Can we do that?

[Questionguy101]

Let me first tell you guys a story...

Some years ago, an old lady walked into my office one day. She handed me a few tax statements including 1099INTs, 1099Rs, 1099-SSA etc. Then she asked me if she had to file a tax return for that year. I added up the total income from the statements that she gave me. The total did not exceed the requirement to file a tax return in that year based on her age. So I kindly told her she did not need to file. She walked away. I did not charge her 1 cent even though I spent my time to go over the statements and explain to her the requirements to file.

Two years later. This same lady stormed into my office one day. She handled me a CP2000 from the IRS which said she owed a few thousand dollars of past due tax. I read the notice and found out the reason is that she had a few stock transactions in that year. But she did not include the 1099-B in the tax statements that she gave me. And since she did not file a tax return for that year based on my 'advice', the IRS considered the full amount of proceeds as her taxable income and hence the balance due in the CP2000. And all she said to me was "YOU TOLD ME I WAS NOT REQUIRED TO FILE. NOW YOU HAVE TO CLEAN UP THIS MESS FOR ME !!!!!!!!!".

In order to "clean up the mess", she had to file a Schedule D to report the stock transactions and that required the original cost basis of the stocks that she had sold in that year. When I asked her for the cost basis, she just said she could not remember because the stocks were purchased long time ago. And then she yelled to me "YOU SHOULD KNOW HOW TO FIND THE COST BASIS BECAUSE YOU ARE THE ACCOUNTANT, NOT ME !!!!!!!!!".

To cut a long story short, I had to make calls together with her to her investment company, her investment adviser, etc and practically begged different people to dig up the information about the cost basis. Eventually, the information was gathered, the Schedule D was filed and I think that "cleaned up the mess" since she did not show up in my office again.

From the beginning to the end of the ordeal, I was not paid even 1 cent for my time, my efforts and the agony to deal with her. End of story.

Thank you for spending the time to read my long vent. Anyway, because of this bad experience, I swore I would never tell anyone not to file a tax return again. If someone comes into my office with tax statements, I would just go ahead to file the tax return even though the total income does not exceed the requirement to file.

My question is: Are we obliged to tell our clients not to file a tax return if their income does not exceed the requirement to file. If I did not tell my clients about that, would I get into trouble? Please share your thought.

[AJsTax]

Yes, I would say

I would think, but do not have specific code, that we must tell a client that they are not required to file this year. It has been my experience that most will file anyways and the return is priced very low to reflect the amount of work and risk.
I would not have handled your case the same as you did. but that is fine..I would have explained very clearly that I am not responsible for not bringing income to me to report. If they client has history with us we have a good idea of what to look for.
We just got a letter yesterday for a long time client that "forgot" that he had two brokers last year..We had to beg him to get us 1099s from the one and he never told us about the other. Now he has over $30,000 in stock sales show up on a cp2000. How in the ^&%$&% do you forget that ?? This is a fairly young person running a small business, so not a total dope..well not quite anyways.. Point is, we can not be responsible if we ask for all information and the client fails to supply it. There will always be extra costs to correct a return if it was not our fault.
Back to the other side of it..I tell the client they do not have to file and let them make the decision and are sure to explain that if they missed anything they are responsible.

[Koss]

Cleaning up the mess

You can't win.

If you tell someone they're not required to file, and it turns out that they are required to file, they may flip out on you, which is exactly what you experienced.

But if someone is really not required to file, and you don't tell them that, and you prepare a return and charge them for it, sooner or later, somebody, somewhere, is going to accuse you of unethical business practices. It would get ugly. It would look like you were taking advantage of low-income senior citizens. Consumer protection agencies, state attorneys general, and possibly even the IRS would have your head on a plate.

The only way you can really protect yourself is to create a file when you tell the client that they are not required to file. You should document everything they gave you, so that you can show that your advice that they did not need to file was correct based on the information they provided.

Do you work for a chain?

In my office, we would not have "cleaned up the mess" at no charge.

You were not at fault, because your determination that she wasn't required to file was accurate based on the information she provided. Even if you did not keep a written or electronic record of that information, your memory is sufficient. You did not have a legal obligation to prepare that return at no charge.

I don't mean to belabor the point. But think about this:

If you had prepared and filed a return two years ago with the information the client provided at that time, she still would have gotten an IRS notice, and someone would still have had to clean up the mess. She failed to provide complete and accurate information to the tax pro.

Suppose she had provided complete information two years ago, and the tax pro really blew it, and told her she didn't have to file when in fact she did. The resolution is still the same: File the return. It's an original tax return. There's no reason it should be free.

