company  for over $120,000 remodeling their home and did not have the cash to pay the taxes.

The cash in the restaurants and in the dentistry practice were “bone dry”.  In fact, WALLY was getting phone calls from his suppliers that they were going to stop supplying his restaurants.  Winnie’s Essential Oil business had suddenly slowed and the dentistry practice had hit a slow period.

So on April 22nd, WALLY and Winnie came to my office and sat down at the conference table with a view of majestic pine outside the window of my 2nd floor office.

For the next hour, WALLY and Winnie poured out their story of their misery as we reviewed  what their tax and cash position was.

WALLY then pulled out the tax returns for their businesses and personal tax returns.  Winnie handed me  the financial statements for their businesses for the previous year.


After 15 minutes of total silence as I “read” through their financial statements and tax returns, I told them that there was no magic wand that would vaporize their owing all of the tax unless we had worked together the year before.


However, if they were willing to listen to what I had to say and to respond in a timely manner our requests, we might be able to reduce their income taxes.


I explained that normally 95% of the tax savings occurs in the fall of the year between the day after Labor Day to New Year’s Eve.  In addition,  once the “paint” is dry on the year end, it is very difficult to go back and fix the high amount of income taxes.


However, I found one significant preparation error that resulted in about a $26,500 error. The error was that the CPA preparer failed to show WALLY’ s restaurant S corporation and Winnie’s dental practice as active or what is called in  tax jargon “non-passive”.  The reason for the error is that the tax software ASSUMES that taxpayers do not actively work on a flow through entity like an S corporation and a partnership.  S corporations and partnerships that file Forms 1120S and 1065 do not pay a tax on these returns but flow the profit or loss down to the owners.  Then at the individual level on Form 1040, Schedule E, page 2,  the tax preparer checks the box that the taxpayer is active or non-passive in the business. If the business owner is active (generally active is defined as working at least 500 hours during the tax year in the business), then the taxable income is not subject to the Obamacare 3.9% tax for adjusted gross income over $250,000.

“Winnie and WALLY, since you each worked more than 500 hours in your businesses, you were not subject to the 3.8% tax and your income taxes would decrease by $26,500 for 2014. However, before we amend the tax returns for this preparer error, we need to see what else is wrong on the tax returns. Mark, my associate and I will need you to carefully scrutinize if the balances in your business financial statements are materially correct or not.  I have to warn you that if your CPA preparer made other mistakes we will need to make other changes”, I said.

“I do not want to amend the tax returns” said Winnie.  “I have heard that amending tax returns causes an IRS audit”.


“Winnie,  in my over 30 years as a CPA, I have never once seen an amended return trigger an IRS audit.”,  “I can guarantee you that amending the tax returns will not trigger an audit but I cannot guarantee that you will not be audited randomly”, I said.


The happy ending was that the Winners’ 2014 tax returns were amended resulting in tax refunds.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009