What do you think?

[OldJack]

Oh please.

It is clear that the warranty covers penalties and interest, but in this case it is clearly an additional tax. What the preparer failed to include on the tax return was the 10% additional tax that was due. The tax code 72(t) clearly calls it an additional tax so we should quit calling it a penalty and trying to make it covered by the warranty.

[SCL]

Oh please.

It is clear that the warranty covers penalties and interest, but in this case it is clearly an additional tax. What the preparer failed to include on the tax return was the 10% additional tax that was due. The tax code 72(t) clearly calls it an additional tax so we should quit calling it a penalty and trying to make it covered by the warranty.

AMEN!

[jainen]

>>The tax code 72(t) clearly calls it an additional tax so we should quit calling it a penalty<<

In a 1991 lawsuit called IN RE CASSIDY, JR., the IRS said the very same thing trying to assert priority against a bankruptcy estate. The court absolutely shut them down.

First, the judge observed that "merely denominating an obligation as a tax does not mean it is such for all purposes." Then he quoted the Senate Finance Committee report, summarizing that "Congress's main intention was to penalize those taxpayers who made early withdrawals from qualified pension plans." In the resulting order, "the Court concludes that the Section 72(t) exaction is a penalty and does not constitute a tax."

That ruling was affirmed by the Court of Appeals. There are many other cases where the courts have called it a penalty. I would certainly argue that it is well within the scope of what Jackson-Hewitt guarantees.

[OldJack]

>>First, the judge observed that<<

As it says its only the judge's observation and his ruling in his court. Fact still remains that the law is clear with congress intent when the code says "additional tax". The term "additional tax" is not something any congress could not understand when voting. Sure congress intended to penalize the taxpayer just like they do with all taxes, but the word of the law still says it is an additional tax. I have not read the court cases but it appears as another example of judges trying to legislate from the bench. Also, this post was not about bankruptcy cases, you can do better than that.

[jainen]

>>this post was not about bankruptcy cases<<

True, the case was about interpreting taxation outside the tax system itself. The original post is also about a non-tax issue, the guarantee. But the judge was looking directly at the tax code when he reviewed Congressional intent and quoted specific language. He drew from precedent to state baldly, "The IRS argument ignores the express intent of the congressional drafters."

You say "congress intended to penalize the taxpayer just like they do with all taxes." That's not the purpose of taxation, and you know it. You also know that "to legislate from the bench" is a misstatement of the court's Constitutional role. This court, tax court, and others equate this particular use of the word "tax" with a penalty. "Additional" is also a general term. Late filing and other penalties are established in the code with variations of the very same words, such as "add to tax." I hope you aren't mentally overwhelmed by the word "tax" appearing in the tax code. You still have to figure out what it means.

[taxxcpa]

>>this post was not about bankruptcy cases<<

True, the case was about interpreting taxation outside the tax system itself. The original post is also about a non-tax issue, the guarantee. But the judge was looking directly at the tax code when he reviewed Congressional intent and quoted specific language. He drew from precedent to state baldly, "The IRS argument ignores the express intent of the congressional drafters."

You say "congress intended to penalize the taxpayer just like they do with all taxes." That's not the purpose of taxation, and you know it. You also know that "to legislate from the bench" is a misstatement of the court's Constitutional role. This court, tax court, and others equate this particular use of the word "tax" with a penalty. "Additional" is also a general term. Late filing and other penalties are established in the code with variations of the very same words, such as "add to tax." I hope you aren't mentally overwhelmed by the word "tax" appearing in the tax code. You still have to figure out what it means.

According to your logic, JH should pay all "penalties" including the "tax" on early withdrawals which you consider to be a penalty. Therefore even if the "penalty" had been correctly shown on the original return, JH should pay it???

Even if you can somehow read that interpretation into the JH guarantee, I cannot believe any court would uphold any such play on words and hold JH liable for an amount clearly owed from the word 'go' by the client.

It is analogous to the concept of the "letter" of the law and the "spirit" of the law. The intent of JH's guarantee is to reimburse the client for any additional expense due to errors made by JH. If an 'error' does not result in any additional expense, then it is hard to justify JH assuming such an expense. If an item of income was reported on the wrong line, but reported in the correct amount, would you assume that JH owed the tax related to that line on the form?

