Return filed opposed to extended

[jshtax]

A client came to pay and pick up their returns on April 9th. Their return was supposed to be extended but the person in the office that handles submitting the electronic returns failed to pick up on the extension and filed the return when they saw it was marked paid. The client is furious for 2 reasons: 1. They were not able to pay and were going to pay at the time the return was filed knowing it will include penalties and interest but they would not "be in the cross hairs of the IRS for collections" and 2. they needed the additional time to fund a retirement account(SEP IRA). How would you guys handle this situation?

[JohnH]

I think you have to level with the client, and put everything in perspective:

1) Their opportunity to fund the SEP ended when no extension was filed. That door is closed.
2) They are not in anybody's cross-hairs. They will simply need to navigate the payment process now, just like they would have done it with an October filing. They can get 90 days to pay by making a phone call after they receive their notice around mid-May. Or, if they need longer than 90 days, they will need to file an installment agreement request, which has a fee associated with it. Either way, their FTP penalty and interest will be the same regardless of whether the return was filed Apr 15 or an exension was filed. The FTP penalty and interest began Apr 15 and will run until it's paid.

Aside from the lost opportunity to fund the SEP, they are in the same position with or without the extension. Was the intended SEP contribution a meaningful amount, or just a token payment to shave a little off the tax liability? In this situation, I MIGHT be wiling to refund them the FTP P&I for 3 or 4 months, but only for the portion which applies to the tax savings resulting from the SEP contribution had they been able to make it. And only if they are otherwise a good client. And only if they go ahead and make the SEP contribution for the current year. If they are a PITA, then I'd most likely just apologize for the error and move on .If they are as furious as you say, they probably aren't coming back next year unless they are otherwise reasonable people who will appreciate a token concession on your part.

Also, unless they are making the full allowable SEP contribution each every year, they are only getting a marginal tax benefit by making last year's contribution now vs going ahead and making a contribution now for the current year. The analysis is a little more complicated, but for nominal SEP contributions, you can demonstrate that they get only a slight P&I benefit by holding the contribution window open via the extension.

[jshtax]

I just love when people make mistakes in the office I am not aware of until the client gives me an ear full.

[joanmcq]

I do not allow anyone to submit efiles except for me. The stakes are too high, an not just for your client's increase in tax from the inability to fund the SEP. You've filed a return without the signed 8879, and without the client having a chance to review the return, both no-nos.

The client has a legitimate complaint, regardless of the amount of SEP contribution involved. If it was a 'nominal' contribution, say a few hundred dollars, John's suggestions might work. What if income drops in the upcoming year, and the client cannot contribute for 2014 what s/he could have for 2013/2014 if the return was extended?

If you are going to continue to allow staff to submit the efiles, I'd revisit your processes to ensure this doesn't happen again.

[michaelmars]

If the sep resulted in a few thousand dollars of additional tax I would notify my E&O carrier of a potential problem.

[jshtax]

If the sep resulted in a few thousand dollars of additional tax I would notify my E&O carrier of a potential problem.

The other option is just fund the SEP and move on. As long as the contribution is noted as a prior year and not current year it wont be an issue.

[Jack from Ohio]

Who amongst us has not simply made an unintentional mistake. Yet our clients expect perfection with zero tolerance for us being human. I would fire that client and allow your blood pressure to come back down 10 points.

I make my fair share of mistakes. So do our clients. I have stopped being held captive to the necessity of total perfection in my work. I strive for total perfection, but if there is anyone here who has achieved it, tell me what I am missing??

Fire the client.

I have transmitted 4,960 files for about 2,900 clients this season. I missed a couple. Included in that amount were 269 extensions, all filed electronically.

[JohnH]

The other option is just fund the SEP and move on. As long as the contribution is noted as a prior year and not current year it wont be an issue.

Won't work. The return has already been filed, so there's no way to avail themselves of the tax benefits of the deduction for the 2013 year.

[michaelmars]

BET the client calms down in a couple of days. in 25 years I only lost 2 clients because of errors.

[jklcpa]

The other option is just fund the SEP and move on. As long as the contribution is noted as a prior year and not current year it wont be an issue.

No, this won't work to fix your error with 2013; it would be a contribution for the 2014 tax year. If no extension for 2013 was filed and the return that was filed included a SEP contribution that was not made by 4/15, then you should amend that return because that SEP contribution is not a valid deduction. If the return didn't include the SEP contribution then no amendment is needed, but as michaelmars pointed out, the client will owe additional taxes, penalties and interest because of your mistake.

