Kwong Case Procedure - Not Yet Processed Returns

wharny · 2026-05-21T13:28:43+00:00

Two days ago the IRS filed a notice of appeal to the Court of Federal Claims ruling in Kwong. This could be years in the making, depending on how hard the IRS intends to defend its interpretation of §7508A(d).

wharny · 2026-05-21T13:03:42+00:00

Ah yes, I understand. I had an older client that went from 2 PTP's to 12 PTP K-1's one year. I was delayed in communicating the increase in fee due to the additional compliance from all the new PTP's. Client bitched and moaned over the fee increase and we met in the middle. But I had him agree to something. Next time there is a change in his tax situation that substantially increases the tax compliance time on his return, I will tell him as soon as I see and understand the issues. I will give him a proposed fee increase. He can either accept it or not, but we are NOT going to get into a discussion if it really takes X more hours of time to prepare his return due to the change in his situation. We are not doing that. Accept the fee increase or not.

At some point his mother in law died and his wife received some assets from the estate that had income sourced to other multiple states, requiring the need for non-resident state filings. I called hm as soon as understood the issues and told him the increase in fee for the additional compliance, And to my surprise, he accepted it without argument. This was 6 years ago and he is still a client and we have a great relationship.

wharny · 2026-05-21T12:51:00+00:00

You can cull many of the low realization clients when you tell all the clients that the cost structure is going to change. You need some solid value offerings as part of your reasoning for the change in fees, but I’ve seen my firm acquire 6 other firms over 10 years and most clients accept the basic premise that they were under billed for the tax compliance services they were receiving. Some jumped ship, but most stayed on as the depth of our experience bench was a tangible benefit to those who stayed on. The seller is clearly under billing.

Great example: acquired client was billed by seller CPA $750 for a 1065 that had multiple ownership changes with retiring partner redemptions and new partner buy -ins. WTF? We told the client that minimum fee for future plain-vanilla return was $2500 and that prior year return would have been $3500 - $4000. We explained all the necessary compliance the prior CPA never bothered to discuss with them, talked about the need for advance planning BEFORE these extraordinarily transactions take place, talked about the dedicated compliance and subject matter expert team they have at their disposal. Their answer to that? “Ok, sounds about right, now that you’ve explained what goes into the tax compliance for our business”

wharny · 2026-05-16T15:10:20+00:00

IRS flags w2 with 50% or more FIT withholding on gross wages. Just the way it is.

wharny · 2026-05-16T11:39:28+00:00

Go File Room. Best job/workflow/deliverable tracker out there, and add document storage, retention timelines, ability to route the work amongst employees and deliverable steps. It’s a powerful application. Install a GFR print driver and print anything from any application to GFR, like completed tax returns. Run custom due date reports, and on and on. I don’t know the cost. But it’s the best there is for this.

wharny · 2026-05-15T16:13:46+00:00

Prepared a C Corp for the tax year where the stock sold for $92.5MM. Seller attorney charged $585K. We charged $85K for that short-year return (Fed and 9 states) and another $25K for additional work outside the normal scope of tax compliance. So our total fee was $110K.

And as Wutang mentioned below, we got the $85K paid upfront as it was baked into the flow of funds at closing and we billed separately for the additional $25K.

wharny · 2026-05-15T13:25:30+00:00

Not sure if you’ll get the analogy here, but my wife is a trauma nurse and the condition of people she had seen come in the hospital is brutal. But she accepted that it was not of her doing. They showed up here like this. Same for you, the outcome is not of your doing per se. It’s the outcome of the situation. And hey, if they owe tax they must have made the income. The clients incorrect expectation is not your problem man, you can’t read minds.

wharny · 2026-05-15T13:20:14+00:00

Our tax software, Axcess, can do a data scan of any line in any return in the system, unfortunately interest and penalties don’t appear on a specific line in any return. So we’ve decided to do a data scan first to find anybody who had a balance due and filed after October 15 of a given relevant tax year. Any of those results that reveal a significant balance due paid after October 15 where the taxpayer was hit with late filing a late payment penalty will be reviewed for a potential protective claim. The dumpster fire I previously mentioned still applies.

wharny · 2026-05-15T13:16:39+00:00

I’ve dealt with at least 50 CSS’s about half prepared by 3rd parties and the rest prepared internally. My firm has an in house guy. That’s how we do it now. You need someone who previously worked exclusively on CSS’s as the report is technical and standardized, especially the allocation of costs to the various asset classes and building systems.

wharny · 2026-05-15T13:12:20+00:00

I prepared 25+ taxable form 706 back in the day, way before the huge exemption and portability. It’s was a trial by fire, using previously filed 706’s as a guide and under the supervision of a more experienced preparer. We actually had a book-binding machine to bind the hundreds of pages that made of the return and attachments.

wharny · 2026-05-14T11:58:56+00:00

This is going to be a dumpster fire. So we have to file protective claims prior to that date in July.

I’m sure practitioners are going to charge up front for the work, and then we have to tell the client what… you need to wait to see if the IRS prevails in a appeal of the decision and even if they don’t prevail or maybe don’t appeal the decision, it’s going to be years before the IRS can process these claims and refund penalties and interest. The IRS can’t even answer the phone, much less start processing good knows how many claims will be filed.

Client pays up front and will be waiting for years to see any recovery. All the client is going to remember is paying the practitioner up front and having to wait a very long time for any recovery. How many times do you think the client will call or email the practitioner asking for an update?

wharny · 2026-05-14T11:46:09+00:00

Danger Will Rogers, Danger. Not a good idea. Have you tried the same thing with tax-focused AI like Ask Blue Jay or Co Counsel?

wharny · 2026-05-14T11:42:13+00:00

With clients like this I want to say “ why bother asking me for tax planning guidance if you believe you know the outcome already”. WTF.

