Client wants to hit my E&O insurance

[WITAXLADY]

so in 2012, client took out $20,000 from IRA - no exception, no tax either..

somehow it got missed - was in their packet when they brought it back with the letter - so I am wondering if it was in there originally and plus wouldn't you wonder why your refund was so large with a huge distribution and don't you look at your taxes a teeny bit?

 

So I offered her to take care of penalty and work off part of the interest over a number of years..

she has a business and there were some numbers way low from 11 and 13 and I suggested she do some digging.

 

Well her friends said she would get audited if she amended and since my insurance won't pay the amount due I should just pay this.

With the Sch A and C and 8880 with lower income they will probably owe only the penalty on fed and state of $2664 and interest of $400? 

 

So I said also keep good track of this year and it can come out of 2014 taxes and we can do them real early Jan and get money back to pay or the IRS will take part of it  - usually get back about $4-$5,000 as hubby withholds a lot. She says well I do not know after this if I will be back - I said we all make mistakes.

 

Why would I pay her interest? Do I just let it go to the E&O?

burn

D

[MDEA]

On the federal side you should be able to have the penalties waived under FIRST TIME ABATEMENT. I do not know about the state. I have paid interest and state penalties for clients when I was positive the mistake was mine.I have also split these items when I felt It was also partly client's fault.I have never used my E&O insurance.

[ILLMAS]

Do you make copies of your clients records?  

[Gail in Virginia]

On the federal side you should be able to have the penalties waived under FIRST TIME ABATEMENT. I do not know about the state. I have paid interest and state penalties for clients when I was positive the mistake was mine.I have also split these items when I felt It was also partly client's fault.I have never used my E&O insurance.

I am not sure from your explanation if you are talking about the penalties for under-reporting/underpaying or if you are including the penalties for early distribution.  I have not typically had any luck with first time abatement for this type of situation, but it does not hurt to try.  And I do normally pay the penalties and interest if I feel that it was my fault.  But knowing for sure if they had included the information and you missed it, or if they failed to include it and put it in afterwards is tough unless you routinely copy or scan everything they bring to your office, even the stuff that you know you are not going to use.  Like MDEA, I have never used my E&O insurance - it would take a really large claim to cause me to do that instead of paying the penalties myself.  I feel sure a claim would cause my rates to skyrocket.

[MDEA]

I have been able to abate under-reporting/under paying penalties on the same type of incident. The early distribution penalty must be paid.

[michaelmars]

my e&o carries a $1000 deductible so I never had to use it, even in one case where I paid $3000 in penalty, I felt it wasn't worth it to get higher premiums going forward.  I always pay penalties but hardly ever pay the interest.  Unless its a great client I figure the interest paid is what they earned on their having the money in their account during the period.  I will also usually give the next year free is it was a blatant screw up.  Also in the o/p its not up to the client to hit the insurance policy, they make the claim against the preparer and its up to the preparer to decide to make a claim or not.

[mcb39]

I just recently finished a client who took out 30,000 in 2011; no tax, no exceptions; but also no return filed for 10, 11, 12 and 13.  The biggest beating he is taking on all four years is the failure to file penalty.  I tell my clients that they MUST file even though they cannot pay.  IRS is not happy with persons who DO NOT file when they are required to do so.  He came in with transcripts from IRS that clearly showed $30,000 withdrawal from IRA.  He swore that he never took out more than $10,000.  More delay while he searched for proof.  In the end, he "remembered" and it clearly showed the deposit in his check book. 

 

None of this pertains to D's question, but let me tell you that there was no abatement, no mercy, etc.  He is crying "usury".  Basically, I am telling him to pay up and not rock the boat.  He would have owed much more if I had not prepared his Sch C; OIH, Sch A, etc.

 

A few years back I had a longtime client who drove me batty; calling at all times of day, evening and weekend.  Somehow, we had a mixup on her Fed payroll deposits and she demanded that I pay the penalty and interest.  It was not entirely my fault as she was doing the payroll and sending me the numbers.  I wrote her a letter; included a check for less than half of the whole.  At the same time I informed her that this would end our professional relationship as we obviously no longer trusted each other.  That was the best client that I ever fired.  Since she is family of family, I still see her and still hear about her situation.  She is paying big bucks now to have her business taxes prepared.  Odd thing about it is that her children and sisters still come to me for tax prep. 