[kcjenkins]

It's always embarrassing to have to admit a mistake, even one made by an employee, but I tend to agree with JohnH and Michael, just face it but don't let it eat you up. We are human, and unless it was a new client, odds are good you will be forgiven, altho it might take a little time.

[jshtax]

Won't work. The return has already been filed, so there's no way to avail themselves of the tax benefits of the deduction for the 2013 year.

it has worked in the past. I had a client tell me that for 5 years we took a deduction he never contributed the money.

[JohnH]

it has worked in the past. I had a client tell me that for 5 years we took a deduction he never contributed the money.

OK, well maybe I mis-spoke.

It won't work legally, but that doesn't stop some people.

In this case, I assumed the client has not made the SEP contribution, and they intended to make it during the extensions period, thus no deduction was taken on the original return as filed. Maybe I read the OP incorrectly.

[Terry D EA]

Well, jshtax, if that's the case then your client is guilty of tax fraud plain and simple. I agree with the others it simply won't work. I would indeed fire this guy before it comes back and bites you. I know you trusted this guy that he was doing what he said he was and it would be hard to do any due diligence here. But.... when I realize that he is guilty of tax fraud then it is time for him to go. A mistake is a mistake and should be rectified and is acceptable as I agree with Jack we are prone to errors because we are human. But purposfully committing fraud is inexcusable.

[Terry D EA]

Thanks John for your added comment on "it won't work legally". Claiming kids and taking deductions for them for five years may have worked but it isn't legal either. Some people. Geez!

[joanmcq]

I saw nothing in the posts to indicate this was the same client. Might have worked before matching became much better. Yes, the IRS does match 5498s to the return.

[JohnH]

This client will have a major problem if this comes to light, maybe even after the SOL has expired. And anyone who has knowledge of it, even after-the-fact, could find themselves in a sticky situation if the client decided to throw them under the bus.

[Terry D EA]

Thanks Joan. I guess the posts were referring to two different clients. The one that claims he took the deductions and never contributed the funds is the one that I was referring to. John hit it again with being thrown under the bus.

[JohnH]

I was giving this situation some thought as I was driving home, wondering exactly what I would do if a client told me he had been deliberately giving me bogus IRA deductions for 5 years running. I decided the only thing I'd know to do is give him 5 years of amended returns, all at no charge, and a goodbye letter. The only other thing I might do is ask him if he has any of my business cards in his possession - and if so, I'd ask him to give them back to me.

[Pacun]

Going back to the original post, if they don't have money to pay the taxes, most likely they will not have money to fund a SEP.

Before we go hard on the poster, the poster didn't say that he prepared that return when the IRA contribution never took place. If a new client comes to me and hires me to prepare his 2013 taxes, and while talking he mentions that 5 years ago he forgot to fund his IRA, I will suggest to go back to his old preparer to amend his return because a mistake was made. I will also make sure what he wants from me, does he want me to prepare his 2013 taxes, amend the 5 year old return or both. I normally charge extra for amending returns.

[michaelmars]

I was giving this situation some thought as I was driving home, wondering exactly what I would do if a client told me he had been deliberately giving me bogus IRA deductions for 5 years running. I decided the only thing I'd know to do is give him 5 years of amended returns, all at no charge, and a goodbye letter. The only other thing I might do is ask him if he has any of my business cards in his possession - and if so, I'd ask him to give them back to me.

i wouldn't prepare the amended unless I got a retainer, you are not obligated to prepare returns for a client, you only have to notify them of the error. Also before I did the amended I would want verification of all other items on the return.

[JohnH]

I understand your point, Michael, but this is an extreme situation, IMO.

And it requires extreme measures because I'm in 100% CYA mode at that point.

This isn't about notifying a client of an error - it's about a lying cheat dragging me into his scheme.

If a client told me he had deliberately cheated on his taxes for 5 years, and had made me a part of the pattern, I want to send a clear signal. I want him to know that I'm washing my hands of him and that I'm giving him the means to correct the problem. I'm not even sure I WANT to be paid for this. I'm certainly not going to waste time talking with him about retainers, what he ought to do, or anything else requiring thought or action on his part.

Chances are he won't send in the amended returns and he will keep lying to his next preparer. But my name is always going to be on those returns in question. If he gets caught and the IRS comes knocking on my door, I want air-tight proof that I gave him everything he needed to get it right.