Preparer payment of client's penalty and interest

[Albe]

I'm wondering what policies everyone uses regarding payment of penalty and interest for your client's when an error made by a preparer (or former preparer) of your firm has caused additional tax due with a 1040x or with a notice from IRS. Do you pay the penalty and interest, just the penalty, just the interest, or none of the above? Also, why have you chosen the policy you have chosen?

[taxfun]

We pay penalty, not interest (as client has had use of the money in the interim).

[Albe]

I agree

That is our policy as well, but I have trouble getting client's to understand the concept of the use of money. They will respond with "If this never would have happened, I would've paid all my tax by the original due date and would never have owed any interest" and therfore expects or wants me to pay the interest. I recently lost a client over this very issue.

[Uncle Sam]

Preparer Payment of Penalty and Interest

As a matter of policy, I pay the interest and penalty charges for mistakes I make in preparing clients' tax returns where it costs them additional money - I don't pay the tax department - I just reimburse the client the amount shown on the notice, and I don't charge for correcting the error. Of course, if it's their mistake, I charge them for repreparing the return.

[Snagglefoof]

Errors and Omissions

...Insurance I suppose could be billed for this, (for those of you who have it).

I reimburse penalty and interest up to the amount of my invoice for the service
that gave rise to the error. And this applies only to the first notice -- if the client
lets the notices pile up for a year or two, I pay penalty and interest on his
first notice.

I could probably be held liable for the penalty alone, with no ceiling on the dollar
amount, but I tell me customers what my policy is. In only one case in 30 years
of preparation has a penalty (which was my fault) exceeded my reimbursement.

Honestly, out of 150 returns or thereabouts (almost all of them "long" forms),
I may have one error per year that creates a CP notice for the customer.

[Safire]

Not paying the interest could be compared to you taking out a loan for them without their permission, and putting that money under their mattress without their knowledge.

If I made the mistake, I pay penalty and interest. My mistake, my loan.

But I would agree, from the first notice they received only. Because if they let notices pile up for months or years, that's not my fault.

[rosieea]

That is our policy as well, but I have trouble getting client's to understand the concept of the use of money. They will respond with "If this never would have happened, I would've paid all my tax by the original due date and would never have owed any interest" and therfore expects or wants me to pay the interest. I recently lost a client over this very issue.

My policy is to pay the interest as well as the penalty. The client may have had use of the money, but the "loan" was involuntary; i.e., I agree with the client as quoted above.

[jimmcg]

Have not had any for many years but I state in my engagement letter that I will pay any penalties resulting from my errors and client pays the interest. Client agrrees with this and signs the engagement letter before any work is performed. If client does not agree and sign the engagement letter they take a walk elsewhere.

[veritas]

Pay the interest and penalty. Pay it to the client directly and deduct it as a refund. Or do like Matt Sova or Jainien and don't make any mistakes.

[taxmandan]

I will pay the interest if the client brings the FIRST notice to me in a timely manner (30 days or less). I ask the IRS to drop the penalties 'cause the error was not by the taxpayer and it's not right to charge them a penalty. So far, (twice) that has worked to get the penalty abated.

Daniel

[sea-tax]

I have each client sign letter of enagement which limits my liabilty to the amount the tax returns charge. I usually will pay both under the same circumstances as mentioned already. However i try to actually credit their next bill which is usually the next tax time, This ensures that I get to see them again. I have only had to even do this like 5 times so it has worked so far. hopefully it is not a usual pattern .

[veritas]

I will pay the interest if the client brings the FIRST notice to me in a timely manner (30 days or less). I ask the IRS to drop the penalties 'cause the error was not by the taxpayer and it's not right to charge them a penalty. So far, (twice) that has worked to get the penalty abated.

Daniel

Good point. We always try to eliminate the penalty if the dollar amount warrants it. Our general policy is never pay a penalty to the IRS.