[JohnH]

Is the $2,664 penalty comprised of $2,000 early withdrawal penalty plus $664 of estimated tax penalty and Failure to Pay penalty combined?  If that's the case, you should prepare a pro-forma of the original return to show her the total penalty she would have paid on the original return if the $20K withdrawal had been included.  That figure would include the estmiated tax penalty up through the filing date.  That sum is hers to pay, although I'd at least make an effort to get all or part of it waived or abated. 

 

The remainder of the penalty is on you.  I understand the reasoning behind refusing to pay interest, but I personally don't agree with it, so I'd probably pay all the interest.  I say that because the interest is added at about 3-4% per year, and the client could only have earned about 1% per year or less if the money were in a savings account.  Given that I feel obligated to pay most of the interest, I'm not inclined to quibble over the 1%.

 

Form what you said about her comments, she probably isn't going to return no matter what you do.  So this becomes an issue of your integrity and how you feel about the way you handled it, rather than client retention.  Decide what you're willing to do based on what is fair and reasonable for you and the client, give the client your numbers and reasoning, and move on.  I might decide to discount their fee next year as an additional mea culpa, but I wouldn't commit to that at this point.  It all depends upon the client's attitude (if they do return).  Some clients come to regard any mistake on your part as something to hold over your head in perpetuity.  For them, the discount is essentially offset by the PITA premium.  For others, who are reasonable and appreciate the way you settled it, you might want to do anything from a discount to a "no charge" return next year.  But no sense staking out your position on that issue until their position is known.

[KINGCHUCK1971]

Do you make copies of your clients records?  

I'm with ILLMAS,

I make copies of all my clients documents. Then you'll know for sure if you used everything they submitted to you. If you forgot to use the IRA information then the penalty is on you.

[Lion EA]

I would pay the penalty IF I made an error.  I would not pay interest since they had use of the money.  HRB would send them a Form 1099 for paying on the client's behalf.  So, I would suggest a discount on next year's tax prep fee (or free) instead of paying the penalty.  And, if I had any doubts as to what the client gave me, as you do, then I would offer a percentage of the penalty/discount on next year's fee.  I would also fire this client (after next year, if they return to claim their discount) unless their attitude changes.

 

We're all human.  Both your client and you.  There was only one perfect human (or at most only one perfect human, depending on your beliefs) and we crucified him.

 

I'm not scanning nearly enough.  Really need to scan everything.

[kcjenkins]

My position was always that the tax is on them, just as it would have been had it been on the return,  Penalty and interest on me, if I made the mistake.  

 

 

plus wouldn't you wonder why your refund was so large with a huge distribution and don't you look at your taxes a teeny bit?

 

That part bothers me, because I always ask each client if they had any unusual activities, sales, withdrawals, new dependants, etc.  I guess all experienced preparers do.  Assuming you did that, the client should have mentioned the IRA withdrawal. 

 

Still, either way, the tax on the withdrawal is hers.  Explain that to her in a letter, with a check for the penalty and interest, and put on the front of the check, in the "For_____________" space  "Payment in full".   If she cashes that check, that's the end of it.  

[Lion EA]

Oh, yes, the tax is always theirs.

[easytax]

so in 2012, client took out $20,000 from IRA - no exception, no tax either..

Well her friends said she would get audited if she amended and since my insurance won't pay the amount due I should just pay this.

With the Sch A and C and 8880 with lower income they will probably owe only the penalty on fed and state of $2664 and interest of $400?

  

Is the $2,664 penalty comprised of $2,000 early withdrawal penalty plus $664 of estimated tax penalty and Failure to Pay penalty combined?  If that's the case, you should prepare a pro-forma of the original return to show her the total penalty she would have paid on the original return if the $20K withdrawal had been included.  That figure would include the estmiated tax penalty up through the filing date.  That sum is hers to pay, although I'd at least make an effort to get all or part of it waived or abated. 

 

The remainder of the penalty is on you. 

Form what you said about her comments, she probably isn't going to return no matter what you do.  So this becomes an issue of your integrity and how you feel about the way you handled it, rather than client retention.  Decide what you're willing to do based on what is fair and reasonable for you and the client, give the client your numbers and reasoning, and move on.

  

My position was always that the tax is on them, just as it would have been had it been on the return,  Penalty and interest on me, if I made the mistake.  

 

Still, either way, the tax on the withdrawal is hers.  Explain that to her in a letter, with a check for the penalty and interest, and put on the front of the check, in the "For_____________" space  "Payment in full".   If she cashes that check, that's the end of it.

Does not matter --- what her friends said --- the PROPER thing is to do the RIGHT thing and that would be to amend and correct the original return. As to insurance --- as stated by others --- E&O always has a deductible, so possibly you will not save a lot --- especially when factoring in higher future rates, etc.

