Penalty and Interest


M

Michael Bratt

Client just discovered an error in their favor on the 2002
tax return, when it was compared to the 2003 return.
Approximately $24,000 in retirement income was inadvertantly
entered as "non-taxable" and, therefore, was not included in
taxable income in 2002. Client (MFJ) is in the 15% bracket,
so tax refund was about $3,600 higher than it should have
been. Client happily did not question this at the time.

(Problem was with the 1099-R received from the Federal
Office of Personnel Management. It does not show a taxable
amount and I just forgot to enter one. My mistake; I should
have known better.)

I am now preparing an amended return. If I understand
correctly, the failure to pay penalty is 1/2% per month (so,
6.5% through May 2004) and the interest rate is 6% per
annum. There should be no failure to file penalty; the
original 2002 return was timely filed.

(The client is also asking about the chances that the IRS
will not discover the discrepancy, thereby allowing them to
keep the refund and without penalty or interest.) I suspect
the IRS will match SSNs from 2002 returns within the next
year. I told them I am preparing the amended return and
advised them to file it, but the final decision is, of
course, theirs.)

In this situation, is it expected that the preparer will pay
the interest and penalties? I'm not HRB, but it seems
proper. How do you handle it?

Thanks.
 
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M

MTW

Michael Bratt said:
In this situation, is it expected that the preparer will pay
the interest and penalties? I'm not HRB, but it seems
proper. How do you handle it?
There is probably no rule anywhere that requires you to do
anything. I would be inclined to reimburse the penalty (if
you can't get it waived...mention the confusing,
non-standard 1099-Rs that the OPM uses), but probably not
the interest. The latter is based on the fact that the
client has had use of the money in the meantime and
therefore hasn't been "damaged."

But, if this was a valuable client that I wanted to keep
(doesn't seem likely under the circumstances), I might offer
to pick up the interest (in addition to penalties) as a
matter of "goodwill." Naturally, I wouldn't reimburse
anything unless or until the client actually files the
amended return and is assessed by the IRS.

MTW
 
H

Harlan Lunsford

Michael said:
Client just discovered an error in their favor on the 2002
tax return, when it was compared to the 2003 return.
Approximately $24,000 in retirement income was inadvertantly
entered as "non-taxable" and, therefore, was not included in
taxable income in 2002. Client (MFJ) is in the 15% bracket,
so tax refund was about $3,600 higher than it should have
been. Client happily did not question this at the time.

(Problem was with the 1099-R received from the Federal
Office of Personnel Management. It does not show a taxable
amount and I just forgot to enter one. My mistake; I should
have known better.)

I am now preparing an amended return. If I understand
correctly, the failure to pay penalty is 1/2% per month (so,
6.5% through May 2004) and the interest rate is 6% per
annum. There should be no failure to file penalty; the
original 2002 return was timely filed.

(The client is also asking about the chances that the IRS
will not discover the discrepancy, thereby allowing them to
keep the refund and without penalty or interest.) I suspect
the IRS will match SSNs from 2002 returns within the next
year. I told them I am preparing the amended return and
advised them to file it, but the final decision is, of
course, theirs.)

In this situation, is it expected that the preparer will pay
the interest and penalties? I'm not HRB, but it seems
proper. How do you handle it?
Well, of course you are handling it right by preparing the
1040x (free of charge). There should be no penalty since
t/p relied on competent counsel. Just the interest. I
don't think they add that failure to pay 1/2 % on 1040x's.

As to the interest, well, taxpayer benefits from "borrowing"
the money from the government. Question is, how does that
interest rate compare to his cost of capital? If he's
maxed out on credit cards, then 6% is a bargain, hence your
obligation should be zero. On the other hand, if he has no
credit card debt and only earning interest on bank cd's at
2%, then my opinion, and how I handled it one time before,
is that you owe him the differnce. And if the difference
just happens to be equivalent to what his return would cost
him next year, your fee, that is, .... well.... see where
I'm going with this?

Just hope your client is the understanding type and doesn't
live in a northern state where they automatically say SUE
SUE SUE!.

Cheer$,
Harlan Lunsford, EA n LA
 
B

Barney Bird

Michael Bratt said:
I am now preparing an amended return. If I understand
correctly, the failure to pay penalty is 1/2% per month
(so, 6.5% through May 2004) and the interest rate is 6%
per annum. There should be no failure to file penalty; the
original 2002 return was timely filed.
Interest rates are announced quarterly. Interest rates for
the quarters from April 15, 2003 until now are 4% and 5%.
You will find a table of interest rates at the url pasted
below.

http://www.smbiz.com/sbrl004.html

If the tax is paid with the amended return, your client will
not owe any failure to pay penalty. You are correct that no
failure to file penalty is applicable presuming the original
return was timely filed. The only addition to tax that will
be owed is the interest, which shouldn't exceed $180.