If there are penalties and interest involved, then the situation does get a bit more complicated, if the client is asserting that she told you about the stock sales, or showed you the 1099s. Then it's her word against yours. And theoretically, the firm or the tax pro could be liable for the interest and penalties if it was really the tax pro's error. But it doesn't sound like that's what happened here.

And by the way, I'm not talking about any firm's "guarantee," or promise to pay interest and penalties. I'm talking about common law liability for errors and omissions--in other words, malpractice.

I suppose my office might "clean up the mess" at no charge if the client was the elderly mother of another client with a long, solid relationship with my office, or something like that. We would look at it on a case-by-case basis, if the client was accusing us of giving the wrong advice. Sometimes preserving the relationship is more important than being right.

But my knee-jerk reaction is to vociferously defend this type of claim. I don't care whether there's a paper trail or not. If the client didn't give me complete and accurate information, then I'm not responsible for this sort of mess, and I'm not going to fix it at no charge.

BMK

[RitaB]

Off topic

I have gotten several clients over the years who came to me cause the other guy "left off my stock sales." Yeah, right, you didn't tell him about them.

Same type person will ask you if they can take the loss when their stocks tanked, and no sales were made. They might even argue with you.

Clients are awesome.

[ttbtaxes]

The file/no file issue is a tough one. In the future, I would be sure to send a letter to the client and outline which documents you were given. Also keep a copy thereof.

One of the problems I'd have is if that old lady came along 8+ years later. I'm not sure that file, with its copies, would still be in my possession.

[taxmandan]

My question is: Are we obliged to tell our clients not to file a tax return if their income does not exceed the requirement to file. If I did not tell my clients about that, would I get into trouble? Please share your thought.

I tell clients if they have no filing requirement. However, this lady was not a client so I would have not advised her without a signed engagement letter which states that she has reported all income AND I had scanned copies of her paperwork as provided. In this type of situation I very specifically question them about stock sales, because that is the number one thing they don't mention. "I lost money so why do I have to report it?" Yadda, yadda.

[Burke]

Some very good points. I have a return in my bin which I have been mulling over what to do with. Elderly lady who does not need to file as income not over threshold. Didn't need to file last year either, but someone else did it for her. But I had another come in once, to give me all her reported income documents -- she didn't need to file either. Two years later, I see her and she happens to mention, well.... she does hair in her home a couple of days a week but it's not enough to "mess with." How much is not enough? Oh, around $10K.

[AccTaxMan]

Some very good points. I have a return in my bin which I have been mulling over what to do with. Elderly lady who does not need to file as income not over threshold. Didn't need to file last year either, but someone else did it for her. But I had another come in once, to give me all her reported income documents -- she didn't need to file either. Two years later, I see her and she happens to mention, well.... she does hair in her home a couple of days a week but it's not enough to "mess with." How much is not enough? Oh, around $10K.

I had a client who filed a single tax return in one year. The following year when he was here again to do his tax return, he mentioned his "wife". When I asked why he told me he was single the previous year, he said it was too much trouble to file a married separate tax return so he decided to just do a single one. Then I told him he had to amend the last year tax return. He left. When I called him again to remind him of the amended tax return, he just said he had someone else amended for him already. *speechless*

[Jiggers]

I have several "elderly" (cautious as I am almost one!) long-time clients who may or may not have to file since their income has been reduced considerably.

I learned a long time ago to have them come in for an appointment, make copies of all documents, staple their copies together, do a calculation to see if they need to file, and if not, send them on their way, no charge.

So that if in the future they get that CP2000 and are pointing a finger at me, I ask them to bring in their CP2000 and their 2XXX documents for review. I reveiw the notice first to make sure I didn't forget something, and then remove the staple from their documents and show them that the CP2000 is referencing something that they didn't bring me and is not included in their information.

Surprise, surprise, they "forgot" about this or that!

A good professor in accounting once told me that if someone is pointing a finger at you, remember that they have 3 fingers pointing back at them!

[ChEAr$]

Usually such questions like "do I have to file this year"? are from (former) clients. I add up the income on their documents, staple the tape to the documents and write with a pencil underneath, "federal income less than filing requirement. Then maybe also "Alabama income less than 4000".

What i now should do I see is simply photocopy that tape staped to documents and retain a copy.

If somebody brand new comes in for such a determination, there will be a fee, and I will write a letter on my stationary stating the facts.

Oh wait a minute. I'm not taking on any new clients. Case closed.

[JG EA]

Another not-required-to-file interesting story.

I did a scenario for a couple that may not be required to file next year. But in working up the result on Tax Tools I figured the exact amount of income items that would trigger filing and it was LOWER than their filing requirement. That is because their social security is high and 1/2 with about $19,000 of income - which is less than the $21,800 requirement for them - would trigger a tax!!

How about that. Something else to worry about.