Morgan (Host): Hey, everyone, welcome to the latest episode of ‘Client Horror Stories’. While we have a lot of software developers and digital marketers, I’m excited that we’re branching out into different professions to see what everyone can learn because being a professional is being a professional. And I’m honored that Liz Farr from Farr communications is here to tell us a CPA story today. Liz, it is great to have you here!
Liz Farr (interviewee): Thanks, Morgan. It’s a pleasure to be here. I think even though this is a tax problem, some lessons apply to just about any buddy who’s in business and works with clients.
Morgan (Host): I agree. I’m excited to hear your story. One of the things that I’ve learned in my career and also from guests in Client Horror Stories’ episodes is that a lot of the principles of professional good behavior like documenting things, being transparent, and dealing with problems translate into any discipline under the sun.
Liz Farr (interviewee): They really do.
Morgan (Host): So, tell us about the client horror story that you faced once upon a time?
Liz Farr (interviewee): Yeah, these days, I’m a CPA and a professional writer. But for 15 years, I worked as a CPA and mostly did tax returns. A CPA for your non-US listener is a certified public accountant. And one of the main things I did was prepare tax returns for clients. So this was about 2006. I’m just going to call him John Smith because honestly I have blocked out his real name. I don’t even remember his real name. But I always called him our IRS tax dodge. IRS stands for the Internal Revenue Service which is the tax administration part of the federal government.
So Mr. John Smith walked into our office in New Mexico. He had just moved to New Mexico from Pennsylvania. In Pennsylvania, he had sold a 200-acre farm, and the total was probably about $2 million he got from it. He sold it in about three or four pieces. So some of it, he got the proceeds out, and some he sold on real estate contracts, which meant he was financing the sale. And the buyers were paying him over time. So he needed his tax returns done. Usually, when a new client walks in the door, we ask for their tax returns from at least last year. And we try and go back about three years. And the reason we do this is so that we can look and see what kinds of things they have on their tax returns generally.
And to see if there are any opportunities for us to get back some refunds to make some changes. And sometimes they have activities in prior years that have repercussions for the future; their tax attributes that carry forward. So we want to make sure that we capture all of that. And so when we asked him for his tax returns, he chuckled and said, “Hahaha, well, they’re in a box somewhere. I haven’t completely unpacked yet.” So, he gave us a big pile of stuff. And we started working on his tax returns.
Morgan (Host): I have a question. Before we get more deeply into the actual work, I always think it’s useful to identify Red Flags so that we can learn. So you mentioned one Red Flag, which was his attitude about the account history. And he wouldn’t give it to you. And in any profession, for instance, if you take over an online advertising campaign and they refuse you access to their Google Ads account. What happens if I receive them with a campaign ban? So that’s one of the flags. I think there are some other subtle red flags hidden in there. You mentioned that he responded with a joke rather than seriously.
And sometimes I also love telling jokes, and sometimes I’m sensitive due to legal issues, and then if you turn things into jokes, it implies to me that you might be hiding something because there’s a time and place for humor. And there’s a time and place for a certain business. And bout the third Red Flag, I want to get your thoughts. In the past, $2 million worth of land was a lot more than it is today, especially if he sold it a few years ago. And not having an accountant to deal with it already is suspicious. How could you do something so big without an accountant in hand? That feels like the third flag to me.
Liz Farr (interviewee): Yeah, that really should have been a Red Flag because frequently, accountants establish a relationship with their clients that can last decades.
Morgan (Host): Right!
Liz Farr (interviewee): And it may not matter that the client has moved out of state or if the accountant has moved out of state, but they can still stay in touch. They can still maintain the relationship. So yeah, it was odd that here he was a real estate agent and a property developer, and did not maintain his relationship with the accountant in Pennsylvania. And, it will be revealed that there was a reason for not having a relationship with an accountant that he could bring with him.
Morgan (Host): I like you’re hinting at the excitement that has to come, like a true storyteller.
