Discussion:Tax Preparer Mistake

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Scott22 (talk|edits) said:

21 March 2007

I just found out that a client of mine received a letter form the IRS and she owes an additional $1,400 on her 2005 return. I prepared her return for her and her husband and I hit the comparison button in my tax program and it showed it would be more beneficial if they filed separately. Unfortunately it did not pick up that her Social Security benefits would be taxable. I've never had a taxpayer receive a notice of additional tax that was because of my error. What is the protocol in this situation. I'm willing to pay any penalty and interest. How do I explain this to my client. She is not very reasonable.

Death&Taxes (talk|edits) said:

21 March 2007
Ask her if she wants you to buy the nails for your cruicifixion.

Seriously, if you can save tax by amending and making the return joint, suggest that, but let her know you are not going to pay her tax.

Jdugancpa (talk|edits) said:

21 March 2007
All you can do is make a reasonable offer to make her right, which you have done. (Actually, your offer to pay the interest in addition to the penalty is more than fair, in that she had the use of the money for the time.) She'll either take you up on the offer and remain a client, or she won't.

Deback (talk|edits) said:

March 21, 2007
On the MFS return, did you check the box that the spouses lived together in 2005? That would be why your software didn't calculate the taxable SS.

I would pay the penalty and interest. Explaining is not the easiest thing to do when the client is not understanding. But it's something you'll have to do, and then go on with your life. Just mention that you make very few errors, that you're sorry, and you'll pay the penalty and interest.

Deback (talk|edits) said:

March 21, 2007
And, yes, amend the return, if MFJ would have been the best way to file.

Vbcpa (talk|edits) said:

21 March 2007
Yeah - MFS - social security automatically picked up at max - 85%. Apologize - just tell them your program had a glitch in the system - that you have called the software company and complained - you should have received some sort of error message alerting you to the possibility of a problem with the social security - if you didn't definitely software issue. I usually then offer to pay the penalty or to prepare next year's taxes for free.

I just did a tax return for free for a client where I failed to check the box on Schedule C stating that it was the spouses business - caused a problem with the taxpayers wage limitation by social security last year. It was definitely my fault - I admitted it to them and then did what I felt was right to try to minimize the repercussions.

Tilt53 (talk|edits) said:

21 March 2007
If the error is mine, I pick up penalty and interest. But the tax would still have been theirs to pay no matter when the return was done. You're trying to do the right thing. Apologize, and then move on. If they fuss, say goodbye - they're not worth any loss of sleep. We're all human.

Kevinh5 (talk|edits) said:

21 March 2007
remember you can always go back to MFJ with an amended return.

Michaelstar (talk|edits) said:

21 March 2007
None of us get 100% of them right all of the time. Your doing the correct thing. I have found it rare to file MFS and pay less tax but it does happen - very rare though. If nothing else - remember that. Usually there are "other" reasons to file MFS and paying less tax is not one of them.

CrowJD (talk|edits) said:

21 March 2007
According to my old boss: If you're not making mistakes, you are not busy enough!

Kevinh5 (talk|edits) said:

21 March 2007
There are a lot of very busy preparers in the world.

Natalie (talk|edits) said:

March 21, 2007
Vbcpa - just a comment. I think blaming the mistake on the program is just plain wrong. It was not the program's fault. It was the preparer's fault -- for whatever reason. I just couldn't let that slide by because I think there are too many instances when people want to blame someone or something else for things they should take responsibility for.

RSRAGENCY (talk|edits) said:

21 March 2007
SCOTT.....after EVERY season I say a prayer! ....Just let it go!! We are all human. You have done the right thing by offering to pay any penalty and interest.If she still baulks after that, show her the door!! We all try to do the best with our clients. I know, when money is owed, I pick the return apart looking to see if there wasn't something else to deduct. If not, I usually phone and ask for any other deductions not given in. I feel like it's MY money going out! And, believe me, your clients who are worthy will always be with you.....mistakes or not!! This is one client you could well afford to cut lose!!

DJ

Death&Taxes (talk|edits) said:

21 March 2007
As I was sitting with a client the other morning, one with about 40K of income, I noted her itemized deductions were so low this year, then realized there was a 13K deduction for state & local last year. I opened 2005 and discovered that instead of entering 1082 for Phila School Income Tax, I entered 12082. WE've known each other since 1982, she has money and when she comes in, she insists on giving me checks for everything, even paying four quarters of estimated tax on one voucher, but that is no excuse. So I prepared the amended return, worked out the interest charge and told her I'd send her a check for it. My stupidity.

