Preparer Error--Need advice

[Gloria]

I need some advice. I made an error on a 2008 return which resulted in the taxpayer having to pay back $1,891 plus interest of $112. The error had to do with the mortgage interest. The taxpayer is very upset (I do not blame her) and to top it off she is currently unemployed so it will be hard for her to pay the money. I volunteered to pay the $112 interest and the tax preparation fee that I received from her in 2008 as well as writing a letter to the IRS asking if they could possibly eliminate the interest. To the letter, I attached the taxpayers backup that I used that resulted in the error. I made out a check to the IRS for $112 plus the return preparation fee and I put the taxpayer's social security number on the check and attached it to the letter. In the letter I asked for them to apply the amount against the taxpayer's tax increase and if possible to eliminate the interest (wishful thinking--the letter was signed by me and the taxpayer). I wrote the letter for the taxpayer yesterday and today she called me to inform me that she talked to the IRS and they told her that they will not even read the letter and that they will not accept a check from me to be applied against her balance and she also mentioned that they will not accept a check issued to the IRS. I always make my checks out to the I.R.S. and they do not have a problem cashing them. Taxpayer also indicated that the IRS told her that she and I should settle the problem. I told her that I would call her back on Monday because I was also going to contact the IRS as I have not had problems like this before.

I am normally very careful checking & double checking what goes into the return. For those of you that have made errors that resulted in penalties and irrate clients, how have you handled the situation? Even if you have not made errors before, how would you handle the situation?

Thank you in advance for your comments.

[JohnH]

We all make mistakes from time to time, so the first thing is not to beat yourself up over it. Secondly, bear in mind that some clients will understand if you try to be accommodating while other are unreasonable. The client controls whether or not they are a reasonable person; that's pretty much out of your control. All you can do is offer to do what is right and see what happens. If the clients uses good judgement and appreciates your efforts, you will build a long-term relationship and secure their loyalty. If the client is unreasonable, you may as well see them leave now and save yourself a lot of future stress.

You have made a reasonable offer to make the client whole by paying the interest and refunding your fee. I assume there are no penalties. Some preparers will only pay part of the interest because they feel the client had the use of the money (more or less an interest-free loan) but I'm inclined to go along with paying all the interest as you have done. At this point, the client has to step up and accept her responsibility to repay the tax. Surely she isn't unreasonable enough to expect you to pay the tax liability as well, but if she does you must simply tell her that isn't going to happen. She can set up a payment plan if she can't pay it off right now - probably $25 per month if that's all she can afford. She will have to pay interest on the unpaid balance if she sets up a a payment plan, but that is not your concern. You have put her back in the position she would have been in if the tax had originally been paid when due, and that's all any reasonable person has a right to expect.

Don't waste your time writing explanations to IRS. They really don't care about the circumstances and the reasons the error came about won't alter the outcome. Penalties can sometimes be abated, but interest is statutory and really not worth your time and effort to try and get anything done about it.

Three other points.

1) is there also a state income tax adjustment? If so, you should amend that return for her before the state assessment comes flying over the transom and you find yourself plowing this same ground again

2) IRS prefers that you make checks payable to "United States Treasury". (They're harder to alter if they fall into the wrong hands) That's why the IRS person said that to her.

3) you should pay the client directly and let her handle her transactions with IRS. Less chance for them to compound the problem with a misapplication of the payment.

Forgive yourself for being imperfect, chalk it up to experience, and maybe thank God that it's an $1,800 error rather than an $18,000 error.

[Gloria]

John, thank you for your words of wisdom; I appreciate your comments. Regarding the State return, I checked it while I met with the taxpayer and fortunately the State refund did not change. I will go ahead and ask the taxpayer to bring me the check I gave her made out to the IRS and make one out to her.

[jainen]

>>writing a letter to the IRS asking if they could possibly eliminate the interest<<

It is not legal for the IRS to abate "interest" (except for certain rare circumstances). But some of it is called "underpayment penalty" (actually a form of interest), and that is generally easy to abate using vague "reasonable cause" such as preparer error or 3rd party delays.

Whether you pay P&I/tax is a business matter that must be resolved in business terms. You should address it in an engagement letter to begin with, probably saying you will NOT cover it (unless you are competing with national franchises). Then you can make exceptions for your good clients.

Stay professional, making sure all your clients know you are a person, not a machine, but that you stand behind your work. In my opinion, a professional would not refund the fee because of a math or theory error, but only for poor service.

[Philip1117]

As regrettable as the error is remind the taxpayer that right under their signature on the 1040 is a statement that they reviewed their tax return prior to filing.

She had use of the money for the year so the tax and interest are her responsibility. If you feel obligated to pay the penalty if not abated then thats your choice.

Phil