Liz Farr (interviewee): Yeah. So anyway, he brought us the stuff. He had reinvested the money which he got into some land in New Mexico. So part of it, he was building a house on, and part of it, he was building roads and subdividing so that he could sell. So, he was doing all this stuff. And he brought us his documents. It was a combination of tax reporting documents that go to the IRS. So there were some documents of transactions that were reported to the IRS, and then we got a copy of them. IRS checks to make sure that their records match what’s on the tax return. They do this matching, and if they don’t match, then you get a nastygram from the IRS. That’s a technical tax term, by the way.
Morgan (Host): I assume so.
Liz Farr (interviewee): Yeah. And so if things don’t match, they’ll tell you about it. And, we go ahead and adjust your account. You owe us an extra $2,000 or whatever, so you write a check if the estimate is correct. So, he had a combination of IRS documents and some handwritten notes. His wife was the one who seemed to compile all the records. And the best way to explain it is that it was a sheet of paper like a spreadsheet.
So up in one corner, she would have the property taxes. And she would draw a little circle around it. And she’d have the label and then a bunch of numbers. And then on the other corner, she’d have utility bills, with a small circle around that. And then over there might be phone bills. So we got this sheet of paper with all these kinds of circles and squares and filled it in with numbers and labels. And, we couldn’t tell if it was right or not.
Morgan (Host): I have a question due to my ignorance. How sketchy is that? Because I feel like in 2021, everything’s online and spreadsheets, so that’s weird. But I’m old enough to remember the world before computers, like my parents having sheets of paper like that. So maybe it’s someone’s older. And that’s just how they’ve always done it. But I’m not an accountant. So how sketchy is that?
Liz Farr (interviewee): That was not desirable. It was 2006. So it was a few years ago, and they were still people who keep their records that way. They will give you a shoebox of receipts, or maybe envelopes of receipts, and we try to discourage that. But sometimes that’s the best way you can get the information.
Morgan (Host): Okay, so maybe that wasn’t a Red Flag, but a Yellow Flag.
Liz Farr (interviewee): You can say so, but there were never any receipts to back up any of his documentation. So we couldn’t tell if they were just pulling these numbers out of thin air and writing them down or going through a checkbook register or other records; we really couldn’t tell. But I’ve done tax returns for people who have given me comparable stuff, and usually, they don’t know much. But as CPAs, we have to assume that our clients are being honest and forthright.
That is our professional standard to assume that they are being honest. But if we see something that doesn’t make sense, that contradicts something else that we’re getting, then it’s our responsibility to investigate to question the client, to ask them about it. And, it’s always up to them what they want to do about this discrepancy. But if we feel that they’re behaving in an unethical manner, and then it is also our responsibility to say, “I can’t work with you anymore.”
Morgan (Host): I want to do a quick parenthesis on that because I find this interesting. One of the themes of the podcast that I’m very interested in is what is professional behavior? And you made a point that I had never consciously thought about before, which is you said that as the CPAs, one of your professional obligations is to assume your clients are being honest until the weight of the evidence shows that they’re not.
And I’ve never thought, as a pattern, because maybe I am very cynical. I’m very skeptical of everyone from day one. But thinking about it, when you go to the doctor, and your new doctor asks you about your medical history, the doctor has to assume that you’re just not inventing your medical history out of thin air. It has to start from this position of assuming that your professional client is honest, and I liked that. I hadn’t thought about that until right now.
Liz Farr (interviewee): Yeah. As a CPA, it is a part of our ethical professional standards. There are some ethics that we have to adhere to. And so it’s part of being a CPA that we have to do that. It’s sort of boiled in. That’s what we have to do.
Morgan (Host): So back to the story, what happened next?
Liz Farr (interviewee): Yeah, we continued this pattern for a couple of years. He always filed his tax returns by mail. Keep in mind that it was 2006. We still had a lot of clients who were filing by mail. They would like to get their printout of the tax return and sign it with a pen, and then put it in an envelope and go to the post office and stand in line and mail it. They like to do that. So, having a request that they don’t want to electronically it and want to mail it in, was not any Red Flag for us.
