Tax return screw-up, what should I do?
February 20, 2018 7:37 PM   Subscribe

I received a notice from the IRS that there was an error on my 2016 income tax return, and I owe over $3,000. I have my taxes prepared every year at H&R Block, and purchase their "Peace of Mind" guarantee, but I'm guessing they will say the error is not their fault.

In 2016 I received a settlement from a class-action law suit in the amount of $10,000. I received a 1099-MISC statement for this income, which I provided to H&R Block when I had my tax return prepared. I've used the same senior tax professional for several years and trust his work (he's an Instructor-level), so I was shocked to receive the IRS notice saying I owed so much on a prior return.

I visited my tax guy and he looked at the 1099-MISC and said they placed the income amount in the wrong box, it was listed as Business Income or something, so that's how he had filed it. Apparently they were supposed to check a different box when they prepared the 1099.

My tax guy decided to modify and resubmit my 2016 tax return to show that I did pay taxes on the amount, just in a different way than the IRS was expecting.

However, I just received another notice from the IRS stating they still feel the return is in error, and that I owe the money, plus interest now.

I read the fine print on the Peace of Mind guarantee I buy every year from H&R Block, and of course there is a provision that says the coverage does not apply if "incorrect" information is supplied to them when the taxes are filed.

I know nothing about taxes and trust H&R Block to prepare and submit everything as required. The 1099 from the settlement wasn't buried in a bunch of other stuff, and I was clear that the income was from a court settlement.

Is H&R Block still liable for the mistake and should therefore cover this with the guarantee? I am 99% certain they will refute responsibility, claiming they were supplied incorrect information, but I don't know if a senior-level tax professional "should" have known that court settlement income should be filed a certain way, regardless of what box was checked on the 1099.

I've emailed my tax guy a couple of times and he's not responding.

My next step, if he does say they are not liable, is to ask if H&R Block will speak to someone at the IRS using the phone number they provide in their letter, but I wanted to know what my options are.

I've also been using this guy for many years and don't want things to become awkward if I have to force any points.

This is in California if it matters.
posted by wubbie to Work & Money (13 answers total) 4 users marked this as a favorite
Don’t want things to become awkward? He just cost you a $3000 penalty. It’s awkward. If I were you, I’d be calling him and telling you to call back immediately to resolve this issue, and then once he does, find someone else who doesn’t earn you notices and back taxes from the IRS. Of course he should have known the correct way to file your court settlement income, it is literally his job to know and he works for a company full of alleged tax professionals. If you’re doing taxes for a client and you’re not sure how to proceed, you don’t just wing it. You do the legwork to get the correct information! If he was fuzzy on how to proceed, he could’ve, I dunno, called the IRS and asked!

Assuming H&R Block is just going to leave you hanging, I would call the IRS at the number on your letter. Unlike your tax guy, they are helpful in the extreme and will explain the issue to you, help you set up a payment plan, and otherwise bend over backward to make sure it all gets taken care of in a way that isn’t hugely detrimental to you. You can even send payments online directly to them. I would start there. At the very least I would absolutely stop using H&R Block.
posted by Autumnheart at 8:09 PM on February 20, 2018 [20 favorites]

I'd call a trusted tax attorney for a consult, explain the situation, and find out what your options are. I wouldn't trust H&R Block at this point.
posted by onecircleaday at 8:19 PM on February 20, 2018 [3 favorites]

I say the above because you no doubt pay a not-insignificant amount of money for HRB to do your taxes, and you count on them to provide accurate and timely information to the IRS. You are absolutely entitled to some righteous anger here and to demand that they do the job you paid them for. The last thing you should be concerned about is hurting Tax Guy’s feelings. HE screwed up, big time. If he doesn’t answer your next communication, escalate up the chain of command and stir some shit.
posted by Autumnheart at 8:19 PM on February 20, 2018 [5 favorites]

You should understand that he did not cost you any money except whatever interest or penalties they are charging (not that that is a trivial matter!). You owed that original sum. You didn't pay it. You have, in fact, enjoyed the financial benefit of having that money til now. So, in talking to H&R Block, you should focus on the issue of interest and penalties in particular, because you were going to have to pay the original liability regardless.

But I don't think you're going to get very far, as you did, in fact, supply them with incorrect information. You're talking about "senior-level tax professionals"...let's be realistic, you went for the inexpensive option for tax preparation and now you've learned what you get for it, which is, unfortunately, some guy not good or experienced enough to have his own practice putting the numbers in largely mechanically and not applying the sophisticated and somewhat expensive judgment that would've caught the inherent error in the document you gave him. Now you need to hire an actual tax attorney to try to obtain a waiver of the penalty, at least (such waivers do exist, and if you haven't had other issues with the IRS, you stand a chance of being eligible); they can probably also advise you on what, if any recourse, you may have against H&R Block. You may have a malpractice claim, but if we're talking about, say, $1000 in interest and penalties, it will almost certainly cost you more than that just to pursue it.
posted by praemunire at 9:09 PM on February 20, 2018 [1 favorite]

I ran into a similar situation for my 2015 tax return, although I’d prepared it. I had rolled over a portion of my 401(K) to an IRA, and Fidelity was supposed to send the documentation to that effect. So the IRS sent me a notice that I owed taxes on that entire portion.