Kevinh5 (talk|edits) said:

21 March 2007
DT, that happened a few years ago with my neighbor's taxes. I did the next year's free too. If you're honest about a mistake and make it good (penalties and interest and fix it for free) then anybody who still holds something against you is not someone you would want as a client.

TJ (talk|edits) said:

21 March 2007
After all, we are only human - we all make mistakes.

Do your best to make it right; admit that you made a mistake; amend the return if it is possible, pay the penalty and interest, but not the tax. Move on, we all learn from our mistakes.

Smokeytax (talk|edits) said:

21 March 2007
I think we should all just plan on losing a client now & then because of a mistake. It could be worse - if we were surgeons, we would really lose the client.


Cindylee (talk|edits) said:

21 March 2008
I have a similar situation that I need to try and fix. I was ill for several weeks and not able to file my client's return by the extension due date. I included a letter explaining the reason the return was late and also included a letter from my physician. Of course, the IRS pulled the old it's the taxpayer's responsibility to file and so on which I know if the truth. Although, they did say they were sorry that I was ill. Now I'm worried about the other clients that I had this same situation. This could cost me a lot of money if I pay the P & I which is what I feel like I should do. Is there any way around this for me? I was thinking of going to the IRS and trying to appeal this in person. I'm really upset about this whole thing. What really makes me upset is that I had my client's records and he was not able to access them while I was away so he couldn't file anyway.

Any suggestions??

DZCPA (talk|edits) said:

22 March 2008
No penalties on Federal S corp late filings. After getting penalty notices, write letters as if the client is writing them blaming you for the mess up. Have them sign them. Hope you feel better.

LJACPA (talk|edits) said:

22 March 2008
DZ, I thought this had changed, that the IRS was aggressively penalizing S Corp late returns. I know it used to be rare, if at all, but now?

Waynecpa (talk|edits) said:

22 March 2008
LJA, you are correct. A revenue balancer - IRS will be charging $85/month/shareholder starting this year, I believe.
  • Old discussion was bumped by a post that's now been moved (non-pro); no new question here!

BrockEA (talk|edits) said:

24 March 2010
Just be firm and apologetic.....some of these people go looking for a gold mine. Explain to her that she is made whole and that by your magic of tax preparation, she had an extra XX months to use her money.


My engagement letter states that if I screw up, I will pay penalties and interest but that the tax remains THEIRS. It also disavows this pledge should there be some non-error reclassification by the IRS on some point of contention. That way, if I prepare a return with some emerging tax issue and the client gets reclassified in something that could go to court, I do not pay those penalties and interest.


My letter is so strongly worded and one-sided, I am not sure I would sign it. :D


BrockEA

Pent-Up (talk|edits) said:

24 March 2010
In most states one can not disclaim Professional Negligence in a contract, many Physicians tried this in their Consent Letters contemplating risky Surgery. Same goes for all Professionals including Tax Preparers drafting Engagement letters, seeking to disclaim their negligence; it violates strict adherence to the "Standard of Professional Care".

Brock's statement that "I do not pay those penalties and interest" is not reliable.

For if it were, in all Professional Contracts, of all kinds, the Professional would include, "I'm not responsible for nothing I do for any reason" - those simply violate your duty to the public, to always perform to the Professional Standard of Care.

If you are not willing to do that, then don't hold yourself out as a Professional.

Where their is an assessment the traditional logic has been to argue the Taxpayer would have owed the tax, so the Preparer is to pay the late charges; the argument makes the client "whole".

BrockEA (talk|edits) said:

25 March 2010
I think you misread my post.


I didn't disclaim responsibility for negligence, I said that I disclaimed any responsibility for penalties or interest for non-error assessments/reclassifications that was due to tax areas where the taxpayer wishes to challenge the IRS in court. I clearly state that if it is an error or omission on my part, I pay those penalties and interest. I do not agree with you that this is unreliable.


BrockEA

Kyea (talk|edits) said:

25 March 2010
I just finished patching up something that I can't believe happened. It falls under the "trusting, software a little too much". This isn't a matter of expecting the software to to know tax policy and regs for you. I know much better than that.

In my state, when the education credit is taken on the 1040, you immediately get an error message when you begin the state return. The error is for you to do some due diligence such as the student going to an in-state school, undergraduate, etc. However, when checking these boxes one might be lulled into thinking that the state would make the calculation, about 25% of the federal and enter the credit in the return. You would think so, the child care credit makes a seamless transfer over to the state return with the only difference being that it is recalculated at the state rate.