Every year when it was time to do his tax return, I’d ask him if he ever came across those old tax returns from Pennsylvania before he started working with us, and I kept asking him for them. And he always had some excuses like that must have been in the box that got lost or never found them. Maybe we threw out that stuff when we were getting ready to move. Who knows? But we never got them.
And after a couple of years, it became a moot point because many tax attributes have a lifetime; and they expire. In short, if you were carrying forward any losses, they’re gone now. So, it continued for a couple of years like that. This guy would come in, and he was kind of a character. One of his hobbies was this thing called Cowboy Mounted Shooting.
Morgan (Host): Cowboy mounted shooting? What is that?
Liz Farr (interviewee): If you put that into Google, you’ll get these videos on YouTube of cowboys riding around stakes with balloons on top of them. And they gallop a horse down through this pattern around these stakes and shoot with a gun. I don’t know if it’s a BB gun or not, but they shoot the balloons out in their riding. And your score is based on time and accuracy. Yeah, this is a sport. There are a lot of really bizarre sports that have to do with horses.
Morgan (Host): There are certainly bizarre sports. Maybe someone else can start a podcast on the weird sports out there.
Liz Farr (interviewee): Yeah. So, he is a character who might come in his cowboy boots and talk about the horses. And once, he even brought in a copy of a magazine for this sport so that we could see it. One time, one of the partners in the firm was in Phoenix and decided to go to a rodeo because they didn’t have anything else going on. And there was John Smith over there on his horse galloping down and shooting out balloons.
Morgan (Host): It’s incredible to me; the things that people are interested in and do for fun. It is a whole other type of diversity.
Liz Farr (interviewee): Yeah. So, as time went on, another Red Flag came up. It didn’t seem like he was paying the estimated tax payments that we set up for him. In the US, if you are not having taxes withheld from your paycheck as an employee, then it’s your responsibility to make quarterly estimated payments where you sort of guess what you’re going to owe next year. And these are usually based on your tax bill from the prior year. So, it didn’t seem like he was making them; it was really hard to tell if he was or wasn’t. So this was a Red Flag, but he kind of hemmed in hard. Or he would say, “Well, I’m sure I did. I’ll get you those canceled checks.” And so we thought maybe he did. He got a lot going on.
Morgan (Host): In general, a lot of hemming and hawing could be at least a Yellow Flag. And I also want to point out people repeat questions or requests that are important. If you ask someone something, and they haven’t been hauling, but if you ask it four times, and there’s always an excuse or reason, then the repetition adds weight that makes the light yellow, a dark yellow, or the light red a darker red flag.
Liz Farr (interviewee): That’s about right. And this kind of went on. Since he sold his Pennsylvania property but continued to receive payments from the purchasers, he had to file a Pennsylvania tax return.
Morgan (Host): Yes!
Liz Farr (interviewee): So, one year, I remember very clearly, standing there with him and showing him all his tax returns and all the vouchers that we had made for his estimated taxes. We showed him his Pennsylvania tax return, and he grabbed that Pennsylvania returns and ripped it in half in front of me, and said, “Well, that’s what I think of it.”
Morgan (Host): Wait, did he rip his tax return?
Liz Farr (interviewee): Yeah. And I thought, well, that’s a little weird. You know, you should be filing.
Morgan (Host): So ripping up the tax return changes it from a Red Flag to the bomb is off. Normal people behaving normally would never do that. Ripping up the tax returns is a literal f*** you to the IRS.
Liz Farr (interviewee): Right. To the Pennsylvania Department of Revenue. It was getting a little weird. It must have been about in 2010.
Morgan (Host): I have a question. That was such a bomb, maybe with the other ones you could put up with warning signs. But with that one, did you ask him, why was he doing that? Was he not going to pay? Did you address it with him?
