Ethical Inconsistency?

[Snaggletooth]

People in Tennessee consult with their lawyer when their loved ones die. Part of the typical paperwork executed by these lawyers is a TN estate tax return. Tax people and accountants are rarely engaged to prepare the estate tax return. TN has a $1MM exemption and a flat 5% tax on the excess.

Unless there is no wiggle room, lawyers will value estate property at less than $1MM and will file the return without an appraisal. Tenn Dept of Revenue knows full well this is going on but does not enable its agents to take on members of the Tennessee Bar.

Although rarely engaged to prepare an estate tax return, we as preparers are seemingly ALWAYS confronted to compute gain/loss when this property is ultimately sold. Typically we find out the value upon death is severely understated by the attorney. Real estate will often be sold within a couple years for 2X or 3X multiples of the value claimed by these attorneys. On the horns of the proverbial dilemma, as preparers we are forced to choose between a reasonable basis at date of death, versus a consistent treatment of the lawyer's estimate, which obviously penalizes the taxpayer unfairly.

My question deals with our ethical responsibility. Anyone who reads the above will agree that the situation is wrong. However, what is OUR responsibility?? We had nothing to do with the understatement, and we are NOT being engaged to file a Tennessee return. And our responsibility certainly has nothing to do with a righteous crusade against the Tennessee Bar or any members. If we simply ask for an appraisal and file accordingly, are we not fulfilling our responsibility? Are we welching out on an ethical mandate to assure Tennessee is properly reported when we haven't even been engaged to do so?

Just exactly WHICH of these many parties do we have an ethical obligation to?

I have posted this situation before, but have never asked the question in the above fashion.

[erchess]

Cya

Your primary obligation is always not to get yourself in trouble with a taxing agency. Your second obligation is to weigh what your client wants and what you as an expert know is best for him or her while obeying your primary obligation.

In this case I would be careful to document what my client claimed as basis and how he said he got that figure but I would not feel that I needed to audit his records the way I would with mileage or charitable contributions. I sure wouldn't ask to see an estate tax return for inherited property but if I did see one we would use that as the basis or the client would sign a statement for my files to the effect that he knew he was not using the value reported on the Estate Return and I was not liable for any problems this might cause.

Unless you know to the contrary it seems highly unlikely that a regulation exists allowing a penalty on you for not following the basis on an Estate Return you didn't prepare and which you have a good faith belief was wrongly prepared. On the other hand they certainly can't require that you rat your client out in fact the penalty would be FOR ratting the client out.

Just my two cents.

[Gretel]

I think the client is responsible too for what is reported on the estate tax return. It's reported in his favor to avoid TN death taxes. I would not easily want to report a different basis then was reported on the estate tax return. If the client doesn't like it he/she complain to the lawyer or the bar association.

[Lion]

Not unfair

Why is it grossly unfair to your client? He deferred taxes from the estate tax return to now. He's had the use of the property and the extra money not paid in taxes. He signed the return that reported the basis. Now he has to live with it. You ask him his basis when he inherited the property. If he wants to use something else, he can deal with appraisers and lawyers and the state and maybe amended estate returns and give you his basis over his signature. Don't make his problem into your problem.

[DaveO]

This is much like the situation where an elderly person gifts, or sells at a low price, assets to their kids to avoid the property going to pay medical bills. I just found out one of my clients was "sold" 2000 acres of ranch land for $1 by her parents for just this reason. Parents aren't expected to live much longer and client is ready to sell as soon as they pass. I've advised them of the tax bite to come but feel no compulsion to undo their "estate planning". In your clients case they made a trade off for a low estate tax bill. They enjoyed the benefits at that time and it's now time to settle the account.

[Snaggletoof]

Responsibility

All responses are appreciated, and agreed to. Under no circumstances do I deem this situation fair, consistent, moral, or anything else.

However, the question is "What is our professional responsibility, and to whom?" The obvious answer is our first responsibility is to the client - but how do you fulfill that obligation under these circumstances?

Although the attorneys may have been wrong to begin with, and the taxpayers wallowing in gleeful bliss enjoying the fruits of the misreporting, this is not about beating them up, or hanging an albatross around anyone's neck. It is about what OUR ethical burdens may be.

[DaveO]

I would not seek to amend or correct the attorneys work. I would take the basis from the papers prepared by a paid professional and use that information without worry or ethical concern. I don't think were are under any obligation to question if the results are fair or not. Our obligation is to correctly prepare the forms using the best verifiable information available.

[Gretel]

I don't have an answer to the ethical question. Maybe taxing agencies come first.

I do see the dilemma with obviously wrong reporting. If we get a K-1 and know that it is wrong we would try to get it amended by the professional who prepared it. If that is not possible then we would report the correct figures on the 1040 and attach an explanation, wouldn't we?

Besides dealing with a lawyer, I don't see much difference in this scenario. However, I would let the client deal with the consequences. Meaning he has to contact his lawyer or needs to get an appraisal.