JohnH

A client this stupid is never going to change. Just be glad you advised them of the penalty and they made the choice to pay less.   May as well cut your losses at the outset. 

I had a somewhat similar situation with a freight broker client for many years. In Quickbooks and on their financial statements, we would show gross billings and then use a contra-account to reduce gross revenue by the amount of the payments made to the carriers.  The contra-account showed up as a negative revenue entry.  We did this in order to have a better handle on the "true" net revenue in evaluating operations.  From an accounting standpoint, this was essentially the same as having a cost of goods sold entry. 

But on the tax return, I would simply move the amount of the contra-account into "other expenses" for tax reporting.  Operational net income was the same by either method, so the tax return agreed with the books.  But I'm sure it would have required some explaining if an  audit had ever come our way.  

6 hours ago, Slippery Pencil said:

That was a terrible decision.  You make it sound like you persuaded him to do this.  If so, that makes the decision even worse.  You should have persuaded him to file an extension and wait.  Live and learn.  File extensions, they're your friend.

I agree.  The ONLY thing to do in this situation was to file an extension. If the client refuses, I’d tell them to find another preparer.  
 

But that horse has left the barn. now you’re stuck with unraveling the mess, which could easily take months or more.  Likely to be lots or unbillable (or  unnecessary) time wasted on this.  
 

Hopefully you’ve learned a valuable from this mistake.  Experiences like this are how one sharpens their skills. 

11 hours ago, Abby Normal said:

I keep my explanations brief. You listed a bunch of things the IRS already knows just by the nature of the 1040X.

Here's how I'd edit your explanation:

CORRECTED FORM 1099-NEC ($10,000).

CORRECTED 1099-MISC: $10,000
----------------------------------------------

It seems to me that line 1 net change would be zero, and the other lines only change due to form calculations, so there's no need to explain this to the IRS.

And you could combine the two lines above into one line for convenience of copying and pasting.

Brevity, above all else.

I agree. “Brevity, paramount.”

Or worse, install the toilet paper on the roller with the edge facing the wrong way…

39 minutes ago, RitaB said:

Also hate doing the books for people who think running it thru the bank account converts a personal expense to a business expense.  

Everybody should know by now that running it through the bank account isn’t right.  The only proper way to convert a personal expense to a business expense is to charge it to a company credit card.  

An extension can easily be structured as a de facto installment payment plan for 6 months with no setup fee.  The simplest way I know to do this is to file an accurate extension (with or without payment-makes no difference), and then set up a personal EFTPS account and make payments through that account, applying them to the year under extension. You have a nice, neat, accessible record of your payments to date when you file the return. 

Of course, interest and FTP penalty on any unpaid balance will run during the extension period, but that would happen anyhow even if a formal installment agreement were possible  

How this for a response?
 

“Glad to hear this good news. You’ve learned a lot about QBO, which may help you get your info together in a timely manner next year.  Meanwhile, attached is your extension, because I don’t plan to stay up until 3am working on the revisions. “ 

Sounds like the son knows more about taxes than you do.  I'd give the info back to him with a suggestion that he employ his expertise and prepare the return himself. 

But you still provided a service.  They learned what to say and what not to reveal to the next accountant they interview.

4 minutes ago, Medlin Software, Dennis said:

In this specific case, since the employer is in MA, probable more delicate than difficult.  I suspect an oversight, maybe belief the pandemic rules were still in place, maybe new payroll person.  Normally, I would pass.  But this case, I would share the options with the potential client and let them adult.  If they want to do it right, I would take it on.

I think you nailed it. Thanks to everyone for the insights, especially at this time of year. 

11 hours ago, cbslee said:

How do you file a NC return with less wages than shown on the W 2?

So are you going to have your client ask his employer to amend his W 2?

 

That's the easy part.  No need for an amended W2.  The taxpayer reports the entire income on the NC return since that's their state of residence.  Then they claim a credit on the NC return for taxes paid to MA on the MA income.  (The credit is limited to the lesser of the amount actually paid to the other state OR the amount of NC tax attributable to the income reported to the other state, calculated at the NC rate.)  NC provides a schedule designed specifically for this calculation.  

The more difficult part relates to what happens if the employer isn't pleased that the taxpayer opened this can of worms, as Medlin pointed out.  That's probably my greatest concern in this entire matter.  I'm thinking of declining the work based on that consideration alone.  

Thanks for the cites, Lion.  That's very helpful, and I will probably call MA if I decide to do the work.  

1 hour ago, cbslee said:

If it was my client I would follow the W 2. I don't know if NC does W 2 matching but my state does.

I'm inclined to follow the W2, but there is a potential glitch.  The taxpayer is ultimately responsible for filing a correct return even if the employer makes a withholding mistake.   If MA does have a filing requirement for non-residents, the SOL never begins to run for an unfilled return.  If MA discovered the filing requirement in the future, they could compel a return to be filed, which would likely include penalties & interest for a late-filed return.   If at that time the NC SOL had expired, then the taxpayer would have no opportunity to amend the NC return and claim a tax credit on the NC return for all or part of the tax paid to MA.  Chances are that would never happen,  but if it did, it could be costly. 

