Penalty

[Maggie]

Part of the 1040 tax package I send to clients contains Form 8879 with a note stating that the form authorizes me to e-file their return, and that their return will not be e-filed until I receive the signed form. A client gave me the balance of their tax information late on April 20, 2013. I completed the return and mailed the tax package to her. I never received the signed Form 8879. Unfortunately I didn't realize this until October, at which time I immediately e-filed the return. I normally follow up on missing Form 8879, but just didn't this time. The client paid the $3,000 tax due in August of 2013 (4 months late).

Just received a penalty notice from the IRS. How would you handle to failure to file penalty (which of course is the largest). Would you pay it? Make the client pay it? Split it? Request an abatement? On what grounds?

Thanks!

[MAMalody]

My Engagement Letter indicates my error, my payment. This appers to be preparer oversight (error). I had a similar situation only it was a RMD that I was asked to compute. Cost me $1700 dollars, kept client and would you believe it, I have never made that mistake again. I would not know how to send an abatement request because from the IRS perspective there was no reason for it.

[Burke]

This is not wholly your fault. The TP should have returned the 8879 in April, or at the very least in August, when the tax was paid. Perhaps he thought he couldn't file until he was ready to pay. Perhaps he DID sign the form and mailed it to the IRS. I have had this happen. I think some allocation between you and the TP is reasonable. Depends on your client and what your relationship is, if you really want to keep him, etc. Judgement call. You can try asking for abatement. Did IRS assess FTF from 4/15 to payment date? Or to efile date?

[Maggie]

FTF was assessed to e-file date. And I suspect she didn't even open his tax package until August. When I completed the return I called to tell her what she owed. She probably realized she couldn't pay it, so didn't bother opening the envelope. Thanks for your opinions!

[David1980]

Was there an extension filed / would the FTF been $0 if the return was filed prior to 10/15?

I think from a business perspective whether to pay anything or not depends on what you commit to regarding penalties/errors and what the future holds for potential revenues. If you don't promise anything and don't care if this customer leaves I'd just tell them you can't efile a return until you receive the signed 8879. Of course, that you did efile without it does hurt that argument a little. At the other end of the spectrum, you normally do follow up on missing 8879 and this one return somehow fell through the cracks. So it didn't get the normal attention you give to returns, and had it been followed up on the penalty would likely have been only one month (or none if an extension was filed). So you could say the penalty wouldn't have happened had you done your normal follow up and pay it. Or depending on how the taxpayer is taking it splitting the penalty may be enough to make them happy.

It may not make the most business sense, but I often blame myself rather easily and am overly generous covering penalties if I feel I can blame myself. I'd probably end up paying the penalty. Well, after trying to get them abated over the phone by blaming the preparer. The argument being the taxpayer thought the return was filed in April.

[Maggie]

There was no extension filed, since taxpayer was unable to pay the tax at the due date.

[JohnH]

It sounds as though you have a few problems here:

1) The client didn't sign the 8879, so you couldn't e-file the return, even in October;
2) You didn't follow up with the client regarding the missing 8879, so they may try to blame you for the penalty;
3) It appears that you didn't know you could file an extension and avoid the penalty entirely, even though the client owed income tax and couldn't pay. This is the most serious of the three problems in my opinion.

I'd suggest that whatever you do about this penalty, you should get a clear understanding of what purpose the extensions serves. You could have saved your client (or maybe yourself) a $750 penalty by sending in a little piece of paper even if they hadn't sent you the 8879. You'd need the client's permission to do that, but the permission could even be verbal or an email reply.

If you decide you must pay it, then it might be worth a $750 lesson for you to know how the Form 4868 extension really works, because the next time it happens it may be a client who owes $10,000 or $20,000. Bad advice in that situation can cost you a bunch of money. We all make mistakes - better to learn a $750 lesson than a $5,000 lesson.

[David1980]

http://www.aicpa.org/Publications/TaxAdviser/2013/July/Pages/Buttonow_July2013.html.aspx

[S T]

Agree with some of the other assessments of the OP post, even if the Taxpayer can not pay at 4/15, I always file the extension form. That will eliminate the FTF penalty and tax return is eventually filed during 4/15 to 10/15. Extension form is filed showing the anticipated amount due, with NO payment. This protects the Filing.

If tax is due and not paid by 4/15, you will always have the FTP and interest due from 4/15 to date of payment - hopefully by the final deadline date of 10/15/2013.

Always, always file an extension by 4/15 even if Taxpayer can not pay! And depending on your office practice for payment, etc. There is no requirement for a form 8879 on the extension form for 4/15 - although I always request one from the taxpayer via email or fax.

Sandy

[Kram BergGold]

Penalty Relief

If your client has not had a penalty in the past 3 years call the Priority Line and ask for first time penalty abatement. This would end the problem. Otherwise, I suggest you split the penalty as each of you contributed to making it happen.

[Maggie]

Thanks for all of the info/suggestions. Much appreciated!!

[Burke]

Kram's suggestion is worth a shot. Nothing to lose, and at the very least, ask for FTF abatement from the date the tax was paid. Then reassess re: who is to pay what.

[Burke]

http://www.aicpa.org/Publications/Ta...2013.html.aspx

Good information. I have printed for my files. I note "clean compliance" history, however, indicates an extension must have been filed. Is this the way you see it?

[David1980]

Good information. I have printed for my files. I note "clean compliance" history, however, indicates an extension must have been filed. Is this the way you see it?

No, because the return was filed. "the client must have filed, or filed a valid extension for, all currently required returns" the way I read it, you can't have any returns outstanding and request the abatement. Obviously you can have a return filed late, otherwise you wouldn't be asking them to abate FTF penalties.

[DaveinTexas]

Did client mention an extension?

You said the client gave you the balance of the tax information on April 20th. Prior to this did the client request an extension? I might be misunderstanding the post but if you didn't receive their information to finalize the return why didn't the client request an extension?