State Tax Refund from 2008 - Received in 2010

[Yardley CPA]

Going through tax info of MFJ couple. There are two 2010 1099G's included. One is for 2009 Pennsylvania Tax Refund of $15 and one is for 2008 Pennsylvania Tax Refund amounting to $4,900. Both these refunds were received in 2010. Not sure why the taxpayer received the 2008 refund in 2010. In any event, both 2008 and 2009 returns included Schedule A Itemized deductions in excess of $20,000.

I assumed (and I know what happens when you assume) that the taxpayer received their 2008 state refund in 2009 and included the $4,900 on their 2009 1040.

At this point, I am just thinking of waiting to see if the IRS will send some type of notice and then answer it, indicating that I included the refund on the 2009 return. I will only include the $15 refund on the 2010 return. Thoughts?

[jainen]

>> I will only include the $15 refund on the 2010 return<<

Based on what you have explained, that is an intentional disregard of rules that could subject you to a $5000 preparer fine.

[Yardley CPA]

So should the 2009 1040 return be amended, removing the 2008 state refund from income. Include the 2008 and 2009 state tax refunds on the 2010 1040 return?

My intention was never to do anything unethical; I was simply trying to solicit input on what is the proper way to handle this situation. Considering I already included the 2008 refund on the 2009 return, I did not think it should also be included in 2010.

[Pacun]

It is very embarrasing to amend a return when the mistake is yours (and your clients for not reporting that they didn't received such a big refund). I think the materiality rule/principle will save you from any trouble, but the correct way is to amend 2009 and report the income in 2010.

My first questions to my repeated client are something like... "Was everything OK last year?" "All refunds received?" "Any letters from the IRS or State?". Then I move to the current year.

[Yardley CPA]

Pacun...many thanks for your helpful response. I'm not looking to skirt the blame here, it is what it is.

[SCL]

1099G's don't lie...they are reported to the irs.

there is really not a blame here...except that you have to jump through hoops to make something right that probably net/nets to around a 0 tax effect. amend the earlier retun and get a refund (plus interest) that covers the extra tax on this years return.

i hate it when that happens.

[kcjenkins]

It's not your fault if the client's did not tell you when you were doing their 09 return, that they only received the 08 refund in 2010. You would think, for such a large refund, that they would have been calling you about why it had not come in, back in 09. Are you SURE that both of them are for 2010? I've had clients include a prior year statement in with the current year statement by mistake, and entered it before I noticed the date.

I don't mean to be insulting, just that it's early April and we are all tired and stressed.

[Yardley CPA]

It's not your fault if the client's did not tell you when you were doing their 09 return, that they only received the 08 refund in 2010. You would think, for such a large refund, that they would have been calling you about why it had not come in, back in 09. Are you SURE that both of them are for 2010? I've had clients include a prior year statement in with the current year statement by mistake, and entered it before I noticed the date.

I don't mean to be insulting, just that it's early April and we are all tired and stressed.

KC...you are not insulting at all, nor was Pacun or SCL. I appreciate the responses from all three of you.

I agree that it is mid-April and I'll raise my hand to being tired and stressed, but I must of checked the 1099G's a thousand times to make sure they both said 2010 and they do. The 2008 refund was received in June 2010, the 2009 refund was received in October 2010. The 2008 return was filed timely and the 2009 return was extended and filed in September 2010.

I neglected to ask if the refund was received. I guess I thought, like you, that the client would at least call or email me when they did not receive a refund of that size within a reasonable amount of time. Like I said, I'm not skirting the blame here...I recognize I should have asked.

At this point, I am filing the 2010 return with both refund amounts included. I will then amend 2009 and remove the refund from that return.

Thanks again for chiming in.