Self-Prepared Mess & IRS CP2501 on my doorstep

[bgiez]

What is the best way to deal with this mess (aside from sending him somewhere else)?
Should I merely provide the information requested (basis for the exercised options), to meet the deadline, and later amend to make the other corrections? Or should I prepare an amendment to include the other errors as well as the missing Schedule D entries, based on the amendment that the TP filed last month? Or fille a POA and ask for an extension? The TP is going out of the country on Thursday.

Here's the scenario:

Taxpayer self-prepared 2004 return, filed and paid balance due in April 2005. In June 2006, TP received a corrected W2, which reduced his AGI, and filed a 1040X, which I am sure the IRS has not yet processed. This month (July) he received a CP2501 because he did not include exercised stock options on his schedule D. Deadline is 26 July 2006. Then someone gave him my name and now he's on my doorstep.

After reviewing all of the above, I have come to the following conclusion:

Re original return: several other errors are apparent, and will favor the TP, if corrected.

Re the amendment: almost every entry in column A is wrong, however he managed to get column C correct except the amount of tax paid with the original return (he included the penalty he paid).

Re his state return: he filed a totally different Federal Schedule D with the state return (which changed his state taxable income), didn't take an allowable credit, paid an amount slightly different than what the return showed he owed the state, and never amended the state when he amended the federal.

Barbara, EA

[jimmcg]

Approach this chalenge in a professional manner. Get a sufficient retainer from the client. (at least fifty percent of what you estimate your final fee to be), get a POA, and then communicate with the Service and get a sufficient extension of time to complete your work. Then prepare a corrected and proper 1040X and get the remainder of your fee before you give it to the client. Don't be rushed into doing anything, you are the one in control.

[veritas]

Also drink lots of liquids. Preferably Scotch.

[jimmcg]

Or Southern Comfort. .......Seriously I forgot to mention prepare a solid engagement letter and make sure the client understands it and signs it.

[jainen]

what jimmcg says

Do what jimmcg says (including what he forgot) and also what veritas says. Be sure to do them in the order mentioned.

[bgiez]

Thanks!

Thanks for the input. I'll try to follow the suggestions in the order suggested.

Any suggestions for the wording of the engagement letter?

Barbara

[jainen]

This engagement

This engagement is only about tax year 2004, and does not include any advice about prior or subsequent years. Your work is based solely on information provided by the taxpayer, which you do not audit or verify. The taxpayer is required to maintain adequate records but you cannot determine whether the taxpayer actually has adequate records. The taxpayer is personally responsible for all taxes, penalties, and interest that may be assessed for any reason including a tax preparer's error. You will prepare a new amended return and will make appropriate phone and mail contacts with the taxing authorities, but can not guarantee any specific result. Your fee is based on (whatever it is based on--time, forms, and/or services), does not include contacts at the appeals level, and is due in full when billed.

[Black Bart]

What to do? Hmmm...

What is the best way to deal with this mess (aside from sending him somewhere else)?
Should I merely provide the information requested (basis for the exercised options), to meet the deadline, and later amend to make the other corrections? Or should I prepare an amendment to include the other errors as well as the missing Schedule D entries, based on the amendment that the TP filed last month? Or fille a POA and ask for an extension? The TP is going out of the country on Thursday.

Barbara, EA

The boys have made good suggestions and this will probably take a while to do. Like they said, I'd get half up-front. Then maybe tell the client (smart guy--leaving the country) that it's going to take a while and you''ll need to make periodic "draws" (like a construction loan) against work-in-progress (in case somewhere along the line he gets tired of it all).

I think I'd put everything together in one amended return. It's tempting to fix the options, but then you'd eventually have three amendments complicating the final resolution. Still, I haven't done a 1040X of a 1040X before, so the immediate question that springs to mind is what should be put in the "original" column of the second 1040X -- the 1040 figures or those from the first 1040X? Maybe somebody here knows?

It's not that it can't be worked out, it's just that getting IRS to take basic procedure steps on this sort of thing is difficult, as they generally don't like to "mess" with anything not fairly straightforward and ritual. It isn't easy to get IRS to process a correction of a correction and "straighten out" conflicting information in their computers. If I could get the Taxpayer Advocate (877-777-4778) to handle it, I would. That way you'd be continuously dealing with one person who understands the problem rather than having to explain it several times to several different people (I'm anticipating you'll be making phone calls to IRS) who may or may not be interested. The TA ordinarily is supposed to get involved only when you've exhausted normal IRS channels in problem-solving, but I think this one would qualify as is.

My experience: In '03 one of my clients got an IRS bill for his father's large account. Their names were the same except for a middle initial. I called TA and I didn't really have to do anything like you're doing -- it was just a simple re-posting by IRS of info to the proper accounts. The TA said some of father's info was posted to son's, son's to father's, etc. for several years back. He was very good; calling progress reports to me every now and then, saying he was "working on it," and slowly, bit-by-bit, over a period of four months, managed to get it all done. He said it was "like pulling teeth" to get them to change all of it.