Liz Farr (interviewee): I didn’t address it with him. I was in shock. And I was not the one making the decisions because I was not the owner of the firm. And when I told them, he just said, “Oh, weird”. It was kind of a “hmm” moment for him. So anyway, the bomb went off one morning when I came into work. And our receptionist said, “Hey, there’s an IRS agent in the conference room, and she wants to talk to you and Carol.” Carol was another tax manager in the firm. We went in there, and we had no idea what was going on. We had no clue. And the IRS agent, who was a very nice young woman, said, “I am here because of John Smith, and your names were on this power of attorney.”
A Power of Attorney means that the IRS can talk to us as tax professionals as if they were talking to the taxpayer themselves. So we kind of step into the shoes. And we like to do this because we are a little more careful about what we say. We are a little more circumspect. We try to make sure that the taxpayers’ rights are protected. And then she dropped the big bombshell. He hasn’t filed a tax return in 10 years.
Morgan (Host): In 10 years, he never filed it?
Liz Farr (interviewee): Yeah. And, and the bombshell number two was that this wasn’t the first time he did that. He had done this before. He had a habit of filing his tax returns every ten years then the IRS would catch up. So she gave us all the documentation for the first time. And we could see that he owed about $100,000, and he had to take out a loan to pay it off. But he did pay it off. And it was a really ugly kind of thing. The information that we have is all the income, but without the deductions.
Morgan (Host): Which were on that paper anyway.
Liz Farr (interviewee): Yeah, with just the income and adding in penalties and interest, it was about $250,000 that he owed. We were shocked, but she gave us a ton of documentation because we didn’t know anything about this. So, we called our tech partners and them the situation. So apparently, he had been getting our tax returns just because his banker needed them to lend him money to buy more land.
Morgan (Host): That is a funny twist at the end, he never intended to pay, but he still wanted the papers done. Not for the government entity but for the bank entity.
Liz Farr (interviewee): Yeah, I’ve seen that before. There was another client I worked with, who did the same thing. He didn’t file tax returns for 15 years. And then he passed away. And at that point, the IRS pounced on his sister, the executor of his estate, and found out that he did have tax returns for the first few years. But they were just prepared to show to the bank. Because this particular guy invested in real estate, he was a slumlord. He would buy real estate, run-down it, sell it, buy some more, rent it, sell it. It was just this kind of churn. So this is not that unusual. But still,
Morgan (Host): So, the bombshell happened. And you told the partners, and then you called him up?
Liz Farr (interviewee): Yeah, we called him up. He came into the office and told him that the IRS came to visit and informed us that you had not filed a tax return in 10 years and you had a debt of about $250,000. So how do we fix this? According to the IRS agent, the first thing you have to do is provide her with all your tax returns. When we told him, he just went off into this rage, saying, “This is illegal taxation, and they’re taking all of his goods and taking advantage of working people. And it’s illegal.” And we’re like, “Holy cow! What is going on?”
Morgan (Host): That’s a lot of savings.
Liz Farr (interviewee): Yeah. And so we got all of that to the IRS agent.
Morgan (Host): So curious to know, did he file it? Or did he go another ten years? So you went to the IRS, then what happened?
Liz Farr (interviewee): We got it to the IRS agent. And she processed them, put them in the system, and asked us to make arrangements to pay this debt. And he went into another rage, “I will not pay that. I don’t have the money. I don’t have anything. All my money is locked up in this land that I bought. I don’t have access to it.” And I told him that if you can’t pay the amount due to the IRS, then the IRS has alternative methods of resolving that. The main one is this process called Offer in Compromise, or OYC.
IRS will get a list of all of your financial assets, your houses, your boats or cars, artwork collections, and anything you have. They want to know about your credit cards and the balances on them. They want to know if there’s any room to take a cash advance anywhere, and then they will evaluate all of that together with your other sources of income. They have a formula where they figure out how much they can extract from the assets you have in your income and give you enough to live on. It will not be luxurious living; they want this to be painful, which means you will be forced to make a compromise.
But the first step is to fill out this paperwork for the IRS that lists all of your financial assets, and bank accounts. We told him to fill that out, and he went into another rage and said he wouldn’t do that. In that case, we said that the next step in resolving the matter would be to write the IRS a check for $100,000 or to make payments on it, and figure out how you will do that over time, but if you want to reduce the amount that you owe, this is the first step that you must take. Again, he went into a rage and said that he would not do that, and we didn’t hear from him.
