More taxpayers than ever rely on professional help to fill out their tax returns. Such expertise, however, does not let individual filers off the hook.
That's the costly lesson one couple learned.
In 2006 the married couple got $3.4 million from the termination of a swap transaction. I don't know exactly what a swap is, but I do know that the Form 1099-MISC the couple got detailing the earnings was a clear sign that the couple needed to include the money on their tax return that year. After all, the Internal Revenue Service got a copy of that 1099, too.
You'd think that the firm they hired to do their taxes, a firm that included a lawyer and a certified public accountant, also would be on top of the 1099.
But while filling out the couple's 115-page tax return, the $29.2 million of adjusted gross income that was reported didn't include the $3.4 million swap income.
And double oops when the pair signed the incorrect return and sent it on its merry way to the IRS.
The tax agency, thanks to that 1099 copy I mentioned earlier, quickly discovered the couple's filing error. A notice of tax deficiency, interest and penalty charges soon arrived in their mailbox.
That's when the couple took their case to U.S. Tax Court.
The couple didn't dispute that they owed an additional $521,473 tax on the unreported $3.4 million; specifically, their total tax bill that year should have been $4.24 million instead of the $3.72 million they paid.
They also accepted that they owed interest because they didn't pay the correct amount of tax on time. So they paid the overdue tax and interest.
But the couple really didn't want to pay the $104,295 penalty the IRS assessed for the mistake. After all, the error was made by the tax preparation firm.
Guess what? Tax Court Judge David Gustafson didn't buy it.
Neither the mister or missus is a tax expert, wrote the judge, "but [the husband] is financially sophisticated, and he has a basic understanding of the taxation of interest income, dividend income, and income from the sale of stocks and bonds." No argument there, given the $3.4 million gain.
More to the point, the Tax Court record notes that the couple "did not compare or match the items of income reported on the Form 1040 and its schedules with the information returns that the third-party payors had provided. Consequently, petitioners failed to make sure that all their income items were reported on the return" prepared by the firm they had hired.
They simply assumed all was correct, signed the 1040 and sent it on its way. Not to stoop to the junior high humor level, but y'all all know what happens when you assume.
So now the couple also must pay the penalty since, as Gustafson wrote, the couple's "reliance on their return preparer did not constitute reasonable cause for their omission of the $3.4 million income item."
For the rest of us, the lesson is clear. Pay attention to the statement at the end of each tax return -- be it a 1040, 1040A or 1040EZ, filed electronically or by paper -- right above the signature line that says, "Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete."
The IRS and the Tax Court will take you at your word.
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