Should I hire a tax lawyer, or contact the accountant, over bad return?
October 29, 2014 5:45 PM Subscribe
My accountant screwed up my 2012 tax return, to the tune of a six-figure tax bill. You are not my lawyer, or my accountant, but hopefully you can help me figure out which I should contact: a tax lawyer or the accountant?
(Asking on behalf of my wife.)
In 2009 I bought a house with my then-husband, for $370,000.
In 2011 we had a less-than-amicable divorce.
In 2012 we sold the house that we had purchased in 2010, for $345,000.
In 2013 we used the same accountant (my ex-husband's accountant) to do our separate taxes.
Today I received a letter from the IRS stating that I owe $136,000 on my 2012 tax return, because the house sale was not reported properly. Looking back on my 2012 return, I see the house sale was not reported on my return at all (along with a few other, smaller problems that I think suggest the accountant was not paying attention).
Acknowledging that taxes are the responsibility of the taxpayer, not the accountant, what should my next step be? Contact the accountant directly? Contact a tax lawyer? Something else?
I have all the documents from the house sale, etc., to document what actually happened.
Any advice would be greatly appreciated!
(Asking on behalf of my wife.)
In 2009 I bought a house with my then-husband, for $370,000.
In 2011 we had a less-than-amicable divorce.
In 2012 we sold the house that we had purchased in 2010, for $345,000.
In 2013 we used the same accountant (my ex-husband's accountant) to do our separate taxes.
Today I received a letter from the IRS stating that I owe $136,000 on my 2012 tax return, because the house sale was not reported properly. Looking back on my 2012 return, I see the house sale was not reported on my return at all (along with a few other, smaller problems that I think suggest the accountant was not paying attention).
Acknowledging that taxes are the responsibility of the taxpayer, not the accountant, what should my next step be? Contact the accountant directly? Contact a tax lawyer? Something else?
I have all the documents from the house sale, etc., to document what actually happened.
Any advice would be greatly appreciated!
When you say "accountant" do you mean a CPA or a tax preparer ? It sounds to me like its some stupid oversight. You don't owe any tax from your description,(losing money on a house.) I would ask the "accountant" to explain what is up but I don't know that I would trust him. Go to a CPA, it doesn't sound complicated but they should be able to help. My wife had a similar terror letter from the IRS because she sold some security she had inherited and the IRS was all: unreported income, how did you buy this security, back taxes, penalty, interest etc. All she had to do was write back pointing out that it was part of an inheritance.
posted by Pembquist at 6:22 PM on October 29, 2014
posted by Pembquist at 6:22 PM on October 29, 2014
Either a lawyer or a CPA will handle this just fine. Go with whoever's more highly recommended/trustworthy.
posted by michaelh at 6:23 PM on October 29, 2014
posted by michaelh at 6:23 PM on October 29, 2014
This problem will probably be no big deal. I'd go to the old accountant first if you have a good relationship with them and some hope they can sort out the problem. Or else a new accountant. It feels premature to go to a lawyer unless you have some reason to think you'll end up actually owing the bill with penalties.
The complicating factor here is the divorce and the shared accountant. The ex-husband probably has the same tax snafu as the wife and I can't imagine any way this could be some weird divorce scam / harassment. Presumably everyone's interest is aligned to sort this out. But if there's any concern about that go with a new accountant that has never met the ex.
posted by Nelson at 7:24 PM on October 29, 2014
The complicating factor here is the divorce and the shared accountant. The ex-husband probably has the same tax snafu as the wife and I can't imagine any way this could be some weird divorce scam / harassment. Presumably everyone's interest is aligned to sort this out. But if there's any concern about that go with a new accountant that has never met the ex.
posted by Nelson at 7:24 PM on October 29, 2014
Contact the original accountant first. I'm pretty sure the problem is that it wasn't reported, this does NOT necessarily mean that you actually owe as much money as the IRS says you do, if you were actually living in the house at the time. It's sort of like--if you sell stock and fail to report it, let's say you sell a million dollars worth of stock, they'll show up and be like, HI, YOU OWE US TAXES ON A MILLION DOLLARS. Except you don't; you owe them taxes on the gains only, and if you'd bought that stock for two million dollars originally then you don't owe them a penny. They just don't know how much the gains are until you tell them. Your original accountant screwed up, but because they screwed up, will probably be extremely apologetic and handle this for free... you might have to pay someone else if they aren't very forthcoming.