But not for the state education credit. You still have to scroll down several spaces and enter the schools name and address. No address, no credit.

It didn't happen on many. On those it did it was a positive, the client got back more. No one was outside the amended deadline period.

I explained that although it was something I should have caught earlier, I did in fact catch it, and there was no monetary loss except the cost of money and that was of no concern to any of my clients.

I take pride in being carefull, and diligent, but as said in this positng, we are human, busy, and stressed this time of year.

FloridaTaxes (talk|edits) said:

25 March 2010
What software do you use? Seems unfortunate.

I just got a new client who brought me last year's tax return from his CPA that he used for 9 years along with the 2009 docs. The engagement letter was absolutely unfair to the client. It stated the firm will never pay penalties or interest for any reason at all, and that any necessary amendments were going to be billed at standard billing rates regardless of why the return was being amended. Don't know if that would hold if the client sued them. And he said this CPA started out with a small office and now has merged with someone and they have grown to 50 employees. Every year they assigned someone different to do his tax return for the past 3 years. And they charged him $700 for the 1040, which is ridiculous. He had A LOT of stock transactions but they imported them.

Kyea (talk|edits) said:

25 March 2010
I use Pro Series. I do like the software. I'm not blaming the software. However, I'm really surprised that when the diagnostics are run that there isn't a message that inquires as to why I have a federal education credit but have not completed the form to ensure that the state credit is calculated. There are so many of these bells and whistles elsewhere in the program.

Again, it was my bad. I'm just going to have to add another note to my list of "don't forget to check for these things". It was caught before anyone would have lost the credit due to an expiration of time.

Kokomo (talk|edits) said:

31 March 2010
I would pay the penalty and interest. If the client still wants to go let them.

I just discovered that I had not caught an error that the previous tax preparer had made in the depreciable basis of an asset. I had taken the numbers "as is" from the prior preparer and had followed the same error. After I discovered my own error I offered to pay the P&I and do the ammendments for free. Client is OK with that but very angry at the prior CPA. I did tell the client that the prior CPA should probably do the ammendments for free.

WHITETHORN (talk|edits) said:

15 April 2010
When I missed an item on a tax return I paid the penalty and interest explaining that the client would have had to pay the additional tax anyway and she had the use of the money for a longer period of time. Then I gave her a certificate for a free return next year, thus insuring her coming back to me. She came back the next year and gave me a nice tip.

Taxlady2010 (talk|edits) said:

10 March 2013
How bad does it have to be before you offer a free return? For example mistake from one year causing $30 extra tax due with the next year causing a $65 refund. This seems trivial enough to not expect to offer a free return. Definitely going to fix the errors and live with whatever happens. There is no penalty and will be $2 in interest on a state return.

Kevinh5 (talk|edits) said:

10 March 2013
"Bad" is in the eye of the beholder. Meaning the client. I would probably offer a $100 discount for a small error like this, not a free return. But in the long run, if the client thinks it is a HUGE error to be off by $30, you are still better off in the long run by giving the client a free return NEXT YEAR and keeping the client 5 more years than to have to go out and get a new client.

Do you know how much it costs to get a new client? Take a look at your marketing and divide the total marketing expense per year by the number of new clients. I'm talking newsletters, Christmas cards, etc. to existing clients (to get referrals and keep existing clients) as well as yellow page, adwords, signs, letters, etc. I figure it costs me LESS to give away a $250 return and keep a client 5 more years than to pay all of those expenses all year to get a new client

Taxlady2010 (talk|edits) said:

10 March 2013
As always, Kevin, your advice is truly appreciated. Thank you. This is a long time acquaintance and a very nice person. I am thinking of dealing with it now instead of offering something for the future. I am very paranoid about negative feedback, though I don't think this will happen. I do know that I would rather deal with it than to ignore it. If I lose the client, so be it.

Kevinh5 (talk|edits) said:

11 March 2013
My bet is that the client appreciates your honesty and integrity and stays with you. Keep up the good work. Your clients do appreciate you.