[Unregistered]

amend the amend

"Still, I haven't done a 1040X of a 1040X before, so the immediate question that springs to mind is what should be put in the "original" column of the second 1040X -- the 1040 figures or those from the first 1040X? Maybe somebody here knows?"


You're amending the amended return. Your starting point is whatever you had on your previously filed return.

[Black Bart]

Thanks pal.

"Still, I haven't done a 1040X of a 1040X before, so the immediate question that springs to mind is what should be put in the "original" column of the second 1040X -- the 1040 figures or those from the first 1040X? Maybe somebody here knows?"
You're amending the amended return. Your starting point is whatever you had on your previously filed return.

What do you think? File on the options first or all together?

Are you the same guy/girl who was talking about politics a while back? Wanta debate? Or are you for "taxes only"?

Regards / BB

[Snaggletooth]

Mental Toughness

This is not intended to sound like a Knute Rockne inspirational speech, but the solution is to start from the beginning, obtain the facts, compare with what's been reported, and respond accordingly with corrected reporting.

Brilliant advice, right? This response should be "canned" and can be preached to 75% of all posts.

However, in reading the above, I detect a penchant for wanting to solve this problem with one fell swoop instead of unraveling the yarn, and respinning it correctly. I detect also that the reason for seeking a quick panacea is that the customer is putting pressure on the situation. The customer must realize that this one is really FUBAR and is not going to be resolved quickly. You were not the cause of this mess, and the customer must come to grips with this. Instant relief is not to be had.

Most likely you will have to deal with an Ombudsman at the IRS, but unfortunately it requires three correspondences with no response before one will be made available (unless you know one). From the post, I see the interaction of a number of issues, including an errant W-2 and misreporting of a stock option. If the stock option were exercised in the same year, it's possible the stock option may even by the reason for the errant W-2.

[S T]

Follow up View

My approach, for what it is worth,

1. is to handle the CP2501 notice (different dept and they have no record of the clients filed 1040X) Since it is exercised options (not sure here if we are talking about options through employer that were grossed up on W-2), but if so, they have already been included, just that the client did not report the 2nd part of the transaction through the stock brokerage reported on 1099 B which would produce a minimal gain or loss on Schedule D. So depending on the stock option transaction this could be handled very quickly.

2. If you haven't already, file in POA and sign on to E Services so you can obtain the account transcripts once the CP2501 notice has been handled. You then can also monitor the first 1040X and find out when that is posted.

3. Once the CP2501 notice is concluded, and the clients 1st 1040X has been posted to the account and all of that is resolved, then file in the corrected 1040X for the other changes that you want to make.

I think the important note here is that IRS can not seem to "multi-task" very well!!

Not sure what State the Taxpayer files in, but the States pull the Federal Transcript Tapes, and that is usually about 12-18 months after file date.

So wait for the final 1040X, then amend the state return, attaching copies of the IRS correspondence and 1040X returns.

Calculate your time spent in dealing with the different aspects of this problem and charge the client accordingly. The taxpayer does not have a "clue" about the inner workings at the IRS Depts, to straighten out this mess! nor probably any idea about filing corrections with the State Agency.

Good Luck,

Sandy

[bgiez]

Thanks, Sandy

Thanks for the plan, Sandy. I, too, have noticed that the IRS doesn't multi-task well, and want to avoid the problems that would entail.

I contacted the client this weekend and told her it would involve discussions with the IRS and that my charges would be hourly, at $60 per hour. She almost had heart failure, but this was after she had reminded me of her degree in finance from Columbia University, NY, her husband's mid-6 figure income, and her ability to prepare her own return. And after I had pointed out that there were errors I could correct in her favor on both the Federal and the State, and she was not interested in reducing her tax liablity, after all her husband's income was in the mid-6 figures. Apparently it's ok to overpay the government, but not pay an individual for their time and expertise. Go figure!

Barbara, EA

[bgiez]

You're right

You're right, Snaggletooth, the client is very pushy and can't stop talking long enough for me to even think. I will be meeting with the client tomorrow to get the signed POA and engagement letter, then they are going out of town. That should get me some peace and quiet to deal with the IRS.

The corrected W2 does not seem to have anything to do with the exercise of options and I know how to compute basis on them, so that's no problem. It's that incorrect 1040X and the fact that the client now thinks the copy of the returns he provided to me are not the ones actually filed.

I noticed you are in Manchester, TN. That's not too far from where my daughter, son-in-law and grandkids moved last year. My son-in-law is the new Doc in Cowan, and my grandkids go to school in Suwanee, St. Andrews next year for the oldest.

By the way, what's FUBAR (think I can figure out the first two letters.)?

Barbara, EA

[veritas]

# # beyond all repair. From military WW2 I believe.