posted by Sequence at 8:38 PM on October 29, 2014 [1 favorite]
posted by Sequence at 8:38 PM on October 29, 2014 [1 favorite]
When a tax preparer made an error on our return, she had to pay the difference. That was in Oregon, and she was recommended by a bank; your situation may be different.
posted by Cranberry at 10:33 PM on October 29, 2014
posted by Cranberry at 10:33 PM on October 29, 2014
I've been a tax preparer.
I would just reiterate that this is a filing error but you may not owe anything if your return is simply amended and filed properly. The old tax preparer should, ethically, do the filing of an amended return for free. Mistakes happen; sub-forms are missed. Often this is due to a miscommunication more than incompetence. It happens, especially with unusual situations.
And sure, if you want to switch next year, he probably wouldn't blame you.
I would ensure that the amended return shows you don't owe anything. The thing is, even if you do owe, that's down to the way the transaction went down. (Before divorcing again ... uh, well, hopefully you won't ... tax planning is something to consider.)
I suspect it's more than likely that you can just file the amended return, find out what you really owe or don't, and proceed from there. I seriously don't know that I see a reason to involve a lawyer here against the accountant unless the IRS is hitting you with some major penalties, but their glacial process means that probably isn't the case yet.
Let's say there are penalties for tax that you owed but did not pay in the correct time frame. (If it really turns out you owe six figures, that may well be the case. For most taxpayers penalties like this are fairly nominal.) Anyway, you may end up having to prove in court that you provided certain information and that the accountant ignored it. That's the question you and your lawyer would have to work out.
But the thing is this was a capital loss. There are complicated rules for rolling over the sale of a primary residence. But frankly, there's a $250,000 exclusion on the profit of a home sale, which doubles for a married couple filing jointly. There are different ways to handle taxes during a divorce which make a difference in how the IRS calculates these gains, exclusions, and so forth. A competent accountant should run all the options and show you which ones are best for your scenario. Regardless, though, you really need to have had a significant capital gain for this to matter, unless it was handled in some way that the IRS would give side-eye to, like creating a paper loss and doing a voilà!-no-tax-owed kind of thing when you really couldn't.
Still, we don't have enough information to know that. Go back to the first guy and feel free to give him what-for since he didn't show you all the if-this-then-thats and you got an IRS nastygram. But I reiterate, getting a nastygram is not the end of the road here. Find out what was done wrong, correct it, and chances are the IRS will simply accept the amendments.
posted by dhartung at 12:05 AM on October 30, 2014 [2 favorites]
I would just reiterate that this is a filing error but you may not owe anything if your return is simply amended and filed properly. The old tax preparer should, ethically, do the filing of an amended return for free. Mistakes happen; sub-forms are missed. Often this is due to a miscommunication more than incompetence. It happens, especially with unusual situations.
And sure, if you want to switch next year, he probably wouldn't blame you.
I would ensure that the amended return shows you don't owe anything. The thing is, even if you do owe, that's down to the way the transaction went down. (Before divorcing again ... uh, well, hopefully you won't ... tax planning is something to consider.)
I suspect it's more than likely that you can just file the amended return, find out what you really owe or don't, and proceed from there. I seriously don't know that I see a reason to involve a lawyer here against the accountant unless the IRS is hitting you with some major penalties, but their glacial process means that probably isn't the case yet.
Let's say there are penalties for tax that you owed but did not pay in the correct time frame. (If it really turns out you owe six figures, that may well be the case. For most taxpayers penalties like this are fairly nominal.) Anyway, you may end up having to prove in court that you provided certain information and that the accountant ignored it. That's the question you and your lawyer would have to work out.
