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Discussion:Penalty Understated Income Amended Return

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Dduckdr (talk|edits) said:

10 June 2009
When I prepared my client's 2007 return I noticed a rather large deduction on his oil & gas K-1 for intangible drilling costs which reduced his taxable income substantially. I did not remember having taken the deduction for the 2006 tax year and set the file aside to amend if necessary. After April 15th I pulled the file thinking I had not taken the deduction for 2006 and prepared an amended return without fee which resulted in a refund of $9,000. IRS refunded the money and three months later sent a bill to my client for the $9,000 plus an $1,800 penalty for understating income. I analyzed his 2006 return and discovered that I had taken the deduction with the original return and the 1040X was improper. My client repaid the tax plus interest but not the penalty. I explained to IRS that it was a simple error on my part and not intentional but they have refused to remove the penalty. I now have 90 days to decide whether to go to tax court. Do I have a defensible position? If the penalty stands do I pay or share with my client? Thanks.

Tkelly911 (talk|edits) said:

11 June 2009
File an appeal on the penalty abatement. There is extensive case law regarding a taxpayer's reliance on a tax professional. This is not a ministerial action (such as a filing deadline). You would have a very good chance for abatement, such that the litigation hazards are probably too high for the Service, especially if you had to petition the court and proffered a 7430(g) qualified offer.

Dduckdr (talk|edits) said:

11 June 2009
Thanks for your reply Tkelly911. I'll file an appeal tomorrow. What is a 7430(g) qualified offer?

JR1 (talk|edits) said:

June 11, 2009
Yeah, don't give up. I had one recently that took five tries to get it abated...just has to hit the right desk.

JR1 (talk|edits) said:

June 11, 2009
But notify your insurance carrier immediately. My policy requires notification within 30 days of discovery, and it'll take months to resolve with IRS. Usually, by the time the ins. co. even gets around to actually doing anything on it, it's resolved. A mark on my permanent record, but not a black mark. And if you don't report to them? You'll be on the hook.

Kevinh5 (talk|edits) said:

11 June 2009
(I would have paid the three month's interest if this had been my mistake. I would have also refunded the fee I charged for improperly amending his return when it didn't need to be.)

JR1 (talk|edits) said:

June 11, 2009
He didn't charge the fee. Interest I usually try to avoid paying to the client, since they did have use of the money...I didn't. But you do what you have to do to make the client happy and avoid an insurance claim, in my opinion. A few hundred bucks can be a cheap price to pay.

Tkelly911 (talk|edits) said:

11 June 2009
A qualified offer is a settlement offer made to resolve the case for a definite sum of money to be paid to the government. If certain other conditions are met, and after non-acceptance of the offer you prevail at trial in the tax court, the IRS is on the hook for your fees (at whatever the current, not-very-generous rate might be).

There are tax lawyers here in Northern California who have been paid well over $100,000 annually in attorney fees based on these offers. Along with Section 7491, it is one of the reasons to early on involve a tax professional familiar with building an administrative record suitable for litigation in cases which may ultimately be tried. The presence of a qualified offer has also been known to be a factor where counsel or appeals must consider "hazards of litigation."

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