Liability Limitation?

"Confused" wrote

So is it 10 minutes, or a couple of days?

I'm wondering why you think AMT has any importance here. If AMT was an issue, I would think that your total taxes would be higher, and therefore more withholding or larger estimated payments.

The specific facts change. Unless you had exactly that amount and type of income and exactly that amount and type of deductions, AND the tax laws didn't change one bit, the best you got is a guess. Tax planning is not a guarantee, it's an estimate, a guess. Sometimes - often actually - we guess wrong. Sometimes by a very small percent which could be a large amount. It could be overpaid or under paid.

Me thinks you're focusing your rage on the clause in the engagement letter and not on the facts and circumstances of what happened.

I once had a client (done been fired a long time ago) who couldn't get his act together by 4-15, and extension was prepared based on his opinion that his income was less than the prior year, when the numbers were presented, they were $30,000 larger than the prior year. Not my fault, although he huffed and puffed and made threats, it was his fault. There were other issues as well, as there often is, and of course, it was all my fault if you listen to him.

So, I suggest you look hard at the facts before you place blame.

You certainly shouldn't get any of the refund amount, just like you don't pay the extra tax amount. As for how much of the 5% the IRS pays me on money I had to borrow at 18% due to your error you should receive, do the arithmetic :-)

(Murphy's Law says that the client's financial position will always be the opposite of the helpful one.)

Seth

People have to look out for themselves. They should generally ask for a contract up front, especially in weighty matters like hiring a lawyer, doing tax returns, car repairs, etc. If contracts can be nullified by a judge because of this-or-that reason, that might be good for a handful of clients. But most tax companies seem to give a contract at the time of service, and many here have attested to this. But if their contracts could be nullified like that, that would drive up their costs as they would have to charge more to cover themselves against frivolous lawsuits.

There are basic contract principles, among which that you shouldn't be held to a contract if you had no opportunity to know the contract terms.

Contracts can't be and aren't nullified for arbitrary reasons. But inserting a term at the last minute when your client has no reasonable option to walk away, is unreasonable and will not normally be enforced.

Just a point, but the current rate is closer to 3%, so the delta is around

2% and that's annually. So an increase in tax of $1,000 equates to interest of about $20, a $10K increase in tax amounts to about $200 interest.

One of the reasons for my interest clause is because clients are notoroious for dragging their feet when the get letters from the authorities. I have folks come in to get their returns done and they bring letters they got from the authorities in June of the prior year. They SAT ON THEM and some haven't even opened them. Should I be responsible for interest on something when the taxpayer didn't get me the info timely?

It depends on the situation. In the past, though infrequently, I have fallen on my sword and told the IRS that this was MY fault, not the clients and that the taxpayer should not be punished when I misinterpreted something. On at least one occasion, about 12 years back, I even told the IRS that if anyone should penalized it should be ME as I was the one who made the mistake - the IRS abated that penalty and did NOT come after me for it. So it can work.

Does it work all the time - NO! It depends on the taxpayer, the tax preparer and the issue at hand. In my experience, I've seen the Federal and State authorities reluctant to abate penalties for either taxpayers or taxpayers who used preparers where there have been lots of errors. For example, one unlicensed firm I know of went through a period about 7 years ago where many of their returns had their extensions revoked and penalties and interest assessed. The IRS would NOT abate a dime of them. It was never said aloud but it came across clear enough that this particular firm had a history of filing extensions showing no balance due and which when actually filed showed significant balances due. The IRS was trying to make a point. Interestingly, it was just shortly after that the IRS changed its position and started accepting extensions for balance due returns with no required payment.

Mainly, you have to look to the facts and circumstances of the particular issues involved.

Gene E. Utterback, EA, RFC, ABA

There are two issues here than many NON professionals may not be aware even exist. There is the preparation of a return and the issuance of a position opinion and there are different standards involved in each. Opinions, even for tax planning, are based on certain assumptions and estimates and as the actual circumstances vary from those assumptions and estimates so too will the actual results - this sentence is INCLUDED in all the advice I give my clients about what do to and how to do it. You also have to look at the nature of the advice requested and the opinion itself.

For example, there was a case we looked at a few years back - when the new exclusion for the gain from the sale of a home first came into being. As you know you can sell your home and exclude the gain as long as you live there for 2 of the last 5 years. Client goes in to have his taxes done and is concerned because they sold their home for a $100K gain. Preparer says "don't worry about it, the first $500K in gain (since you're married) isnt' taxable anyway. Client is thrilled. Client buys a new home and sells it about six months later for a $20K gain. Client goes to get that return prepared and tax preparer says you have to pay tax on this. Client is MAD because preparer said you can exclude gain from sale of a home, so he sues.

Now who is at fault here?

The client did something NEW without asking for guidance while relying on guidance he got a year ago.

Tax preparer only told part of the story, the part about excluding the gain - WITHOUT mentioning that there was more to it.