I'm still researching, and while the situation with remote workers isn't all that unusual, I haven't yet found any definite guidance. (MA did have some interim rules during COVID, and the taxpayer met an exception of sorts, but those rules have expired. I think that is the exception Medlin referred to in the previous post) 

All wages and w/h are allocated to NC. 

Taxpayer is a resident of NC,, working remote for a company with its HQ in Massachusetts.  The employee occasionally travels to the MA office for meetings, etc.  Total number of days in MA were about 26 in 2023.  Many trips included overnight stays in MA, if that matters.  Employer only withheld NC income tax per the W-2.

I haven't yet found clear guidance on this, but can anyone tell me if MA is going to want to tax the MA portion of earnings as a Non-resident?

I'm shameless about this eyesight business.  I alternate between taking my glasses off to look at someone sitting across the desk, putting them on to look at the computer screen or read a document, and grabbing one of several magnifying glasses lying around when the text on a document is too small.  I'm thinking about mounting a magnifier on a swing arm on my desk so I can keep both hands free.  

If the payments cleared before the due date of the return, there will not be any Federal penalty or interest.  Not sure about how your state operates.  However, if the return is ever audited and an assessment is made, a FTF penalty would be added to the assessment.

Obituaries?

Maybe the best thing will be that he doesn't pay you and is so embarrassed that he is ashamed to contact you again. I've had a couple of situations like that over the years, and decided that never hearing from them any more was worth the value of the unpaid bill.  

On 10/25/2022 at 12:32 PM, Lion EA said:

But when I compute that the return was correct, and my software computes the return the same way, but the IRS (or state) refunds a different amount or sends a balance due notice with NO explanation of how they arrived at their amounts, I do NOT want to say I made a mistake. I want the IRS to send an explanation the way they used to. They are NOT sending letters recently, just different refund amounts with no explanations or balance due notices with no explanations. I am only human and do make mistakes, but I want to learn from my mistakes, want to know what I did wrong. I do NOT want to admit to someone else's mistakes!

Some people like to learn from other peoples' mistakes. 

Others learn from their own mistakes.

I seem to be different. I often learn from my own mistakes... by repeating them.

Is the exact amount really important?  As long as the client receives more than the refund claimed on the return, and the excess is reasonably close to the amount expected when interest is added, I tell them to deposit the check. I don't understand why some checks will show the interest in a small notation on the lower-left while other checks don't, but it isn't worth the trouble to inquire. 

On 10/3/2022 at 11:16 AM, cbslee said:

Once in awhile I get a text in Chinese. Fortunately I don't understand it so I delete it

Don’t you know you’ve won the China Lottery and you’re a multi-millionaire?  All you need to do is send them $495 and your bank account info. It’s all legit - they just need to validate who you are. 

Client: "Anything you can do about these penalties?"

You: "Sure, I can show you how they're calculated."

I'm puzzled a bit by the lack of discussion of this distinction in other accounting & tax publications.  I've read several articles by law firms purporting to "explain in detail" how this all works, but every single one of them leaves the reader thinking Sep 30 is a "drop dead" date.  (Perhaps they are trying to create a sense of urgency, which also might translate into premium billing for the work?)

Yet, at the same time the Journal of Accountancy is certainly a reliable source so I have no reason to doubt their analysis.  The only thing I can surmise is how averse many people are to "penalties" in the generic sense.  For example, a FTP penalty is peanuts when compared to a FTF penalty, but I sometimes question whether a particular commentator understands the difference since they seem to treat all penalties as the same.  

Whatever the case, if a taxpayer owes $10K and can't make the Sep 30 deadline but could be ready by Oct 31, they pay a $500 FTF penalty vs $2,500. And so on, with the penalty increasing by $500 with each succeeding month until the 5th month.  (I'm not taking into account the interest and the relatively tiny FTP penalty, since they remain the same under any scenario of filing and payment)  As you said, Lion, this is huge. Especially at this late date. 

Here's the link to the article in the Journal of Accountancy on Sept 23, 2022.  The 7th paragraph is quite clear. (I counted singe sentences standing alone as a paragraph).  The source is certainly reliable, although nobody else I've read has mentioned this - most just imply that the return MUST be filed by Sept 30, 2022. I'd like to hear your thoughts, or any one else's, on whether there is any other way to interpret this.  If reliable, it will significantly alter my work schedule this week (for the better).

https://www.journalofaccountancy.com/news/2022/sep/penalty-relief-deadline-fast-approaches-2019-2020-tax-returns.html

Here's the operative paragraph:
"Although the time for the full penalty relief is running out for businesses and individuals that have not yet filed their 2019 or 2020 returns, those that miss the deadline but file during the first few months after the Sept. 30 cutoff will still qualify for partial penalty relief. For eligible returns filed after the cutoff date,  penalties will start accruing on Oct. 1 instead of the return's original due date. The IRS noted in the news release that the late-filing penalty accrues based on each month or part of a month that a return is late, so filing sooner will limit any charges that apply."