Tax Saving Strategies
Subject: minimizing overall tax liabilities among related entitiesKerry,I am a CPA practicing in Texas and I am interested in an issue you have discussed on your blog. It involves the legal shifting of income and deductions between at least three (or more) entities, say a C corp with a fiscal year-end, an S corp with a calendar year-end, and an individual owner of both corporations. I understand the why, the timing, and the benefits of the shifting. My philosophy in dealing with clients and the IRS is similar to yours. I am not afraid of taking an aggressive position on my clients' tax returns, even in light of the changes to the Circular 230 rules and the IRC Section 6694 penalty provisions. But the hesitancy in using this strategy is my possible inability to have enough solid reasons to convince the IRS that there is a valid business purpose for the arrangement. I am a bit nervous about the IRS asserting that the entire arrangement is a sham thereby collapsing the two corporations into one and destroying my tax planning. It would be helpful if you could reveal at least a portion of your strategy for developing the rationale for using this method of tax planning. If that would be too intrusive and not something you would like to divulge, would I get some of my answers by using TAX Coach? At your recommendation, I subscribed to their service but have not run an analysis for a client yet. How successful have you been in defending your clients who are using this tax planning strategy when they were audited?Thank you, have a good tax season, and I hope you won't tell me "I really should be working with my own professional advisor on this matter" (ha).
As you'll see in an upcoming post, there seems to be a lot of self censoring by tax pros whose imaginations have obviously gone wild about encountering the nastiest IRS auditors who will disallow anything that could have possibly saved the clients money on their taxes. The result is a fear to recommend very basic tax savings strategies, such as multiple entities, and thus forcing their clients to pay more in taxes.
Having encountered every possible kind of IRS auditor there is over the past 30+ years, from real hard-asses to wimpy ones who literally allowed me to have my own way with everything, this fear is crazy and smells of professional paranoia.
As long as a valid business connection is there, such as leases, commissions, royalties, salaries, etc., and the amounts being passed between the owners and the entities are consistent, IRS will have to accept the figures.
I have had cases where IRS auditors have seen monies being passed around different entities, and they only cared that all entities were using the Cash basis of accounting and that the amounts were consistent.
As part of the Clinton Family's attack on me for being critical of them in my newsletters, IRS came after Sherry and my personal tax returns and had no problems with the monies we shuffle around our different corps when I showed the figures were consistently treated on our 1040 and the 1120s.
About four or five years ago, a client's 1040 was selected for audit based on huge interest expense deductions. When the auditor saw a lot of money passing back and forth among the client and his several wholly owned C and S corps, all he asked me was whether the corps were all on the Cash basis. When I explained that they were all using the Cash basis the auditor said that was good and he wouldn't need to look at the books for any of the corps. He said that if any of the corps had been on the Accrual basis, he would have had to perform a full blown audit on the corp as well.
Using corps to shift money around to minimize the overall tax burden has been around for longer than I have and will always be a perfectly valid technique. I guess I was lucky in the fact that one of the CPAs I worked for at the beginning of my career was using this strategy for his own and his clients' finances; so I got an early start with it and have been working with it ever since. It is a shame that there are too many tax pros today who are afraid of it.
While I haven't used them for any of my clients, TaxCoach does have some nice reports that you can generate to show clients how using corps can work to reduce their overall tax burden.
Good luck. I hope this helps.
Thanks very much for your reply. It was just what I needed to hear in order to boost my confidence enough to begin recommending this strategy to my clients.