The woman was a secretary by day, a hooker by night. With $500 for each evening's efforts, she invested in English antiques. Then her house, and her uninsured antiques, burned. She went to see the accountant.
How could she get any of her investment back? The Internal Revenue Service would ask how a $200-a-week secretary could file deductions for a loss of $5,000 in antiques.
No problem for the accountant. He told her the IRS was not the vice squad; it wouldn't arrest her for anything but not paying her taxes. So for the three years she had been a hooker, the accountant backtracked to file tax forms estimating her nighttime income for "entertainment and therapy services." He then deducted the costs of her business, hotels, phone calls, travel and doctor visits. Only then did he deduct the thousands in losses for her antiques.
The woman paid no back taxes and received several thousand dollars for the loss. Accountant to the rescue.
For a great many taxpayers, the accountant is the new Lone Ranger -- stepping out of the stereotype gray suit and into the role of the unsung hero of Washington. Less visable than politicians, lawyers, lobbyists or journalists, the accountant nonetheless flourishes as the one who keeps many people from going to jail, from going bankrupt -- and from going out of their minds a week from Wednesday, the infamous IRS deadline of April 15th.
There are classic Washington tales of heroic accountants in action: When Sen. Herman Talmadge's wife tattled that he had spent campaign contributions on cabs, dinners and home repairs, it was an accountant whose advice had saved the day: He had convinced Talmadge to report his campaign contributions as income all along. No law says you can't use campaign contributions as you please. Talmadge may have had problems but not tax problems.
When a Washington journalist decided to get married on a country meadow he hired a hot air ballonist, magicians and ordered food and liquor for a few hundred people. It was an accountant who made the fantasy pay off: He wrote the wedding off as a business expense because 90 percent of the people there were fellow journalists and the event "raised his status in his profession." The IRS allowed it.
Then there is the story of the Navy consultant who decided to bag the workaholic life. His accountant told him how to do it: First buy an old cabin in West Virginia -- a state with low tax rates -- to establish a residence. Then transform an old bus into a mobile home. Use the bus to travel to contracting jobs around the country. The result -- deduct the cost of the bus, food, everything bought while on the road.
An accountant who comes up with a scheme like that gets a nod from other accountants when the story is told. "Yes, he's very creative, very creative," they'll say in the same droll way that basketball players say about Dr. J, "Yeah, he can play."
What an ordinary accountant can do for more ordinary people can also be magical, though less dazzling. By knowing the tax code and keeping updated on tax rulings, an accountant can save you hundreds, even thousands of dollars.
"With inflation pushing a person's income up," says Ross Collins, a private accountant in Falls Church (acknowledged by his peers as "very creative"), "we have what is called 'bracket creep' -- income creeping up, pushing people into higher tax brackets. Suddenly a mistake on anyone's taxes can cost them hundreds of dollars. Some people would rather have an accountant than risk the mistake."
A second reason accountants are in vogue is that tax law and tax forms are confusing. It takes the IRS half a page on a 1040 form to tell you how to answer the question, "Where do you live?" Some people would rather leave the headaches to an accountant.
"What an imaginative accountant should do for you is help you make the most of the dollars you earn," says Larry Bailey, who works with one of the "Big Eight" accounting firms, Peat, Marwick, Mitchell & Co. "I can help you structure a purchase [or] investment to get the best possible tax situation come April 15th. There really is not that much I can do for you after the first of the year to help with last year's taxes. If it is just a matter of tax returns, most people with W-2 income can do their return's themselves."
But even for people with the simplest tax forms, Bailey and other accountants warn against common faults:
The most frequent mistake is not taking deductions. "You should be deducting every business-related expense," says one accountant, who like five of the seven accountants interviewed for this article asked that his name not be used. "I had a reporter as a client who listened to WTOP [an all-news radio station] on the way to work every morning to keep up with what was going on. I had him write off the cost of the radio."
"If your wife has a hobby," the accountant adds, "get her to start selling some pieces of her work. If she's selling things, she is in business and you can write off the cost of her supplies."
Take for example, the Washington real estate broker who went to the Caribbean on vacation. By asking a hotel owner if he would accept a bid to buy the hotel, the broker wrote off the vacation as a business expense.