But the thing is this was a capital loss. There are complicated rules for rolling over the sale of a primary residence. But frankly, there's a $250,000 exclusion on the profit of a home sale, which doubles for a married couple filing jointly. There are different ways to handle taxes during a divorce which make a difference in how the IRS calculates these gains, exclusions, and so forth. A competent accountant should run all the options and show you which ones are best for your scenario. Regardless, though, you really need to have had a significant capital gain for this to matter, unless it was handled in some way that the IRS would give side-eye to, like creating a paper loss and doing a voilà!-no-tax-owed kind of thing when you really couldn't.
Still, we don't have enough information to know that. Go back to the first guy and feel free to give him what-for since he didn't show you all the if-this-then-thats and you got an IRS nastygram. But I reiterate, getting a nastygram is not the end of the road here. Find out what was done wrong, correct it, and chances are the IRS will simply accept the amendments.
posted by dhartung at 12:05 AM on October 30, 2014 [2 favorites]
I assume you can lodge an amended/corrected return? If so, no big deal, see another accountant/tax agent. Your old one may correct it for free if you want to try that on, otherwise just pay the new one and put it down to experience.
If malpractice is involved, report him to the relevant professional association.
posted by GeeEmm at 12:59 AM on October 30, 2014
If malpractice is involved, report him to the relevant professional association.
posted by GeeEmm at 12:59 AM on October 30, 2014
Relax, this will be fine. This is a computer-generated notice, based only on information the IRS has in its system.
-Contact a new CPA and file an amended return within the time specified on the IRS notice. If you can't meet that deadline, call the number on the notice. The IRS is actually a great agency to deal with.
-If you sold the house at a loss, you likely do not owe any tax; if there was a liability discharged, you may owe tax on cancellation of the debt. Regardless, it won't be $136K. With asset sales, the IRS often receives information only on the selling price, and not the seller's basis. Only the gain is subject to tax (amount realized less adjusted basis), not the gross receipts. It's possible your total tax liability was actually less than you reported on your return, and the IRS owes you money.
So, just take a deep breath, call a new CPA, and get this straightened out. Maybe you'd get your fees refunded by the old preparer, but really, it's not worth the hassle (especially in this case, where it's unlikely that you actually owe the IRS 136K).
Make sure the new CPA corrects any state/local return as well (if relevant), once your federal changes are finalized.
Sidenote: this is actually the best time of the year to receive a notice like this, in terms of finding a CPA -- the 2013 season just closed (Oct. extensions), and the 2014 season won't pick up until mid -December (when everyone wants to do clever "tax planning" with 15 days left in the year).
posted by melissasaurus at 4:47 AM on October 30, 2014 [1 favorite]
-Contact a new CPA and file an amended return within the time specified on the IRS notice. If you can't meet that deadline, call the number on the notice. The IRS is actually a great agency to deal with.
-If you sold the house at a loss, you likely do not owe any tax; if there was a liability discharged, you may owe tax on cancellation of the debt. Regardless, it won't be $136K. With asset sales, the IRS often receives information only on the selling price, and not the seller's basis. Only the gain is subject to tax (amount realized less adjusted basis), not the gross receipts. It's possible your total tax liability was actually less than you reported on your return, and the IRS owes you money.
So, just take a deep breath, call a new CPA, and get this straightened out. Maybe you'd get your fees refunded by the old preparer, but really, it's not worth the hassle (especially in this case, where it's unlikely that you actually owe the IRS 136K).
Make sure the new CPA corrects any state/local return as well (if relevant), once your federal changes are finalized.
Sidenote: this is actually the best time of the year to receive a notice like this, in terms of finding a CPA -- the 2013 season just closed (Oct. extensions), and the 2014 season won't pick up until mid -December (when everyone wants to do clever "tax planning" with 15 days left in the year).
posted by melissasaurus at 4:47 AM on October 30, 2014 [1 favorite]
Oh, and I say see someone new because you now have a conflict of interest with the old preparer -- ethically, he/she should refer you to someone else or have you sign a waiver, but that may not happen.
posted by melissasaurus at 4:52 AM on October 30, 2014 [1 favorite]
posted by melissasaurus at 4:52 AM on October 30, 2014 [1 favorite]
This thread is closed to new comments.
In other words: both, but in that order.
posted by DarlingBri at 6:07 PM on October 29, 2014 [6 favorites]