pay the interest?

[luke]

taxpayer had alimony paid on 2006 return ($20K) - was audited by IRS in 08 - alimony was disallowed (amount was payable to her kids at death of ex-spouse) - now client wants ME to pay his nearly $600 in interest because we put alimony on his 06 return (originally gave us his hand written info with pertinent alimony info)
What do any of you think?

[DaveO]

I'm sure he wants you to pay the interest. However I don't think you are liable as long as you made a reasonable inquiry to determine it was alimony. If the divorce lawyer told him it was alimony he should go there.

[ChEAr$]

Concur

client made the error and OP relied on representations of the client.

[JohnH]

There's probably no legal basis for him to require yo to pay the interest, so you have to make this decision based on other considerations. The main one would be -> is he going to leave if you don't pay the interest? If that's likely, then you have to decide whether he's worth keeping and how long it will take you to recoup the investment by retaining his business (allowing for the fact that he may leave no matter what you do).

In any event, if you decide to pay it you could offer to split the cost. The reasoning would be that he did have the use of the money during the intervening period, which either allowed him to earn some interest/dividends/cap gain on the money invested elsewhere, or else he paid less interest on borrowed money in the intervening period. Given that he may not have paid interest on the money at the full rate assessed by IRS (or the investment income may have been less than the IRS amount), there is some room for any reasonable person to compromise.

On the other hand, if he's so unreasonable that compromise isn't possible, then you don't need him as a client. I've seen both situations in my business from time-to-time, and felt that each one ended the way it should have.

[erchess]

I am reading

the original post differently from the way I think the rest of the respondents are reading it. I'm reading that Luke deducted the alimony knowing all the time that payments were to go to the kids if the ex spouse died.

If that's true then I would think Luke should acknowledge that he made an error in tax theory. When I do that and the IRS catches it I pay the interest and penalty and I offer a reasonable discount on my services for the next year or two if I seriously like having the client around. Of course if the client is a pain then I only pay the penalty and interest.

If Luke didn't make an error in tax theory then he at the very least failed to followup with questions to see if what the client called Alimony was really Alimony as the term is used in our business. I would say that warrants thoughts along the line of what JohnH suggested - how much do you like having this client and how likely is he to leave anyway?

[S T]

Question

The t/p was ordered to pay the children at the death of the ex-spouse her portion of what seem to be alimony/spousal support? If it was spousal support/alimony that was due the ex-spouse, but t/p had not paid, then wouldn't the character of the payment still be alimony/spousal support? And as such should have been deductible.

Luke, were you there at the audit, or did just the t/p go?

Sandy

[AZ-Tax]

Still confusing....

taxpayer had alimony paid on 2006 return ($20K) - was audited by IRS in 08 - alimony was disallowed (amount was payable to her kids at death of ex-spouse) - now client wants ME to pay his nearly $600 in interest because we put alimony on his 06 return (originally gave us his hand written info with pertinent alimony info)
What do any of you think?

Ok, Taxpayer paid and deducted alimony on his 2006 return. IRS dissallowd alimony payment(s) due to the fact the alimony was payable to her kids at death. I thought alimony was alimony but I guess not. I guess on my tax organizer I will request a copy of the alimony check(s) to see who the checks were payable to.

[WhiteOleander]

Here is a definition of alimony.

One of the conditions is it must end at the death of the recipient.

"The payer's obligation to make payments must end when the recipient dies, and there must be no liability to make any payment in cash or property as a substitute after the death."

I found this at this link

http://taxguide.completetax.com/text/Q09_2100.asp

[David1980]

I guess on my tax organizer I will request a copy of the alimony check(s) to see who the checks were payable to.

Well that wouldn't make any difference. It's usually paid to the ex-spouse regardless of whether it's alimony or not. In fact, the same check can contain both child support & alimony.

As for whether you should pay anything, that's totally upto you. Unless you agreed to pay interest on mistakes you would have no obligation to. Given the cheap interest rates the IRS charges I think it's a non-issue really, he was able to use that money for those years where he shouldn't have been able to.

If he represented the $20,000 as alimony at the time of preparation, I wouldn't give him a dime. I don't audit their divorce agreements unless they want to pay extra for me to do so.

[JohnH]

(David, keep in mind that when he refers to "interest" the client is probably lumping interest and FTP penalty into the same figure, which would be a total equivalent of about 11-13% APR. I'm just guessing here, but we all know that any tax assessment will contain both, and the clients often don't know the difference).

It's interesting to me how this conversation is shaping up. I don't see this as a "fault" issue, but rather a "client retention" issue. The client has apparently already expressed his opinion that AZ Tax should pay the "interest", whatever it is. We all agree that AZ Tax probably has no legal obligation to pay the P&I. So this takes it completely out of the realm about what AZ Tax is obligated to do and into the realm of whether he wants to keep the client.

If AZ Tax refuses to work with him in some manner, the client will almost certainly go somewhere else. Maybe that's the desired and desirable outcome. But if a compromise is possible and profitable in the long run, then the client relationship will probably be strengthened. If there's no interest in evaluating the situation from that standpoint, then by all means tell the client to get lost because that's most likely what will happen - may as well get it out of the way right now.

[erchess]

Insurance

This is why I wish I had insurance that would reimburse the client for any changes in their return that are not clearly due to the client providing false or misleading or obviously incomplete information.

[Lion]

Insurance

That's available through some software companies for a fee, and maybe directly from the insurance company selling though the software company. Can't remember which ones now, but I saw it when I was software shopping a couple of seasons ago.

[luke]

luke's clarifications

THANKS to all of you who responded to my post - Originally the client brought us handwritten tax information that was called ALIMONY - we had no reason to question whether it was indeed alimony or not!
The client got an "audit" letter and we helped him to craft a reply (he sent a complete copy of divorce decree which called the payments alimony) - that's what he based his onfo on that he gave to us.
There was NO penalty as a result of the disallowance of alimony only interest of about $580.
My thought is that there is no way that I am liable for this interest and have decided that I WILL take a hard line (even if it means losing a $180/yr client!)

THANKS again you guys - I really enjoy this forum and have learned a LOT in a short time!

[JohnH]

Well, you've certainly gotten enough input to cover all the possibilities, so you're making an informed decision. You're the only one who knows the client dynamics in this situation.

If you're in a state with an income tax, remember that there will be a state assessment coming along after this is resolved. (Don't know if you want to get out in front of the situation by informing the client of that, but it's a possibility.)

[Davc]

Not questioning "alimony" is the equivalent of not asking if any political contributions are included in charitable contributions (which I've found to be quite common). When deducting alimony or including it in the recipients income we should always ask to see a copy of the divorce decree.