So when I do tax planning of any kind I include certain caveats -

1 - this is based on certain assumptions and estimates and here is a list of them. If you see any that you think are wrong or if you think I've omitted anything you must let me know; 2 - as your actual results WILL vary from the assumptions and estimates, AND THEY ALWAYS DO, and since those variances can and frequently are material in nature and amount you MUST let me know the minute the item we've planned for is completed and you must get me the pertinient information so I can compare what did happen with what we thought would happen; 3 - this advice is based on the tax rules as they exist today. When (NOT IF) the rules change your results will differ;

Now regarding your comment about AMT - I bring this up specifically because its AMT and because Congress will NEVER do away with AMT. Typically Congress makes an annual patch to the AMT and they usually do this late in the calendar year - likely because they're looking to see where they are budgetarily. So when I do your tax return I can tell you what the AMT patch did for this year but I can't tell you what will happen next year until Congress makes a decision. I get a LOT of these - clients who will be subject to AMT IF Congress fails to patch it fully.

I tell each of them, based on what we have NOW you will be subject to AMT next year. BUT its likely that Congress will patch it, after all they have for the last several years. I don't know how much patch they will provide, but if they do something similar you won't really have an AMT problem - problem is I can't promise that they will patch it the way we want them to. So here's where you are - what you do is up to you.

And yes, I usually put that in writing.

All clients and prospective clients get a full tax organizer complete with our privacy policy, our engagement letter and a list of required questions they must answer. Tax returns do NOT get filed or delivered without a signed engagement letter and the answers to the questionnaire - for new or existing clients.

I'd also like to expand on something just a bit - though you didn't ask about it, I think its pertinent to the topic - Professional Fees.

I often speak with prospective clients who, upon hearing a price quote for the returns, are taken a bit back. They usually have comments like "my other tax guy didn't charge that much" or "why so much?". I ask a few questions, including -

1 - was the prior tax pro licensed?

2 - did they have continuing education requirements?

3 - what did you get besides a tax return from them?

Then I try to explain to them that licensed professionals have certain legal and ethical requirements. I always look ahead a year and see if the client's tax situation will change and what impact that will have and I go over anything I see that may look like it will have a significant change. For example:

A - has a dependent child gotten too old for the Child Tax Credit? If so this can cost the taxpayer $1K in payments;

B - has a child gotten old enough that they no longer qualify for the Child and Dependent Care Credit? Again, this will cost real dollars;

C - was there something on this year's return that won't be on next year's and how will that matter? If you sold stock this year will you sell it again next year? Will you get another K-1 from Aunt Bettie's estate? etc.

ALL of these things, and more - way too much more to outline here - go into even the most basic of tax planning issues and they all impact the fee. I cover a LOT of these in the engagement letter. Diligent professionals MUST take certain steps to comply with the legal and ethical issues of every client.

So a licensed professional is going to cost you more than using The Box or The Kiosk at Wal-Mart - BECAUSE YOU GET MORE (or should be getting more), even though you may not see it at the time.

As an example, I'll post a question now for the pros who lurk here (and guys, I'd appreciate a response to either help me make my point or show me up as a blow hard) - how many folks have you met with who've owed money year after year and who have said that their prior tax person never told them how to fix it?

Is failing to give advice any different than giving the wrong advice? - Rhetorical Question!

So I, and most other true professionals, do our best to care for our clients. This takes time and requires the assistance of the client. Remember, I can protect you from almost anybody BUT YOURSELF.

Gene E. Utterback, EA, RFC, ABA

Most likely the client. The preparer is sloppy for saying simply "don't worry about it, the first $500K in gain is tax-free", but assuming they did their work, they asked questions to determine that the client lived in the house in the last 2 of the last 5 years. They should have said "given your situation in this transaction, don't worry about it, the first $500K in gain is tax-free". In other words, if the preparer prepends every advice with "given your situation in this transaction," the preparer should be OK. But I think that this phrase is implicitly always present, assuming it can be proved that the preparer did their work by asking the right questions. However, even if the preparer is right, if it goes to court and they win it could still hurt their reputation. So the preparer must always include that phrase.

And it certainly makes sense to do so. If you had a house that was a rental and is not a primary home, then depreciation must still be paid back and the $500K exemption will be reduced by some complicated rules. Since every tax rule has fine points and exceptions, it's always a good idea to include the above phrase.

Also, the rule can be 2 of last 7 years (or some number more than 5) if the taxpayer is on military duty or the peace corps. And you are considered to be living in the house if you are required to be in a nursing home. I was looking in section 121 if the property is condemned, do they waive the last 2 of 5 years requirement (suppose it became condemned a year after you moved in), but could not find anything.

Of course not. Do you think it would help get the clients to provide the notices to you in a more timely manner if you included that failing to do so (within, say, 1 week of receipt) would make them responsible for the full interest?

Seth