[taxxcpa]

I would not pay the interest, in many cases, because the client had the use of the money, not me.

I WOULD pay the interest even though it converts the late payment portion to an interest-free loan. Why should a client be forced to pay interest unless he wants to postpone the payment? When I get a credit card bill, I have a choice: pay on time with no interest or pay late and pay interest. Unless my bank balance is too low to pay the bill, I pay on time since I have no desire to pay interest on money I am able to pay on time.

Payment of interest by a client should be his choice, not the tax preparer's. However, if you do not offer a guarantee, then you probably have no legal liability to reimburse the client for the interest.

[TAXBILLY]

Ialways pay the interest if it is due to my error. The penalty in most cases can be abated but if I can't accomplish this I also pay the penalty.

taxbilly

[OldJack]

>>"Additional" is also a general term.<<

Jainen.. you are trying to sell a cereal box without the cereal.

[jainen]

>>trying to sell a cereal box without the cereal<<

Ha, Ha! Well do I know your scheme, Old Jack. You're a smart grifter, but you aren't going to scam me out of my Willie Mays Breakfast of Champions. That's forever.

[jainen]

>>I cannot believe any court would uphold any such play on words <<

As a matter of fact, taxxcpa, any court would be REQUIRED to resolve the ambiguity in favor of the party that did not write the words. On the other hand, I doubt a court would find intentionally leaving out the phrase "due to our error" to be ambiguous, and no court is going to believe Jackson-Hewitt was not completely aware of every word in its guarantee.

What evidence do you have to support your statement that, "The intent of JH's guarantee is to reimburse the client for any additional expense due to errors made by JH"? That is clearly not what they say, even knowing what their chief competitor says. It is much more likely that the corporation's intent was to gain market advantage, and that would certainly call for a broader guarantee. I find it kind of ironic to insist on a literal reading of the tax code words, but not the guarantee.

As to whether a court would ever hold a service provider liable for "an amount clearly owed from the word 'go' by the client," it happens all the time. A real estate seller fails to close on time and blows a tax-deferred exchange; the court awards the entire amount of tax due, not just an actuarial value that would reflect the deferred status of gain in an exchange. A couple breaks up; the court splits the value of marital assets with an adjustment for the potential taxation that one or the other faces. Whether pre-existing or not, underlying tax is a common element in settlements, and indeed in any business negotiation. It is perfectly reasonable to demand it.

Your last question is a bit off topic, because the wrong line would not usually involve a penalty. And anyway, this was not just a typo. The nature and timing of the income were mischaracterized. My main argument is that the tax preparer reported the income as such-and-such with a particular tax effect. Because the preparer was wrong, the taxpayer is now subject to additional charges NOT assessed on the original return.

That's exactly what the guarantee speaks to. Why else would they introduce it with, ""Q: Do you stand behind your work?"? Maybe they should reword the answer: "Listen, buddy, if the IRS changes what we do, so be it. You are stuck with whatever you are stuck with."

You might still predict that I couldn't convince a court the extra charges are a penalty. All I can say is that others have done so before, and if I use their logic I can expect their success. Certainly I don't know what JH can cite that supports any other interpretation of 72(t), except perhaps this ATX Community.

[taxxcpa]

>>I cannot believe any court would uphold any such play on words <<

As a matter of fact, taxxcpa, any court would be REQUIRED to resolve the ambiguity in favor of the party that did not write the words. On the other hand, I doubt a court would find intentionally leaving out the phrase "due to our error" to be ambiguous, and no court is going to believe Jackson-Hewitt was not completely aware of every word in its guarantee.

What evidence do you have to support your statement that, "The intent of JH's guarantee is to reimburse the client for any additional expense due to errors made by JH"? That is clearly not what they say, even knowing what their chief competitor says. It is much more likely that the corporation's intent was to gain market advantage, and that would certainly call for a broader guarantee. I find it kind of ironic to insist on a literal reading of the tax code words, but not the guarantee.

