Bookkeping Ethics & Tax Prep: Does your Tax preparer owe you a Fiduciary Duty?

What happens when ethical dilemmas and financial reality collide in tax preparation and bookkeeping? That’s what our resident Bookkeeping Mensch, Paul Rosenblum, is going to unpack in this episode. Specifically, where the fine line between fiduciary duty and ethical responsibility, exploring how tax preparers navigate unpaid clients, financial missteps, and tricky legal gray areas. From handling overdue invoices to deciding whether to report client mistakes, it’s all about balancing integrity with business survival, isn’t it? And remember—bad bookkeeping is like a broken pencil… completely pointless!

Transcript

Episode 52

It’s Feb. 1st when I’m writing this, and I have survived another Jan. of 1099’s.  I must admit that I forgot one 1099 for one company, and another very small company that consisted of another one 1099.  They will be done within 24 hours after the deadline, and there will not be any penalties. It’ll be nice to go to the office on Monday, Feb. 3rd, and go back to bookkeeping and not think about 1099’s until next year.  

Welcome to Feb.! (although this episode will be live at the end of the month).  The last episode, I talked about ethical issues for bookkeepers, as well as pricing and this episode I will continue talking about ethical issues involving tax preparers first, and then client situations. 

First, the word ‘Fiduciary’.  The definition according to dictionary.com is  

• Of or relating to the relationship of trust and good faith between a fiduciary and the person for whom the fiduciary acts:
• The executor of a will has a fiduciary duty to act in the best interest of the beneficiary.
• The banks do not assume any financial responsibility—they act in a fiduciary capacity only.
• The American Medical Association said that physicians have a fiduciary responsibility to patients.

I’m Paul Rosenblum.

There is nothing that I can find that says that CPA’s/Accountants and E.A.’s (enrolled agents) (and bookkeepers, for that matter), have a fiduciary arrangement with clients even with an engagement letter.  However, sometimes, fiduciary and ethics co-mingle in the same headspace.

Let’s take a recent example during “1099 season”, which is Jan. of every year. There was a client who I had a blow up with last October and walked away from (yes, I, too, have emotions that show once in a while), and even though they always paid me, they did not pay their tax preparer for the previous years’ taxes.  And now, it’s January of 2025, and the taxes for 2023 weren’t paid yet (at least according to the tax preparer).  I asked why the tax preparer was creating 1099’s for that client without getting paid, and he said because he had ‘a fiduciary agreement’ and had to as long as they were a client.

  Either he doesn’t understand fiduciary and doesn’t understand that tax preparers aren’t included as financial advisors are, hence he doesn’t have a fiduciary agreement with clients, or -- he’s just hiding behind it. This is where ethics comes into the space.  Even as CPA’s, accountants and E.A. (enrolled agents), we all run businesses with the same rules as everyone else. We all have accounts receivable (money that is owed to us), we all have some collection difficulties, and most accounting firms write off some fees that will never get paid to them after dropping a client.  (Usually, it’s the bottom 10% revenue clients are dropped after tax season, or a problem payer).  If a tax preparer or a bookkeeper keeps a client who doesn’t pay, the reason would be to keep the relationship open and hope that you will eventually get paid without suing that person or company, which most tax preparers don’t want to do because of Yelp reviews and other places that ex clients can post bad reviews on. So, we let them ride. I’ve done that, and most of the time, I end up getting paid.  Besides, since I am in their books, I KNOW how much money they have in the bank.  But a tax preparer usually doesn’t have access to their bank account, so they have a different situation. So, the question is: How long does a tax preparer wait until he/she stops working for the client who doesn’t pay?  How does a tax preparer handle their own accounts receivable? And when is one willing just to ‘eat’ what’s owed to you and call it a day?  I’ve had a few small clients not pay me in 2024, and I just walked away 6 months later, after sending them an invoice every month and getting no response.  

By the way, I just saw on the news that Costco employees will get $30.00 to work in the stores.  I’m not charging enough, for sure! But that’s for another day. 

There’s a CPA who I do work for and the client who we share owes more money than they are ever going to be able to pay.  The CPA suggested to the owner of the company to sell it, and in the agreement, stay as an employee for a few years. That was rejected. The CPA suggested that the owner declar bankruptcy so much of the debt will go away.  That was rejected as well.  This is good advice for what the situation is, but it still doesn’t fall in the fiduciary arena. It's a CPA giving a suggestion to a client to accept or reject. 

How much unsolicited, or even solicited advice should a tax preparer or bookkeeper give a client? That’s probably for another episode but let me say that if I give advice to a client, I always preface it by saying that I am not a certified financial advisor, and this is my opinion based on 20 years of working with businesses and doing a lot of research and having a podcast – so it’s my educated opinion on these matters. Take it or leave it.  

Fiduciary and ethics-  Intermingles like a unisex bathroom (did I really say that?) 

