Royer Advisors and Accountants recently started working with a local trucking supplies and equipment company. Before coming to Royer, this company had chosen to work with a sole practitioner for their tax services. Like many of our small business clients, different parts of the business were set up as separate companies or included in the shareholders’ individual tax returns. This resulted in four separate tax returns that needed to be prepared for one client.
As part of Royer’s “onboarding” procedures, we reviewed all of the prior three years’ tax returns filed by the client. In this review, we found several errors on all four of the returns in each of the prior three years.
One error that we found was costing the two shareholders $700 each in additional income tax in each of the prior four years. We also found a reporting error that could have created a crushing tax bill from the IRS. This error would seem like a “little” thing each year but would have been devastating to the company in the long run.
This “time bomb” error relates to the life insurance that the company had on each shareholder. Insuring each shareholder’s life is a common and wise step to ensure continuation of the company if one or both of the shareholders die. While life insurance proceeds are normally not taxable to the beneficiary (e.g. your uncle dies and named you as the beneficiary in his policy), reporting rules for life insurance enacted in 2006 can make the net proceeds (in excess of the premiums paid) taxable income for a business if certain procedures are not followed. By bringing the client into compliance with the necessary procedures, Royer helped the client avoid what could have been a disastrous tax outcome.
It is always nice if we can show an immediate tax-saving opportunity to a new client. And in this case, over the 4-year period, the client lost nearly $6,000 including the hidden cost of poor quality. However, as this case shows, it is the hidden “little” details in a tax return that can blow up a client’s plan. At Royer, we are dedicated to pursuing perfection in all of our client services and relationships.
“Perfection is not attainable. But if we chase perfection, we can catch excellence.”