CPA's Obligation to Fix Error on Return

[NewMexico]

Client filed for mileage deduction on both fed and state return for business use of personal auto- approx 32K miles. She worked for company that had accountable plan and reimbursed for miles. She never filed expense report, and thus never was paid mileage reimbursement. She claimed the 32K miles as a deduction. The state is reviewing her return and wants to disallow the mileage, because client can't prove she didn't get reimbursed by her company. (she no longer works there)

We're going to amend state return and take off mileage. As a CPA do I have an obligation to amend the federal knowing it's wrong ?

Same goes for the past 3 or so years ?

Thanks

Just found a tax court ruling that says that if an employes was entitled to get reimbursed, but failed to seek reimbursement the deduction is not allowed...know anything about this?

From the Web:

Here's another case where the taxpayer tried to deduct employee business expenses personally rather than seek reimbursement from his employer. The rule is simple. If you can be reimbursed by your employer, you must try to recover from him first. Only if you are denied, or your employer has a policy of not reimbursing, can you deduct the expenses on your personal return. This rule is especially important for business owners. Thomas M. and Dolores F. Gomez; T.C. Memo. 1999-94.

[Brad Imsdahl]

Why are you giving up? The state has to prove she got reimbursed, not the other way around.

You don't amend anything. You stick to your guns and fight for your client.

[jainen]

go the other direction

>>stick to your guns and fight<<

I agree mostly. Although the taxpayer has to prove the deduction, the state has to prove there is additional income. You can probably get a very good deal in terms of compromise. (Of course, your fee may be substantial, with no guarantee of success, so the client gets to decide how long to drag it out.)

In California, you are required to notify the state of the results of a federal audit. I don't know of any reason to go the other direction.

[OldJack]

I agree with Brad unless the tax amount is not worth the trouble. If I did agree with the state that does NOT mean you have to amend the federal as her claim on the federal is still valid.

[Brad Imsdahl]

Just found a tax court ruling that says that if an employes was entitled to get reimbursed, but failed to seek reimbursement the deduction is not allowed...know anything about this?

From the Web:

Here's another case where the taxpayer tried to deduct employee business expenses personally rather than seek reimbursement from his employer. The rule is simple. If you can be reimbursed by your employer, you must try to recover from him first. Only if you are denied, or your employer has a policy of not reimbursing, can you deduct the expenses on your personal return. This rule is especially important for business owners. Thomas M. and Dolores F. Gomez; T.C. Memo. 1999-94.

After reading the case, it appears the state is correct. If the taxpayer was eligible for reimbursement but chose not to be reimbursed, no deduction is allowed for the unreimbursed expenses.

[ChEAr$]

circular 230

Client filed for mileage deduction on both fed and state return for business use of personal auto- approx 32K miles. She worked for company that had accountable plan and reimbursed for miles. She never filed expense report, and thus never was paid mileage reimbursement. She claimed the 32K miles as a deduction. The state is reviewing her return and wants to disallow the mileage, because client can't prove she didn't get reimbursed by her company. (she no longer works there)

We're going to amend state return and take off mileage. As a CPA do I have an obligation to amend the federal knowing it's wrong ?

Same goes for the past 3 or so years ?

governs us all. When we find a problem, must advise client to amend.

If original returns done by another, simply advise and let client decide.

If WE made the boo boo, it's best to prepare the amendments (free of
charge of course!), present to client, and recommend he file them and
pay the piper.

[Snaggletooth]

Deduction not Income

Unless I missed something, Brad, Jainen, Jack, we're not talking about the state creating income. They are disallowing the deduction. Two different audit approaches, two different applications of reason. I'm thinking the "creation of income" is something that might have happened if she had turned in her mileage and been reimbursed. And even that event would not have created income if the employer had an "accountable" plan. After coming to a different conclusion than all three of these esteemed minds, I'm thinking I've missed something.

If I were New Mexico, I would file an amended return, charge the client for it, and give it to the client to mail. That way if the client decides not to turn it in, the onus is on her, not on our friend from the Land of Entrapment. I can tell horror stories to my clients and scare them about the electronic matching programs that the states and feds share with each other, but in some cases, they are only horror stories and not fact. I think these programs are not yet terribly effective, but are in their infancy.

Also, I have to really be skeptical about this employee. Taking this deduction means that she drove 32,000 miles, all for the convenience of her employer, and then didn't seek reimbursement. If this is true (and I'm skeptical), both she and her employer had several better ways to handle the situation. Only a few occupations could "sell" this story to me.

By the way, New Mexico, I notice this is only your third registered post. Welcome to the board!!

[NewMexico]

Thanks so Much!

The Tax Book, the CPE credits and this Forum is honestly the best money I've ever spent.

Thanks so much to all of you for your opinions and thoughtful answers. It's really nice to have a second opinion on some of these sticky problems.

I owe you all a bucket of Green Chile.

Thanks Again

[OldJack]

>>If I were New Mexico, I would file an amended return, charge the client for it, and give it to the client to mail. That way if the client decides not to turn it in, the onus is on her, not on our friend from the Land of Entrapment.<<

We are bound by cir 230 in preparing a tax return to the best of our abilities with information presented by the taxpayer and in some cases we are bound to do "do diligence", whatever that means. I don't believe there is any actual requirement for us to audit that prepared tax return after it is filed to discover any possible errors. If we did discover errors, ethics aside, it is not even required that we advice the taxpayer let alone the IRS. Certainly we are not required, nor should we, prepare an amended tax return unless the taxpayer asks us to do so.

There are times when it is in the taxpayers best interest that nothing is done until the statute of limitations expire. To do something against the taxpayers best interest without their request is asking for an increase in your E&O insurance.

In this case as posted there is only a disallowance negotiated and agreed at the state level, that in my opinion does not mean we have to file an amendment to the federal tax return unless the taxpayer requests we do so.

[New York Enrolled Agent]

Old Jack

You write "If we did discover errors, ethics aside, it is not even required that we advice the taxpayer let alone the IRS. "

That is not true - Circular 230 DOES require notification to the client ( but NOT to the IRS).

§10.21 of C230 requires the practitioner to advise the client, promptly, of any noncompliance, error, or omission. In addition, the practitioner must advise the client of the consequences as provided under the Code and regs of such noncompliance, error, or omission.

[JON]

Unless New Mexico is not like Minnesota

they turn all adjustments over to the federal and in turn the federal turns their adjustments over to the state. In Minnesota if you have a federal adjustment you have 6 months to amend the state or they do it and charge a penalty.

Employee business expense when the federal audits the first think they want is a letter from the employer that states these are ordinary, necessary and required for your position and they are not reimbursed by the employer. The IRS will not even look to substantiation of items until they get that from the employer. If you could have turned them in and did not I think that has been held long ago that you do not get the deduction.

Santa Fe and Taos-the hiding place for the stars.???