So we figured out that he pulled up stakes. And it was about the time that our firm accountant, the one who kept the books for the CPA firm, came to me and said that he hadn’t been paying our bills. He had been paying our tax bills every year until we got into this mess. All the work that I had to do in getting all the tax returns together, working with the IRS, and checking the numbers added up to about $4,000 worth of work, which he hadn’t paid. She had been sending him registered letters. They were coming back unopened.
And it seemed like he had pulled up stakes. She even sent our lawyer. We had a lawyer who would do these kinds of collections for us, sent him out there be he could not find him, he just vanished. It should have been a Red Fag that somebody who will not pay the IRS might not pay their bills. So, before we started working on resolving this tax mess of his, we should have said, “Okay, you need to pay us a retainer to do this. You need to pay us $1,000 a month for the next four months.”
Morgan (Host): I think this last point is important and gives a bit of underrated advice, people who cheat other people; will turn and cheat you as well. And it’s very easy to forget when you get caught up in the moment where you think it’s different, but it inevitably happens.
Liz Farr (interviewee): Yeah. So anyway, we didn’t hear from him. We figured it was out of our hands. It will be up to the IRS now to seize his property, track him down, and do whatever they needed to do to collect on this debt, but our hands were clean. We were not able to help anymore. And, then one day, we got a phone call from a guy who said he works for tax relief. Back then, about ten years ago, many companies sprang up to help resolve tax debts. So there would be ads on late-night TV about getting $800 tax relief now.
Morgan (Host): That’s right!
Liz Farr (interviewee): They would always say, “Get your tax bills resolved for pennies on the dollar.” And they would mislead the people into thinking that they had something special, but they didn’t have anything other than the process. They didn’t have anything else they could offer. And a lot of these companies would collect a big fee upfront, maybe $5,000 but wouldn’t do anything with it.
And he said, “Well, we just started working with John Smith, and we noticed that you’re on his power of attorney, and he had worked with you guys for a long time. Your name is on all these tax returns. Since you know him, we were wondering if you could fill out his financial form. We could just run it by you so that you can make sure we’re not missing anything.”
And we said, “We can help you with that. But we are not sure who would pay us to do that.” So, we never heard back from them. So I suspect that they didn’t have any better luck getting him to fill this out. We didn’t hear from them.
Morgan (Host): Did you hear from him again? Or did he just vanish?
Liz Farr (interviewee): Oh, there’s more! He called us up. And he said that the IRS is garnishing his retirement payments. He was getting Social Security payments which is the US Federal Retirement System. So he was getting those. And the IRS was taking a portion of it out to pay his debt. And told us that he made a deal with them that if he gets them his tax returns for this year, till the promised date, they will stop garnishing his Social Security.
And we said, “Okay, but you’re going to have to pay us upfront for that. And you’re also gonna have to pay us for what you owe.” And he agreed and said that he will meet us in two hours. So I went to the firm bookkeeper and said, “Okay, he’s coming in, and we’re going to tack on an extra $1000 to do his tax return.” So he came in, and I gave him an invoice for $5,000. And I said you have to pay us this much before we do anything. And he said, “I don’t have that kind of money. I can’t do that.” We said, okay!
Morgan (Host): Okay, sorry!
Liz Farr (interviewee): Yes. Okay, sorry. He wanted to talk to the owner. And the owner refused to work for free for him.
Morgan (Host): Wow, this is a good story. We got a lot of lessons and Red Flags. While you’re telling it. The question I have at the end is if we were to look back on it in retrospect, with hindsight in 2020, and if it wasn’t for the expertise you have now, is there anything you think you should have done differently? And what are some of the key ones?
Liz Farr (interviewee): Well, in the beginning, we would have said, “Well, if you can’t give us your tax returns, then can you give us the power of attorney so that we can get the IRS transcripts and all the records? ” That would have been something to do. And then we would have been able to find out about his problems sooner. We would know that he had not filed a tax return for a few years. That would have been a big thing right upfront.
