Good client relations: independent contractors, tax forms and more.

• Author: Williams, Leonard W.
• Position: California Tax

Guilty? Have you ever walked your client through an increased federal tax liability as the result of an audit or CP-2000 Notice, but forgotten to warn them of the impending Franchise Tax Board increase?

If you have--and many CPAs are guilty of this lapse--you know your client will be upset.

Or suppose that an IRS audit results in a lot of changes, but because of AMT, the client's federal tax liability will not change. Should the client be warned of a coming FTB change?

You betcha.

When federal taxable income changes, the IRS sends a report to the FTB, which in turn, adjusts for California purposes and bills the taxpayer accordingly.

EDD and Independent Contractors

The independent contractor issue with the EDD is an endless battle. A TaxTalk participant relayed several incidents involving dentists and optometrists and their "colleagues" or dental assistants.

The EDD says these colleagues are employees. The hanging hat seems to be whether or not the "contractor" has a business license.

Next, the EDD checks for a yellow pages business listing, which indicates that they are holding themselves out to the general public as they claim.

The EDD also has done reference checks by asking for client contact information and interviewing them by phone.

In one war story, a dental assistant worked for 10 dentists and the EDD claimed that she was an employee for each of them because she didn't have a business license. The EDD won.

Another participant said dental hygienists can never be contractors because they may not set up shop by themselves. They almost always must work under a dentist's supervision.

Deciding a Corporation's Future

The subject of letting a corporation die or formally dissolving it has been bandied about many times before, but it has returned with another viewpoint. The following war story related by a participant seems to favor dissolving the corporation instead of letting it die.

An attorney set up--but didn't use--a corporation, and more or less forgot about it. He eventually received a notice from the FTB for $19,693.49, plus penalties, fees and interest, which bumped his total proposed assessment to $35,407.

The figure wasn't based on 1099s or any other direct data. Rather, it was based on the "average income amounts reported by businesses in this industry."

If the person to whom the notice is sent continues to pitch the envelopes, it winds up in a field collection group.

It is hard enough to calm down clients when they get notices...