The Professor and the Double Counted Income

Good tax compliance follows from good bookkeeping. Our client, a university professor, repeatedly overpaid her income taxes because of the duplication of income on multiple Forms 1099. Having no accounting system in place, the error went undetected for years.

A successful author, public speaker and academic, our client holds an endowed professorship at a leading university. Although she enjoys a good relationship with her longtime accountant, she loathes completing the annual tax organizer. Her time is better spent writing articles or giving speeches than organizing 1099s and completing the lengthy tax questionnaire. An additional source of stress derives from her apprehension at under-reporting income, thus triggering an IRS audit. As you will see, under-reporting income was hardly the problem.

As Business Managers, we are responsible for providing our client’s CPA with accurate tax workpapers based on reconciled financial data. A substantial portion of our client’s income is derived from public speaking. After reconciling her accounts, we noticed that her public speaking income per the issued 1099s was $25,000 greater than what was recorded in Quickbooks. Switching to forensic accounting mode, we discovered that one of the venues at which she spoke issued a 1099 on her $25,000 fee. That fee was also included on the consolidated 1099 issued by her agent. Preparing her tax return based on the 1099s, our client’s CPA unintentionally double-counted the income.

In addition to overstated income, our client had understated deductions.  Although most of the speaker agency commissions were calculated at a flat 10% rate, the agency was paid a bonus for any single engagement fee in excess of $20,000.  During the year, our client had three such engagements and the premium amounted to $4,000. Having no accounting system in place to accurately track expenses, her CPA simply deducted 10% of the income reported on the agency 1099, and thus excluded the bonus. All in all, the net profit reported on her Schedule C was overstated by approximately $29,000.  We alerted the CPA of our findings and the tax return was corrected prior to filing, saving the Professor $13,000 in taxes. These discrepancies came to light from basic nuts and bolts accounting – the kind where debits equal credits.  Going forward, our client no longer has the burden of organizing her taxes. We will provide her CPA with a comprehensive set of reconciled tax workpapers and the client can focus her attention on writing, speaking, and academic pursuits.