Morgan (Host): I want to comment on that. And, in an expanded version of that, I believe you must have an ABCD before you begin any type of customer relationship with a few mandatory requirements. And if they only have A, B, and C but not D, simply say no; it’s just too risky. If you don’t have D, there are three alternative options: D version one, D version two, and D version three. However, I believe that with experience, you realize the power of policies like that.
Liz Farr (interviewee): Right. The other thing would have been to ask, so why aren’t you paying your estimated tax payments? When it looked like he wasn’t paying his taxes. Do you need help? What’s going on? Is there some explanation? We do need to know that you are paying for these. We need documentation. And if you can’t provide us with documentation, then we might not be able to work with you anymore because we expect you to do that. So that would have been a reason to decline to work with him anymore. And when he tore up that Pennsylvania tax return in front of me, we should have fired him.
Morgan (Host): Tearing up your tax return that your accountant prepared in front of your face feels like a fire=able expense event. Accountants talk about taxable events, and we can talk about fire-able events. And I want to comment on that fire-able event of tearing up the tax return. I’ve seen a lot of professionals who face this challenge where they want people to be nice. I’ve been in situations where someone else has done something completely asshole-ish, terrible, and disrespectful, implying they’re going to break the law and not pay outrageous fees. You just want to be nice, anonymous, and not upset anyone. And I think one of the challenges of being a professional is like, there are times when you have to put your foot down and say no if there’s ever a time like that.
Liz Farr (interviewee): Right. That really should have been a fire-able like event. And I have to think that the only reason that the partner didn’t fire him was that he still had a friendly relationship with John Smith and was still thinking he was fundamentally a good guy.
Morgan (Host): Right. That’s an interesting point because when someone is a bad person, you never discover about it overnight. It’s not like I suddenly appeared and told you I was Adolf Hitler. I never said that to you. Instead, you trust someone. And then there’s a very slow and steady progression of reveals that either someone is nice or not. It usually takes a long time to see that your judgment of him was wrong. It’s a part of flawed human nature.
Liz Farr (interviewee): Yeah, if I had my tax practice like today, he probably would not have ever become a client, especially with that shoddy record-keeping. Things wouldn’t have worked.
Morgan (Host): That makes sense. It has been a great story to wrap up. Any other general lessons or changes or advice that you want to share with your wonderful insights on how to deal with such clients?
Liz Farr (interviewee): The big lesson is to trust your gut instincts.
Morgan (Host): That’s either one.
Liz Farr (interviewee): Yeah, and don’t ignore the Red Flags because they will only get bigger and bigger. And the other thing to remember is that your clients are not your friends. I think that was the reason that he remained the client of the firm so long because he was friends with the owner.
Morgan (Host): That’s a good one. And that’s very underrated advice, as well. Often when you work closely with someone in a profession, you and the client spend a lot of time together. It’s natural to become friends, especially if people have incredible personalities. It’s very natural. And it’s often hard to remember that as friendly as you become, it’s really important to have a boundary between you two.
Liz Farr (interviewee): Yeah.
Morgan (Host): It is a great advice and a perfect one to end the show.
Liz Farr (interviewee): Oh, perfect. Good.
Morgan (Host): It was wonderful. Thank you, Liz, for the time! I enjoyed this story. And I hope you enjoyed telling it, and I hope all viewers enjoyed listening to it as well.
Liz Farr (interviewee): Well, I hope the listeners learned something from this and avoided making the same mistakes we did.
Morgan (Host): Lesson number one, if you’re going to rip up your tax return, don’t do it in front of your accountant. Do it behind their back.
Liz Farr (interviewee): Wait till you get home maybe.
Morgan (Host): Exactly. It was fun. Thank you very much! To be continued.
Liz Farr (interviewee): Thanks a lot!
This article was based on Episode # 23: Liz Farr’s Story, please watch the complete episode here!