Yes, you and your client should assume IRS will catch the
understatement through their computer matching programs.

Barney Byrd
 
J

Joel Berry, CPA

Michael Bratt said:
In this situation, is it expected that the preparer will pay
the interest and penalties? I'm not HRB, but it seems
proper. How do you handle it?
I don't know if it's expected, but if I make the mistake, I
pay the penalty and interest. One of the other guys in the
office pays penalty only. His explanation is that the
client had access to the money for the additional time, and
could have earned interest on it.

Joel Berry, CPA
Sugar Land, Texas
 
P

Phoebe Roberts, EA

Michael said:
is it expected that the preparer will pay
the interest and penalties?
We'd normally pay the penalty in that situation. If the
client requested, we might or might not pay the interest.
If a large amount were involved, we'd write a letter
requesting abatement of the penalty and explaining that if
it's not abated, the preparer will pay it. The IRS doesn't
like making preparer pay penalties.

Phoebe :)
 
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N

Nan Eklund

In the last 30 years my office has paid interest and
penalties when the error was ours. On an amended return,
there shouldn't be a failure to pay penalty, just interest
on what's owed.

Do an amended state, also. We never charge for amending our
error. And - I've made exactly the same error!

Nan, EA in LA
 
E

Ed Zollars, CPA

I don't know if it's expected, but if I make the mistake, I
pay the penalty and interest. One of the other guys in the
office pays penalty only. His explanation is that the
client had access to the money for the additional time, and
could have earned interest on it.
I think if you ended up in court, the "pay penalty only"
answer would be the one the court would follow, using the
logic cited (client had use of the funds). However, from a
client relations standpoint, I think your view is probably
the better on--a client isn't likely going to see this
distinction and, from their point of view, they owe interest
only because you fouled up.

A large portion of the population isn't "up to speed" on the concept
of time value of money, and so they just see that they are going to
pay $350 rather than $300 because you fouled up--and not worry they
are paying the $350 much later than they would have paid the $300.
Even though a court would sustain your position, a client will
likely feel cheated *and* tell others that you cost them all that money.
 
P

Phil Marti

Client just discovered an error in their favor on the 2002
tax return, when it was compared to the 2003 return.
Approximately $24,000 in retirement income was inadvertantly
entered as "non-taxable" and, therefore, was not included in
taxable income in 2002. Client (MFJ) is in the 15% bracket,
so tax refund was about $3,600 higher than it should have
been. Client happily did not question this at the time.

(Problem was with the 1099-R received from the Federal
Office of Personnel Management. It does not show a taxable
amount and I just forgot to enter one. My mistake; I should
have known better.)

I am now preparing an amended return. If I understand
correctly, the failure to pay penalty is 1/2% per month (so,
6.5% through May 2004) and the interest rate is 6% per
annum.
There is no failure to pay penalty on deficiency assessments
(audits) or adjustments to tax (amended returns) if the
additional tax is paid within 30 (?--they change the number
now and again) days of assessment of the additional tax.

If you pay the additional tax with the amended return, only
interest will be due in addition to the tax.

Phil Marti
Topeka, KS
 
J

Joel Berry, CPA

Even though a court would sustain your position, a client will
likely feel cheated *and* tell others that you cost them all that money.
<SNIP>

That's why I do what I do. Plus, it helps me be more
careful. In over twenty years of practice, I've only had to
pay two or three times.

Joel Berry, CPA
Sugar Land, Texas
 
R

Robert C. McRae

I know I shouldn't feel this way, but just hearing that Ed
Zollars made a mistake on a tax return makes me feel better.
After reading his responses, and considering the time he
spends on them, I was starting to think that this is no
mortal man. Thank you Ed.

Robert C. McRae, CPA
Tyler, Texas
 
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E

Ernie Betts

Client just discovered an error in their favor on the 2002
Also does your client qualify for the simplefied general
rule? OPM attempted about 2 years ago to put a taxable
amount on the form and "screwed up" and had to reissue
almost 1 million. I'm just begining to see IRS letters on
the 2002 matching. Just had one yesterday on a 1099-C.
 

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