Former IRS agent loses tax deductions for hiring his kids

BY Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC:

I found this 2011 case of interest:

Luis Bulas verus Commissoner, Tax Court Memo case 2011-201.
The court disallowed Luis Bulas’s payment of $18,000 in wages paid to his two daughters.

Bulas worked for the IRS S for seven years as a revenue agent and an appeals officer. In 1985 he started his own tax preparation and bookkeeping business. He should have known better! Or maybe he was just arrogant since he worked for the IRS.

For some odd reason, Bulas claimed the $18,000 in wages paid to his daughters as cost of goods sold.

This might have been the “red flag” that alerted the IRS. I wouldn’t be surprised if the IRS found Bulas error when they couldn’t match the W-3 to Bulas’ tax returns .

I started my own CPA firm in 1985 too and I believe in being an advocate for my clients. But there is a line between being an advocate for my clients and just cheating which would probably result in getting my clients into big trouble and losing my licenses.

I prepare our CPA firm corporate tax returns and have always put payroll on the line for payroll because I know IRS matches the total of the payroll W-2 reports (called a W-3) to the payroll line on the business tax returns.
A perplexing question I have is why would Bulas spend all of that time going to tax court for the small amount of additional tax he owed?

I would think he would value his time. I have a saying: “ When you decide to do one thing, you have decided to not doing something else. By choosing to spend all of this time this tax audit, he was short changing his clients.

I would think he would want try to work with the IRS agent and the appeals officer. If he lost at appeals, I would think he should just pay the tax and spend his time in a more productive manner.

In fact, if IRS won on the W-2 compensation argument, Bulas could have amended his payroll tax filings and received back all of the payroll taxes he had paid.

The reason he didn’t stop might have been that it wasn’t just the $18,000 Mr. Bulas was worried about. Maybe he was worried about going to jail because he also paid and deducted his daughters’ credit card bills and did not add these amounts to the girl’s W-2s.

What should Bulas have done?

For starters, Bulas should have followed the saying “ pigs get fat but hogs get slaughtered”. He had no records supporting his daughters hours. He didn’t have timesheets. He didn’t have a personnel file with W-4 and other personnel records. Then he started paying their personal credit cards through the business.

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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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