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Tax pro error is no excuse

By Kay Bell · Bankrate.com
Tuesday, June 21, 2011
Posted: 2 pm ET

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 Stephen Woodsum and Anne Lovett 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 Woodsum and Lovett 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.

Oops!

And double oops when Woodsum and Lovett 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 the Woodsum-Lovett 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 Woodsum and Lovett 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 Woodsum nor Lovett is a tax expert, wrote the judge, "but Mr. Woodsum 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 Woodsum and Lovett 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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4 Comments
Jeff Day EA
June 26, 2011 at 10:07 am

When I read this article and the comments, I wonder why the couple did not simply sue the preparation firm and collect through it's error and ommission insurance?

Could there be some possibility that they didn't give the preparer the income documents?

Rigo Vindiola
June 23, 2011 at 3:55 pm

We're a married couple filing jointly thru an enrolled Agent/Professional Tax Preparer. All information concerning money earned/received is given to Preparer, shouldn't Tax Preparer be able to tell us how much we have to pay in taxes
since we give the Tax Preparer the exact number of dollars received/earned for the year?? Our Tax Preparer has made mistakes, that surfaced this year, for 2009 and 2010, and we've had to pay penalties and interest due to the Preparer's mistakes; she's forgotten to include income information presented to her in writing. What can we do??

Marjorie Kight
June 22, 2011 at 12:07 pm

It would be a great service if the Tax Code was rewritten in laymen
language (probably at a 4th grade level) and that the paid tax preparer
would have some responsibility for any errors.

They could also consider a flat tax but write it so the taxpayer can
understand that concept.

I agree that something should be done about the Tax Code.
A re-write in the common man's level of reading (about 4th
grade level) would be helpful. Also, there should be some
shared compensation if the tax preparer makes a filing error.

It would be of interest and value for the Congress to consider
a flat tax and explain it in laymen language.

Homeless
June 21, 2011 at 9:13 pm

Here's the issue...tax form are impossible for normal people to decipher! So even if a normal person looks at the return it doesn't make any sense...the reason they feel the need to hire people that are supposed to know what they are doing.

I just got something back saying we owed 20k for 2009!! This was the first year we went to a CPA...the biggest part of the error is the IRS never received a 1099 that showed withholding, but the other error is the CPA neglected to include one of the 1099's. So now we paid this guy $250 and we will owe the IRS more than that in interest and penalties alone...as if things aren't bad enough!

CPA should have to have malpractice insurance to cover these types of mistakes...the IRS doesn't care...they just want our money and they have made the code too complicated for the average Joe to complete on their own, so we pay these people to do it for us, but they have ZERO liability...how is that right?