As to whether a court would ever hold a service provider liable for "an amount clearly owed from the word 'go' by the client," it happens all the time. A real estate seller fails to close on time and blows a tax-deferred exchange; the court awards the entire amount of tax due, not just an actuarial value that would reflect the deferred status of gain in an exchange. A couple breaks up; the court splits the value of marital assets with an adjustment for the potential taxation that one or the other faces. Whether pre-existing or not, underlying tax is a common element in settlements, and indeed in any business negotiation. It is perfectly reasonable to demand it.

Your last question is a bit off topic, because the wrong line would not usually involve a penalty. And anyway, this was not just a typo. The nature and timing of the income were mischaracterized. My main argument is that the tax preparer reported the income as such-and-such with a particular tax effect. Because the preparer was wrong, the taxpayer is now subject to additional charges NOT assessed on the original return.

That's exactly what the guarantee speaks to. Why else would they introduce it with, ""Q: Do you stand behind your work?"? Maybe they should reword the answer: "Listen, buddy, if the IRS changes what we do, so be it. You are stuck with whatever you are stuck with."

You might still predict that I couldn't convince a court the extra charges are a penalty. All I can say is that others have done so before, and if I use their logic I can expect their success. Certainly I don't know what JH can cite that supports any other interpretation of 72(t), except perhaps this ATX Community.

You really are convinced that the tax on an early withdrawal is a penalty and the "ambiguity" provides ground for a claim for damages even though the client owed the money anyway. Apparently there are several others who agree with you and if you haven't seen the flaw in your logic by now, then you cannot be convinced, so no further discussion seems justifiable. Both sides have been presented about as well as they could be presented.

[jainen]

>>Both sides have been presented about as well as they could be presented.<<

That's nonsense. You guys haven't presented your side at all. You just say over and over again that the tax code uses one word instead of another. You don't back it up with anything.

Why don't you at least point out that 72(t) is in the tax section of the code, not the penalty section. Come on, why don't you cite Kitt v. U.S., where the Court of Claims rejected the plaintiff's due process challenge for the way the law was passed (retroactively). "We see no reason to view the tax involved in this case as anything other than what it purports to be: an additional tax of ten percent. It is not a penalty."

As Old Jack says, "you can do better than that."

[OldJack]

So now Jainen, you switch and try to sell the cereal without the box. LOL

[TAXBILLY]

Jainen must have been a lawyer in a former life because he can argue both sides of the issue equally well! :~))

taxbilly

[taxxcpa]

Jainen must have been a lawyer in a former life because he can argue both sides of the issue equally well! :~))

taxbilly

Apparently he was playing Devil's Advocate. He was trying to see if anyone would quote some official source which describes it as a tax rather than as a penalty.

In some of my experience, I've noticed that court cases often lean more heavily on the letter of the law than the spirit of the law. But nowhere in official or unofficial tax reference material is the early-withdrawal "penalty" actually described as a penalty. Unofficially, however, the tax on early withdrawals is usually called a penalty.

If you call a dog's tail a leg, how many legs does a dog have? He still has only four legs since calling his tail a leg does not make it a leg. If you call a tax a penalty, does that make it a penalty?

[jainen]

>>nowhere in official or unofficial tax reference material is the early-withdrawal "penalty" actually described as a penalty. Unofficially, however, the tax on early withdrawals is usually called a penalty.<<

That is simply not true. I quoted from Kitt, a Court of Appeals decision that is certainly major authority in tax cases. The trial judge in that cited specific legislative history that applied. He also described the way the charge was constructed within the code to support his extremely clear-cut conclusion that it is a penalty. Although that was a bankruptcy court, the question was whether the IRS could consider the charge as part of a tax assessment and enforce collection accordingly. Answer: no.

As for Tax Court, I quoted one of those cases too and I can give you a dozen more that specifically call it a "penalty." Even in the case I suggested for the opposing point of view, the court acknowledged evidence that the IRS itself calls this a penalty.

Unofficial tax reference materials--all the major guidebooks consistently call it a penalty. I suppose that's why you contradict yourself in the following sentence. And your last sentence, about the dog's legs, is my favorite. It's exactly what the trial judge said, that simply using the general word "tax" does not mean it is not actually something else.

[kcjenkins]

I have to cast my vote for Jainen's position in this debate. There is lots of citable support for it being, in fact, a penalty.