There are also situations where ethics and ‘the letter of the law’ inhabit the same space. These are tougher decisions on how to handle the situation. I had a situation relatively recently where a client who was using QB payroll added a ‘tip’ line.  Tips are part of payroll and should end up on the W2 form at the end of the year as taxable income for the employee.  The tip is collected on the customer invoice and then gets paid out when payroll is processed. For some reason, however, there was a very small amount of tips collected in 2023 (tax return filed), sitting on the balance sheet in a liability called Tips payable.  In 2024, there was even a small number of Tips payable sitting as unpaid to employees.  In 2024, there were employees who the company had to terminate due to illegal behavior. The agreement to keep these people out of getting arrested is that they didn’t fight for unemployment and would have no contact with the company again. More than a year later, the honest mistake was found.  The question is this – what to do about it now.  

The first thing that I asked the client is why didn’t the tax preparer see this on the balance sheet in 2023 when they prepared the tax return?  Since the company is a single member LLC, the tax filings do not include a balance sheet like it does in a partnership LLC. The client only sent the Profit and Loss report to the tax preparer and not let them or even consider letting them log into the books to run their own reports.  If you are going to use QBO, the online edition of QuickBooks, then shouldn’t you just let the tax preparer see the books? Not to make entries, necessarily, but to go through everything to make sure the books are accurate?  Client rules and client ethics. Yes, rules for the client aside from paying the tax preparer for tax returns. The 2023 tax return is done. To amend a tax return for just a few hundred dollars would be a flag for the IRS. Not worth that, as well as paying maybe a thousand dollars to a tax preparer to amend a tax return that only changes by $300.00.  

Next suggestion – Pay the people the tips from 2023 in 2025.  Send a check in the mail explaining to them it’s an honest mistake and that is just now being caught.  However, that could open a large can of worms that no one wants to open. The ex-employees could come back and say that they had other tips that were not paid and could report to the appropriate authorities and cause problems for the company and the saga continues all for $300 or $400 dollars. 

Sometimes, in situations like this, one has to think what I call ‘outside the box’. Is it technically illegal not to pay tips to someone?  Of course it is.  If you get caught, could you pay thousands of dollars penalties for a $300 tip?  Sure, you could. And (this is my opinion only) – if I dropped every client who was doing anything not to the letter of the law either on purpose or by accident, I wouldn’t have any clients left!  I’m in NYC! So, sometimes Reality Bites.

 In this case, it was an honest mistake but correcting it could make life chaotic and terrible for the business owner, all over $300.00. So, what does one do? The client told me all of this (with other details, not mentioned here) and asked for my advice.  I gave her some ideas. The most sensible one was to take the tips in 2023 that was sitting in the tips payable account and debit the liability and credit sales in 2025. This way in 2025 the company would pay income taxes on the amount in question. And the 2024 tip payable could be split to the remaining employees. In 2024, payroll taxes wouldn’t be paid, but would be paid in 2025.  I don’t know how this will end, and I hoped that the original employees who are no longer with the company could get this money, but that’s not really an option based on the situation.  Sometimes you have to do the lesser of all evils. 

When the company calls QuickBooks Payroll and finds out how to correct this from happening again, it’s important to get a name of the person who they talked to at Intuit and keep the email with the case number that can be referred back to if needed. Also, it’s important to document that the tax preparer only got the profit and loss and not the balance sheet so this mistake was never seen by them. And document that the problem is fixed moving forward. 

That whole story, by the way, does not fall under the fiduciary agreement that financial advisors have, and accountants and tax preparers and bookkeepers don’t, even though some like to say they do. It’s more about ethics, thinking outside the box, and trying to do the right thing with the least damage. To make the situation worse in this case, would be counter-productive.  It’s about fixing honest mistakes and moving forward.  

I had a situation in 2020 where the company had a cash payroll of around $80,000 for the year 2019. I was having trouble balancing the POS (point of sale) to the ‘cash on hand’ account (and yes, I can do an entire episode of how those two numbers work, along with sales tax). 

I was off by around $75,000.00.  When the owner figured it out, it ended up being the cash payroll paid out from the cash sales, that went into revenue and the cash on hand account but not taken out of the cash on hand account. 

Not only did I raise my dissatisfaction of a cash payroll, we also had a conversation about how to account for that the best way we could. I suggested to take the $80,000 and evenly distribute to both owners in guaranteed payments (on the P&L) s and make it taxable income on their K1, so that they would pay the tax.   We got on the phone with their CPA and told them what was going on. My suggestion was explained and the accountant agreed that it would be one way of fixing it. The IRS and the state don’t care where the tax comes from, just that the taxes are paid. The owners said that they didn’t want to pay tax on it. Period.  The CPA said OK, and right after that phone call was over and taxes were filed, I fired the client in an email explaining to them exactly why. 

 That was intent.  Doesn’t pass the ethics test in my world. So, case by case, one has to decide what to do. And what’s right in their vernacular. This puts the CPA in a tough position. They are signing a tax return saying that there is no fraud that they know of. That was not true.  If ever questioned about this, the CPA would either have to lie or even possibly lose their license if they tell the truth.  Tough position to be in. 

That’s it for now -- taking the rest of Feb. 1st off, except for writing this episode. Tomorrow is a new week and a new month, new deadlines, new clients, new ethical situations, and less sleep and bad moods.  (Just ask my wife!

Be looking for our live webinar sometime soon in March – still working out what software to use.  Email me your questions and anything else that you’d like me to talk about there to Bookkeepermensch@gmail. 

Be in your earbuds soon --- Your friendly neighborhood bookkeeper --Paul Rosenblum