Do not let the tax form intimidate you. Take the time to itemize your deductions. Besides business-related expenses, Collins advises, taxpayers should deduct the cost of any education that helps keep them up to date with developments in their occupation, state or local taxes, casualty losses, interest payments, charitable contributions (cash as well as cars, clothes, household goods and other items) and fees to stockbrokers and accountants.
Deduct union dues, costs for uniforms, fees for professional organizations, sales tax and the first $150 of medical insurance. Deductions may be made for child care in some cases, foreign taxes and political contributions. Income credit may be taken for insulation, storm windows and other methods of making your home energy efficient.
A second mistake made by those who figure their own tax is failure to use income-averaging. The method allows you to average your income for the taxable year and the four years before to lower your tax.
"It [income averaging] is meant to aid someone who had to work for awhile to do something that brings him a sudden burst of income -- people like athletes, actors, singers."
Other than not itemizing deductions there is the grand mistake: not reporting income. The biggest sinners in that category, the accountants say, are physicians, and others who frequently don't report income are babysitters, private contractors and grocery store owners.
Physicians also head another troublesome group for accountants -- people who make bad investments as tax shelters.
"Doctors," says a New York accountant, "don't take time to think . . . Lawyers are not much better. They don't go into bad deals as much but they just let $10- or $20,000 sit in the bank without thinking about it . . . until they don't make partner or the wife leaves them and takes half of everything."
A Washington accountant who has had cabinet members as his clients says politicians are generally good about money. "They have to be at least 'all right' or there's going to be a scandal," he says.
After getting all the deductions to which you are entitled, the next question to ask an accountant is how to invest. Investments and tax shelters vary with income levels and different people.
"The first level of investment is for people who are just starting out," says Collins, "people just coming out of school. They are using their money to pay rent, buy clothes, a car. I tell them to start saving and look towards buying a house -- that's the best basic investment, a house to live in. tIt's an especially good investment in Washington where real estate is going up in value so quickly."
For people who already have a house, accountants have no one recommendation.
A popular investment, though, is pension plans. "The world's greatest tax shelter," says one accountant, "is an Independent Retirement Account, an IRA. You contribute 15 percent of your salary, a maximum of $1,500 per year tax-free. If your wife is not working, it's even higher -- $1,750. You don't touch it or pay taxes on it until you are 69 1/2."
After buying a house and starting a pension plan, the accountants say buying rental property is the best bet. And it can be done, some say, without having a big savings account. The trick is getting a bank loan for the downpayment. At 5 percent down on a $50,000 house in the suburbs, the down payment would be $2,500. Renting the house at $400 a month would leave the investor with a $100 gap to make up every month on the mortgage plus about $60 a month to pay the loan. But for a person making, say $50,000 a year and in the 30 percent tax bracket, the house would reduce taxes so that after taxes the $50,000 house costs the buyer only $50 a month.
"At the same time there are tax-smart ways to accomplish goals, says Larry Bailey. "For example, a good number of people want to make sure they will have money to send their children to college. If that's what they would like to do, there is the 'Clifford trust.' The client gives the money to the child for a trust. The money must stay in the trust for 10 years and a day.
"The benefit," he adds, "is that the money going into the trust is taxed at the minimum tax rate or whatever the level of the child's income. But usually the child's income is not going to be as high as his parents."
"With most of my clients," says an accountant, "it is just a matter of how much they want to pay in taxes . . . They don't have to pay anything if they have the money and interest in investing."
For that particular accountant, avoiding his own taxes has become a game. Last summer, on a Friday before heading to the Eastern Shore, he and his partners were discussing tax shelters. Dreading the traffic on the Chespeake Bay Bridge, they thought of investing in a helicopter to take them to the shore on weekends. They would rent it out of National Airport during the week.
But like the helicopter, the idea took off. Instead of serving as a tax write-off, the plan began making money as other people paid to take the helicopter to the shore. So they decided to buy another helicopter and put it at Dulles -- that one, they thought, would be certain to lose money. Wrong again. Now the partners are in the market for a third helicopter.