I wrote a letter listing out the details, included supporting documentation, and sent it back. But I didn't hear back from them prior to the deadline for disputing in court, so I ended up having to send the package to the US tax court to dispute the IRS. About two months later, I heard back from a local counsel, repeated my explanation, sent my papers _again_, and they finally agreed to concede.

If nothing else, you should dispute the penalty—the form they sent you should’ve included instructions on how to do that. Based on what you’ve written, I understand that you _have_ paid taxes on it, it just hasn’t been accounted for properly. Look at your tax return and see if the settlement money is listed under your taxable income, and then write a letter explaining the mistake.

In the mean time, I would press H&R to explain why their guarantee doesn’t apply. It seems like you provided all the information, and that the mistake was entirely made by them.
posted by pheral at 1:24 AM on February 21, 2018

Not knowing the fine print, but: If the calculation from the IRS is correct, and if they made that correction using the same 1099-MISC information that you provided to H&R Block, then H&R Block also had the ability to file it correctly in the first place, and their guarantee should apply. (If, on the other hand, IRS made the adjustment based on some other source of information, then H&R Block did their job correctly with the information they had available.)
posted by Mr.Know-it-some at 5:48 AM on February 21, 2018 [5 favorites]

Looks like the Peace of Mind guarantee provides for HRB to pay for the difference in taxes as well as the penalty and interest. This is different than their standard guarantee, which I think covers just penalty and interest. Seems like you should press them on it and see what they say. I don’t know if they are on the hook or not, but don’t worry about making it awkward, because unlike the standard guarantee, you paid for the extra protection — like insurance. That’s what insurance is for. It’s one thing for a service provider to go out of pocket for a customer issue that the provider could possibly argue it was not their fault. It’s a very different thing to collect what amounts to insurance premiums where presumably only a portion of customers will have an issue that requires a payout. In the latter case, I would expect the provider to feel a lot more comfortable stepping up.
posted by odin53 at 6:08 AM on February 21, 2018 [1 favorite]

HR should be going to bat for you here in dealing with the IRS, but I don't think they will be on the hook for the error.

Did you get a corrected/amended 1099 ?

Several years ago, we received a "corrected" 1099 on Friday April 12th from E-Trade. We had already filed our taxes for that year. The correction details don't matter, but it meant we owed $600 more in taxes. Wasn't E-Trade's fault, wasn't tax preparer's fault, technically wasn't the companies fault, it just is.

So we filed the amended return and paid the extra money. (We had already received our refund, which makes it more complicated w/ IRS to give them money back etc). There might have been $12 in penalties, and I forget if the IRS waived it - I think it did, because I spent waaaay more than $12 worth of my time fighting it, "because the principle!" hah.

(We did our own taxes, but I imagine if we had H&R, same thing: information changed, they can't know it, etc. I'm wondering about the tax guy saying "huh, 1099 used wrong box" -- you pay taxes based on what you've got, not what you think it should be.. )
posted by k5.user at 6:31 AM on February 21, 2018

Before doing anything else, I'd contact the Taxpayer Advocate. They're a department separate from the IRS which is paid for by taxpayer dollars who is there to represent taxpayers in situations like these.
posted by PhoBWanKenobi at 7:41 AM on February 21, 2018 [1 favorite]

Also, the taxpayer advocate is free.
posted by PhoBWanKenobi at 7:43 AM on February 21, 2018

Who prepared the incorrect 1099-MISC? Do they have liability insurance for their mistake that could be paying for this?
posted by jacquilynne at 11:24 AM on February 21, 2018

My tax guy decided to modify and resubmit my 2016 tax return to show that I did pay taxes on the amount, just in a different way than the IRS was expecting.

If your tax guy is correct, it may turn out that you do not owe more tax and do not owe a penalty. You just need to get your tax return and 1099 in agreement so the IRS sees it the same way you do. The IRS matches up 1099 reports with specific lines on your tax return. If you report the income on a different line, although the total taxes are correct, the IRS will see a discrepancy.

You should go back to your tax guy with your new notice and see what he can do about it. It may require a short phone call to the IRS to explain the discrepancy.
posted by JackFlash at 2:14 PM on February 21, 2018

I'm not sure who exactly prepared the 1099-MISC, as I've never been involved in a court settlement payment before. I doubt it would have been my attorneys in the case, but I can always contact them about the error if H&R Block disputes responsibility.

I called my tax guy today and he's going to "escalate" the matter, and hopefully get on the phone with the IRS (and me) to discuss it in real-time, rather than sending letters and waiting weeks for responses.
posted by wubbie at 2:36 PM on February 21, 2018

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