[veritas]

I must take exception to your conclusion. I believe that, as a CPA, I study much more than any doctor or lawyer and participation on tax forums is not to put anyone down it is to discuss and study more than doctors and lawyers. I have both doctors and lawyers as clients and at least the ones that I have are not all that smart.

edit: and to show them I am a professional, I usually charge doctors and lawyers twice as much as anyone else.

My big dream is to get a dentist for a client.

[OldJack]

>>My big dream is to get a dentist for a client. <<

Oh veritas... you look just fine with those teeth.

[mcb39]

My big dream is to get a dentist for a client.

I work part-time for a dental group. They aren't "foolish" enough to ask me to do their tax returns. They just think that I am a bottomless well of free information. However, I don't elaborate on any information that I give them even though most of my dental work is gratis. One of them is purchasing a sideline business not related to the dental field. Since he is the kindest of the bunch, I have been helping him out to get started; but have reservations as to how far I will go. And don't jump all over this and say that I am bartering because my dental benefits are a contractural benefit in my contract of employment.

[jainen]

>>reservations as to how far I will go<<

I would limit it to information I could look up in a minute or two in the Quickfinder. If he needs more detail or anything in writing like a list or spreadsheet, I would at least ask him to allow me to log time spent. That will either scare him off or lead to a formal engagement.

Because of the existing business relationship, I would treat ANY contact with the same Circular 230 issues of being a paid advisor.

[mcb39]

>>reservations as to how far I will go<<

I would limit it to information I could look up in a minute or two in the Quickfinder. If he needs more detail or anything in writing like a list or spreadsheet, I would at least ask him to allow me to log time spent. That will either scare him off or lead to a formal engagement.

Because of the existing business relationship, I would treat ANY contact with the same Circular 230 issues of being a paid advisor.

So far, I have limited information to anything that I can look up in my head; and his questions have not been more than basic. It isn't that he isn't willing to hire me on a monetary basis to help him manage this business. It is that I have reservations about getting involved, for several reasons. I have been both an employee and a paid SE advisor and accountant for a business in the past and it worked out well. That was RE and Appraisal and ended amicably.

All of this because someone said that they would like the chance to have a dentist for a client. Yes, it could be quite a "plum"; and, yes, they DO know how to charge, but being on the inside, I know a little more about what is involved in arriving at their fees. The main reason I work there is the dental benefits rather than the money; though the money is good.

[JohnH]

My dentist recently retired at a fairly young age, which got me wondering how long one can expect to do the delicate type work they do effectively. It would seem to me that a dentist might need to factor into his retirement plans a high probabilty that he/she would find in necessary to quit once the eyes, hands, back, etc start to give out, possibly well before a normal retirement age. And that, in turn, would factor into what their expected earnings & retirement preparations would be, which directly impacts the fees they charge. I've known a few old dentists, but I'm not sure I'd want to see a shaky hand coming at my face with that huge needle or a high speed drill screeching full blast.

So it must be important to them to think about such things, unlike we accountants and tax preparers who can just keep going until we become unbalanced.

[mcb39]

My dentist recently retired at a fairly young age, which got me wondering how long one can expect to do the delicate type work they do effectively. It would seem to me that a dentist might need to factor into his retirement plans a high probabilty that he/she would find in necessary to quit once the eyes, hands, back, etc start to give out, possibly well before a normal retirement age. And that, in turn, would factor into what their expected earnings & retirement preparations would be, which directly impacts the fees they charge. I've known a few old dentists, but I'm not sure I'd want to see a shaky hand coming at my face with that huge needle or a high speed drill screeching full blast.

So it must be important to them to think about such things, unlike we accountants and tax preparers who can just keep going until we become unbalanced.

You called that exactly right, John. Having worked for a variety of dentists for about 25 years total, I have seen most of them retire early and none of them work more than a 4.5 day week. Physically, it is an extremely high stress occupation. When you see them spend nearly 2 hours performing a root canal with extremely tiny files, you know how precise they have to be. I don't work in the dental part as that is not my thing. I am at the desk; but even that is pretty high stress and certainly never boring. I had one dentist retire at 45; come back to work at 50; work another 5 years and then retire for good at 55. BUT...he is not happy! At least, until we become unbalanced, we can continue to do what we do. From 1/1 to 4/15; we all become unbalanced to some extent. Most of the time it isn't permanent, though.