Penalties & Interest

[Eli]

I somehow left off a 1099-Misc on a client's return from TY2007. He just received a letter from the IRS showing he owes about $5400 + about $1150 in penalties & another $450 in interest. Is there any way possible to try to abate the penalties? I haven't told the client yet, but I am going to pay his penalties & interest, but was hoping to at least reduce the penalties if possible. Any ideas??

Thank you!!

Eli

[TAXBILLY]

This is the very reason why it's good practice to have the client give you the figures. Many clients just want to report the 1099-MISCs that they get rather than the real income. However that won't help now.

I would doublecheck the client's expenses for that year to be sure none were missed. I would definitely request an abatement of the penalty and explain that the omission was yours and inadvertent.

Don't be too hard on yourself for the error. I once misread a W-2 income of 92,000 which I picked up as 72,000. That was in the days of carbon copy W-2s and I was able to successfully abate the penalty due to the poor quality of the W-2 presented to me.

taxbilly

[Eli]

I would definitely request an abatement of the penalty and explain that the omission was yours and inadvertent.

taxbilly

Thank you, TaxBilly! Is there a special form I need or can i just type out a letter to the IRS? Then do I send that to the address where the letter came from? I apologize for sounding so dumb on this, but it's my first time (thank God!!) that I deal with this issue.

Thanks again!!

Eli

[jainen]

>>$1150 in penalties & another $450 in interest<<

There is no way to abate the interest, and in my opinion you have no professional obligation whatsoever to pay it. That is simply a marketing gimmick thought up by the corporate types at H&R Block. (Frankly I don't think you are necessarily on the hook for the penalty either.)

So, what penalty is it? For underpayment of estimates, there isn't much you can do. If part of it is late payment. that's hard to abate. Reasonable cause for late payment means the taxpayer (not the preparer) exercised ordinary business care and prudence to provide for payment but was unable to pay without severe financial hardship.

Most likely it is an accuracy-related penalty. Reasonable cause for that includes preparer error if you can explain it in terms of "reliance on professional advice." That requires evidence that the taxpayer provided all required information in good faith, and had no reason to think the "advice" was wrong. An organizer or P&L would be very helpful for that. In fact, it's reasonable to ask the client to provide a P&L for 2007 before you respond. The problem with that, of course, is that an accurate P&L would not agree with the tax return, so how can the businessman claim he exercised ordinary care in signing the return? Still, I see this penalty as primarily to ensure compliance rather than punish. The IRS often seems satisfied if you can demonstrate a good history of compliance and show that specific changes have been made in your procedures (and the client's review) to ensure that the problem won't happen again.

Also take a look at potential preparer penalties for understating a taxpayer's liability. The minimum is $1000! These are new so we don't have experience about when they are imposed or how to fight them. They are supposed to be for taking an unreasonable tax position, and I would guess a math error doesn't count. But be careful if you decide to blame yourself. Don't get the IRS irritated with your response. Your letter should be cool, honest, and very complete. Limit it to a single page with attachments. Include copies of the tax return, organizer and other source documents, citations to code and regs, IRS correspondence, and of course a power of attorney.

[TAXBILLY]

I would send two checks (one for the tax from your client and one from you for the interest) and the request for abatement (no form, just a statement of mea culpa) in one envelope. That makes it easy for them to just close out the account rather than generate a letter of denial of abatement.

taxbilly

[Eli]

>>$1150 in penalties & another $450 in interest<<

There is no way to abate the interest, and in my opinion you have no professional obligation whatsoever to pay it. That is simply a marketing gimmick thought up by the corporate types at H&R Block. (Frankly I don't think you are necessarily on the hook for the penalty either.)

So, what penalty is it? For underpayment of estimates, there isn't much you can do. If part of it is late payment. that's hard to abate. Reasonable cause for late payment means the taxpayer (not the preparer) exercised ordinary business care and prudence to provide for payment but was unable to pay without severe financial hardship.

Most likely it is an accuracy-related penalty. Reasonable cause for that includes preparer error if you can explain it in terms of "reliance on professional advice." That requires evidence that the taxpayer provided all required information in good faith, and had no reason to think the "advice" was wrong. An organizer or P&L would be very helpful for that. In fact, it's reasonable to ask the client to provide a P&L for 2007 before you respond. The problem with that, of course, is that an accurate P&L would not agree with the tax return, so how can the businessman claim he exercised ordinary care in signing the return? Still, I see this penalty as primarily to ensure compliance rather than punish. The IRS often seems satisfied if you can demonstrate a good history of compliance and show that specific changes have been made in your procedures (and the client's review) to ensure that the problem won't happen again.

Also take a look at potential preparer penalties for understating a taxpayer's liability. The minimum is $1000! These are new so we don't have experience about when they are imposed or how to fight them. They are supposed to be for taking an unreasonable tax position, and I would guess a math error doesn't count. But be careful if you decide to blame yourself. Don't get the IRS irritated with your response.

Jainen,

As always thanks for your always excellent advice. I will get to work on the request.

Thank you & Billy once again!!

Eli

[joanmcq]

Before you get too hung up, verify that the 1099-Misc was NOT included in the gross income of the Sch C. Taxbilly is right; regardless of the 1099s they should have given you the total income; I then back out what was received on 1099 for the 'not received on 1099' entry line, and enter each 1099. That way the total income is reported regardless.

I have had a couple of CP2000s (this is a CP2000, isn't it?) where the income was duly reported but they got the notice anyways. so we showed how we came to that figure and got a no change. The penalties is the accuracy related penalty, and it is automatically assessed whenever the underreported tax is over 5K. Interest you are NOT going to get abated. I have had some luck in getting penalties abated lately.

[michaelmars]

AGREE with joanmcq, send a check for tax and interest and request penalty abatement do to either the eror was yours or client messed up but has a great record for prior year of full compliance. If the error was yours i'd pay the penalty but never the interest, in theory the client earned interest on the 5400 still being in his bank.