Sophisticated Investments

At tax time, does someone you know receive a Schedule K-1 (Form 1065) from an investment they or their financial advisor bought into; maybe in the oil & gas industry? Their tax preparer is familiar with the K-1, but they may or may not know what to do with the attached information. Supplemental information documents look confusing, and they do not contain explicit instructions on what to do with the data, which may lead to some tax preparers ignoring this information. Since the documents typically report tax deductions, the IRS is not going to make a taxpayer claim them. Hypothetically, everyone would be none-the-wiser after losing out on tens-of-thousands of dollars in tax deductions.

A client of ours was almost in this situation, except those deductions were caught before it was too late to benefit from them. Our firm was engaged to prepare the current year tax return for this client. Included in their tax documents was a Schedule K-1 from an energy industry investment they had purchased through a brokerage account. Although the amounts were insignificant, the previous tax preparer had chosen to ignore the data from cryptic supplemental documents on the client’s prior year tax return.

The figures reported in the current year were too significant to assume they were useless and the accountants involved on the current year return had not encountered this situation before. Our firm investigated the supplemental information, determined the tax impact it would have on the client’s tax returns, and resolved the appropriate reporting procedures. Our inquiry of this sophisticated investment resulted in tax refunds of more than $10,000, over a four-year period, allowing our client to finish the basement at his home. In that first year, our client also shared with us that he was ready to sell the investment as the returns were not as high as he expected; until we showed him that there were also thousands of dollars in tax deductions reported on the supplemental information.

Do you know of anyone who may benefit from a more inquisitive accountant? Please share our contact information with them. We would be more than happy to help.