The early withdrawal penalty is hers and NOT YOURS, as is the regular tax on the withdrawal. Interest wise, you can look at it either way but it suggested that you pay -- YOUR part of the interest --- that does not include her part from her additional regular tax because of the withdrawal and her penalty tax from the early withdrawal --- interest on those amounts are HERS ONLY.

If she does not agree, then YOU probably would be better served to NOT have her as a future client. Decide what you believe is the right/proper thing and do it. If you retain her and she trusts you --- fine --- if not, you still did the right/correct/proper thing (in your mind and estimate) -- move forward and do not dwell on her.

The payment in full on the check is an excellent idea, whatever amount you do decide she should receive. After all, she may continue to try some other action using any payment as evidence you agree that you made a mistake... SO --- limit possibilities with things like "payment in full" on the check and DO NOT give her anything in writing.

I am not an attorney, so this is NOT legal advice --- if you desire a legal opinion -- contact a register attorney in your area, etc..

[Randall]

I think most E&O Insurance policies require you to contact them when you are first aware there might be a potential conflict.  You may want to call them and run your situation by them before proceeding further.

[Richcpaman]

WITAXLADY:

 

I don't send checks to clients.

 

I would send a check to the IRS or WI, but I would not send one to your client. 

 

Write the letter to get the penalty abated and prepare the amended return.  The client already has the CP-2000 so the IRS already knows, so no amended return is required, but you can check the totals to make sure the IRS is right.  Then you know how much WI is owed as well.  If the abatement does not work, which it probably will, you are left with the interest, and that is on them...

 

Review all the backup that you have.  In 22 years, I have had only one instance that I had the info and did not report it. This person gave me a receipt for the US Savings bond interest (Calculator ribbon receipt, and no 1099) which we ignored, so I took care of that penalty, and the other "claimed" that that extra W-2 was in the info she gave me... it was not.

 

I am not perfect, just paid a penalty on a SC return.  They do not allow out of state rental property losses... who knew?

 

Rich

[SaraEA]

I try to scan all client docs but admit that some seem irrelevant (Burger King and Victoria's Secret receipts) so don't bother.  And when it's April 14 I admit to being lax in the scanning department.

 

I always return the client docs with two staples across the top, with maybe 3-4 inches between each.  If they have a lot of docs, I group them into normal income  like W2s and 1099Rs, interest and divs, Sch A items, etc. and staple each group with two staples.  A colleague used to tell clients that if a packet was disassembled, we would take no responsibility for missing items.  I don't go that far, but if a client claimed we didn't include this or that first thing I'd look for is the staple holes.

 

We will pay interest and penalties if our fault.  The tax and early distribution penalty are on the client because they would have had to pay these anyway if the return was done correctly.

[WITAXLADY]

oh - I like that about the staple holes - I will look as we staple client copies in the middle!

the $2664 is $2,000 federal and 1/3 for state - $664 due for early withdrawal.

 

Thank you all for your input!

 

Every year we copied a little more, for 2013 - we are trying to copy most everything and for 2014 - we are going to scanning. - where do I save it? To another hard drive or to the cloud that got hacked?

 

And I forgot about my deductible so I will just pay the interest myself - with a check to the US treasury - good idea! and the WI dept of Revenue and hope that first time penalty abatement works.

 

I will with integrity - good point - try to make her as happy a possible - but because of her badmouthing I would like to keep her as it is harder to diss someone who still prepares your tax returns

[Lion EA]

When I worked for HRB, they had us staple all the client's original documents together in 1040 order to return in the folder.  Then, if a claim came in, we were supposed to ask for their folder and make sure the suspect document was stapled in order with the rest or, if unassembled, had staple holes..  A document with no staple holes had to go above my pay grade.  (Although, our district manager recommended ALL claims be paid, so why did he bother teaching us the HRB way and making us check the folders?!)

[JohnH]

One issue which continually puzzles me is the position many take regarding interest. I don't agree with the view that "they had the use of the money", which implies that the preparer has no moral obligation to pay any of the interest. I believe that is short sighted and a bit of a cop-out in the face of reality.

So let's look at reality. If the client had the money in a savings account, they would have only earned about 1% at most. However, the interst is being charged at about 3-4%. So if I am truly committed to making the client whole due to my error, I should be willing to accept responsibility for at least the interest differential.that is, at a minimum I should be willing to shoulder the responsibility for 75-80% of the total interest charged.

[Lion EA]

My clients are making a lot of money on their money, usually via their investments but sometimes in their businesses.  So, using your logic, they would have to pay ME the differential !!