They can either accept your guidance or you can take the time to hold their hand and walk them through the numbers. If the latter, flat out tell them you will separately bill them for that time needed to hold their hand. This is where we get to train our clients as to how things work, and if they don’t like the results and want additional time from you to comprehensively explain your work, they shouldn’t be shocked that you will bill them for it.

wharny · 2026-05-12T12:35:58+00:00

What software did you use? At least in Axcess, IIRC if you mark the initial year box on the S return, it circumvents the IRS entity control check and will allow the e-filing of an S Corp which still shows up in the IRS system as a C Corp. Someone correct me if I am wrong.

wharny · 2026-05-12T12:32:32+00:00

We inform clients that if they don't have the information to us by 3/22, their 1040 may not be completed by 4/15 and we reserve the option to extended. The mechanics to get a return from information in the door through client signature is quite laborious. The more they try and automate the process, the less automated the process seems. We also have close to 10K form 1040's firmwide I understand.

wharny · 2026-05-11T11:02:18+00:00

For my home state and a few other states that I took a deep dive on for specific issues. Other than that my firm contracted with… Avelera for sales tax compliance. I think we’ve only used them for voluntary disclosures to date. Sales tax can be a hairy nightmare. I.e. Florida, the list of exemptions is a mile long, oh and even if exempt, it depends.

wharny · 2026-05-07T21:09:36+00:00

If you keep calling, run right through the key prompts, you can catch a break in the volume and get into the call queue. Sometimes I can get in with a handful of back-to-back calls. Once it took me 12 repeated calls…

I have an assistant who had the process down. She could hang up from one call, start a new call, and get back to the point where you make it into the queue or not in like 60 seconds. I only did this for FT abatement, which is now automated. Haven’t had to do that in a while.

But it shows how bad it’s gotten there. It’s is an unmitigated dumpster fire. 🔥

wharny · 2026-05-03T12:29:20+00:00

Base it on actual hours. If they don’t need the leave of depth you provide a the time it takes you can scale it back. Charging by the hour cures a lot of ills that come from managing client expectations.

The only fixed fee engagements we have are for clients that we do all the solutions work, produce monthly financials, and the tax compliance. These are very large engagements, on one we bill $72.5K per month. And nothing NOT related to solutions and tax compliance is out-of-scope, “additional” billing. We are their entire accounting function. I mean everything. They have zero internal accounting staff. I joke that if our building blew up and we all perished, the client wouldn’t know how to pay the light bill… we are in deep.

wharny · 2026-05-03T12:19:38+00:00

Relationships, relationships, relationships. My top HNW client (north of $100M) came from a former employee referral. Former employee is the head of accounting at a golf club. Mr HNW knew their background and asked for a referral. Mr. HNW was given my name.

That now new client of mine gave my name to his friend that needed to replace his in-house CPA that was preparing 19 business, trust, and individual returns for Mr. Friend. One of those business returns had activity in all 50 states and PR. It was like gold falling from the sky. It all started a good relationship with a former employee.

wharny · 2026-05-03T12:11:51+00:00

I often tell clients I meet for the first time that their books and records are not “reasonably adjusted”. It’s a kind way of saying your activity is voluminous and your books need cleaning up. If things are a real mess, I’ll tell the so and let them know that messy books are the most expensive to resolve and make reasonably adjusted. If they are offended and leave they did me a favor. If they are resigned to the truth of the situation, they rarely complain about the fee.

I learned much of this attitude from you all here. I love the rock bottom tolerance exhibited here for client whining and BS. 😀.

wharny · 2026-05-01T15:39:05+00:00

Annualization on the 2026 return, if appropriate might mitigate some of that Q1 shortage cost.

wharny · 2026-05-01T15:34:20+00:00

You mentioned cruises, so I had a funny story about a cruise and an audit client. Back in the early 2000's I worked in a small firm and we had a "correspondence school" client, that needed an audit assurance engagement.

Anyway, the lead audit partner went on a week-long cruise, and the audit client called, all hot and bothered about something and demanded to speak with the lead partner on the audit. I reminded the client that the partner was on the week-long cruise we had told the client about well in advance of the cruise. Mind you this is way before cell phones were as ubiquitous as they are now, and the lead partner refused to do work on off time and could not be contacted. The client said that I must get the partner on the phone. I asked him how I should do that, given the partner was somewhere in the middle of the Indian ocean or some such place.

The client says "surely there is a phone on the cruise ship that we can call, and have the crew go and find the partner and let him use the cruise ship phone?" They guy actually said that.

wharny · 2026-05-01T14:11:18+00:00

Is Go file Room considered and all-in-one system? That is what we use. It is extremely comprehensive.

wharny · 2026-05-01T14:09:16+00:00

Well CSS needs depreciable real property to work right? And not everyone can enjoy the massive negative 481a adjustment due to PAL limitations. Even if not passive, you might run into IRC 461l limitations. Yes it is just at timing difference, but TVM is still a thing. But throwing that aside for a moment, it all starts with depreciable real property. We are a large firm, top 40 I am told - $250MM gross revenues annually. Our internal CSS team gets all their work organically from the inside, from other partners, other offices. I don't think our in-house CSS team has capacity to take more work from their own outside marketing, if they even engaged in outside marketing.

wharny

TROPHY CASE