CathysTaxes (talk|edits) said:

11 March 2013
Taxlady, last year I found out I made a major mistake in the client's previous year's return. I don't know how it happened, but the client's schedule C got marked as 'statutory employee' (even though he did not have a W2) and I did not get a warning message about it. So, the return did not calculate SE tax! I was horrified! I should have caught the mistake, but I didn't. The client's wife was SO understanding, I couldn't believe it! I was more upset than she was. I refunded the previous year's fee, amended the return (free of course) and comped the current year's fee. I also told her I'd pay any late fee/interest/penalty (which I did). Would you believe she didn't want to accept the refund fee check? She called me not too long ago, she'll be bringing in this year's stuff.

Now in your situation, I may just offer some sort of discount.

Wkstaxprep (talk|edits) said:

11 March 2013
I agree with paying the penalty for client. Is there any legal obligation to pay penalties when we make the error? Just wondering out loud.

CathysTaxes (talk|edits) said:

11 March 2013
I'm sure if a client filed a suit in small claims for the amount of a penalty and/interest, he'd win in a heartbeat. IMO, why make the client go through that aggravation and expense when the mistake was clearly tax preparer (or tax prep software).

I actually had one client refuse to cash a check I gave him to cover a penalty. He said I always gave him breaks and did him favors, so he wouldn't cash it.

Wkstaxprep (talk|edits) said:

12 March 2013
I agree Cathy. My concern is what if it happens to a client who makes big bucks and they get a penalty of $20,000? We still pay it? Luckily (or unluckily) i dont have such clients lol

CathysTaxes (talk|edits) said:

12 March 2013
William, I believe that's when you get your E&O Policy out. I'm sure a client socked with that kind of penalty for a preparer mistake is going to get a lawyer.

My clients are small.

Gazoo (talk|edits) said:

12 March 2013
Have them check a box when you take on the clients:

____ Old Lady From Pasadena

____ Conservative, letter of the law

____ Aggressive

Most of the lambs today will check aggressive as the personality they want you to adopt when you do their return. heh, heh. That's exactly what you want them to do. Now cut ahead....a year down the line you make a colossal mistake. (The norm in my office.) "Sorry, you checked aggressive and I tried to save you every cent and these things happen." Simple is that and the problem disappears.

Client: "He didn't make a mistake. He was looking out for me and he tried to save me money. The guy is a genius."

What they don't know won't hurt 'em. <wink>

Kevinh5 (talk|edits) said:

12 March 2013
OH, Gazoo, I am SUCH a Jan & Dean fan! Thanks for that! I got to see them perform about 14 years ago before Dean died. It was the highlight of that Summer for me.

Gazoo (talk|edits) said:

12 March 2013
The Old Lady from Pasadena. Heh. Heh. There is no telling what the lady was really up to.  :)

Kevinh5 (talk|edits) said:

12 March 2013
https://www.youtube.com/watch?v=CUlH09TMKgQ

Kevinh5 (talk|edits) said:

12 March 2013
https://www.youtube.com/watch?v=xGdLDOXyWsg

Gazoo (talk|edits) said:

12 March 2013
Spring is almost here. I need to dust off my Beach Boys LPs.

Everybody remember, the client will spend any amount of money to "save taxes". You didn't make a mistake. They will spend $4,000.00 to save $5.00 and they'll love you for it.

P.S. The clothes that Jan & Dean wore on the Dean Martin show would be worth a fortune in a vintage clothing store today. The real deal.

Wkstaxprep (talk|edits) said:

13 March 2013
Hi Cathy, thank you for your reply. At your convenience could you kindly explain how an E&O policy works, just the very basics? Thank you very much.

CathysTaxes (talk|edits) said:

13 March 2013
William, my only knowledge of E&O Policies is from what I've read here. I'm so small (business wise, not height wise, though Hubby calls me 'Shorty' for some reason), I haven't obtained the policy. I know it stands for 'Errors and Omissions', so I would imagine it's like any other malpractice insurance. If you make a booboo (and it's not fraud), the amount is covered.

Wkstaxprep (talk|edits) said:

14 March 2013
LOL. Thank you Cathy! Appreciate it.

Aa1123 (talk|edits) said:

28 May 2014
Similar situation as the one CathysTaxes mentioned in March 2013 - spouse has a sch c with $147k profit. SE tax was calculated, just not enough - because the wages from husband's w2 were incorrectly checked as "spouses w2" in ProSeries, his FICA was deducted from the se total. I just realized the error, not sure how it happened but I know I need to tell her she owes an additional $6,600 for 2012. Not looking forward to the conversation. Any suggestions - other than triple check next time?

BTW I do have errors and omissions, however, hadn't thought about filing a claim....

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