 

My engagement letter states no interest if not preparer error.  But, I have "paid" interest by reducing future tax prep fees.  A 1% error on a $4 million dollar return not discovered for three years, add in CT at their 8%, would wipe out my income pretty fast, so I don't offer in writing.  I would start from No and then magnanimously offer something that feels right to me.  (If I ever end up giving something that feels wrong to me, I'd fire that client afterwards.)

 

I don't remember a client ever asking for interest.

 

(Working at a year-round HRB Premium office, I had clients from other offices come in to file claims, including one lawyer who would NOT make his ES payments and then file a claim for P&I.  He said it was always paid, but I don't know what the district recommended or corporate did or did not do.)

[JohnH]

My clients are making a lot of money on their money, usually via their investments but sometimes in their businesses.  So, using your logic, they would have to pay ME the differential !!

 

 

With all due respect, to me that is a rationalization, not a reason.

 

But I do get the point concerning the potential problems with higher-income clients. 

Perhaps that is a good reason to consider a risk-based fee schedule.

[Lion EA]

It wasn't a rationalization.  It's a fact.  The suggestion was that I pay the differential between what the IRS charges my client in interest and what my client earned on the use of his money, but there IS NO differential for me to pay him, he earned a higher rate than the IRS and even CT charges combined.

 

My point/rationalization is that I DO offer what I feel is right and not zero.  And, also, that it has not happened often enough for me to have a general procedure.  But, I do NOT put in writing that I will pay interest; I need to CMA for when the interest would put me out of business.

 

A risk-based fee schedule sounds interesting.  How does it work?  A new client comes to me who did not listen to his prior preparer (or his prior preparer had given up trying to tell him what to do) or his situation had changed drastically and he owes $100,000 including tax, penalties, and interest for his 2013 return this week.  Do I base my fee on his P&I?  The mistakes he made in not using the ES vouchers or new W-4 his prior preparer gave him?  The possibility he's been doing something fraudulent so his prior preparer fired him when he discovered it?  Which risks do I charge for and how much?  I've heard of preparers adding $500 to EIC return fees to cover possible preparer penalties.  Are there risks that I can put a cost on to have a fee schedule?  Or, do you assess the risk return by return as you complete them and price accordingly on a case by case basis?

 

I don't have a lot of clients, but most are very high earners.  So the possibility of one lawsuit or unhappy client (along with their family members and their business returns and all their referrals) wiping me out worries me.  For instance, I alerted my clients to their potential change in tax due because of the NII, using their 2012 information to provide an apples to apples comparison, and of course told them to alert me as they saw changes during 2013.  But the client whose investments earned $85,000 more didn't notice and also didn't bring me his brokerage statement until this month!  Luckily, he was smart enough to understand his higher tax bill as I went through his return with him.  I do have clients who have no idea how income and taxes relate (the proverbial trust fund babies).

[MAMalody]

I just got an e-mail from a client that had received a CP2000 about two missing W-2s from their 2013 tax return  Looked up the return, checked copies of W-2s, not there.  Informed client I had no copies of said w-2s and they did not appear to be on the return.  It looked to me like they owed the tax.  Just got a subsequent e-mail from client, I don't have W-2s but know I worked there, guess I will pay the tax, P & I.  Good end to story.

[JohnH]

I think a risk-based fee schedule takes into account the higher risks associated with the preparation of tax returns for high-income clients.  The upcharge provides sufficient income to pay the additional premiums for higher E&O coverage.  After all, E&O insurance is the ultimate protection against catastrophic claims by clients for the tax preparer's errors.  If the client base involves higher risk, then the coverage should be stepped up accordingly, and those clients' fees need to reflect that fact.

 

I don't think this conversation involves clients who fail to provide information, or clients who are dishonest with respect to the info they provide us.  Those clients clearly are responsible for all their P&I.  I wouldn't consider paying a penny in either of those situations.  We are discussing situations in which the preparer makes an obvious error which costs the client penalties & interest and has to make a reasonable, consistent decision on how to make the client whole.  Incidentally, if the interest related to a preparer error would put the preparer out of business, chances are the associated penalties have already accomplished that task.  After all, 3-4%  (APR) interest on an error already has a 6% (effective APR)  FTP penalty attached to it.

 

But in all this discussion, we haven't referenced what the E&O Insurers generally do.  I assume the have already plowed this ground.  If a payable claim is filed, do they only pay penalties, or do they also pay all or part of the interest?

[mrichman333]

I also make copies of all documents, that way I know if I missed something or the client forgot to bring it to me.