Our CPA misled us

[WhiteOleander]

that he originally overlooked?
Maybe I am missing something here. If this was a disbursement for a business expense or a deduction on the Sched. A form 1040, wouldn't this reduce the tax instead of increasing it?

I took it to mean that the husband took out something that would generate a 1099R. If I am correct, it may have caused not only a higher tax liability, but also a 5329 penalty.

Just the way I read it.

[KJ Judd]

I read it that the husband posted a S corp distribution as an expense. (So the flow of cash to "pay himself" was listed as an additional expense, not a reduction of the retained earnings.) This definitely would cause the issue here.

[joanmcq]

That's the way I took it too.

[Corduroy Frog]

Answer One Question

BreckGirl, I've wanted to ask a question but decided to let this banter fly back and forth for awhile. The question is just one of many disconnects which tell us "something's wrong with this picture."

So your husband is told he has a refund, even filing married and separate. (Irrelevant what you do with it - it's your money, foolish or wise and benevolent, whatever. Doesn't matter)

Why does he file separate? You tell us from the start that he owes back taxes. However, if he has a refund, surely someone (including the CPA) should know that the refund will be applied to back taxes, and therefore will not be forthcoming to finance any vacation.

My question is as follows: If anyone thought he had refund enough to cover these back taxes and finance a vacation, then why didn't you file joint? For most Americans, filing joint saves at least another $2000-$3000 or more versus filing separate. Married filing separate is the highest tax rate of all status.

The disconnect is that the very reason for filing separate was eliminated by the refund itself. And you must have known his purported refund was enough to pay back taxes or you wouldn't have relied on it to take a vacation.

Somewhere in this chain there is a broken link, big time. You may not be aware of it. It will be interesting to see how your meeting with the CPA turns out. Our suspicion is that he is really not that stupid, and there has been misinformation. Please update us after you have your meeting.

You have been beat up pretty bad for visiting us. We normally are not this hostile, and frankly, some of the harshest comments have come from otherwise cordial people. But none of us can put 2 plus 2 together, and we know from experience when gears are not meshing.

[Bees Knees]

The lesson that needs to be learned here is a lesson for us. Taxpayers will believe and think what they want to, despite our attempts to explain what is wrong here.

The lesson is, NEVER give out an estimate of a tax refund or balance due for your business clients. Period. If you do a thorough enough job that you can safely tell a business client he is getting a refund, then you probably did enough work to complete the return and the only reason you put him on extension is because your printer ran out of paper.

How can you possibly give an accurate estimate for an S corporation client prior to balancing the books? You can’t. This CPA is a fault. Not because he gave a wrong estimate. But because he gave ANY estimate prior to the completion of a balanced set of books.

[outwest]

Right on target Bees.

Couldn't agree with you more.

[BOB W]

How can you possibly give an accurate estimate for an S corporation client prior to balancing the books? You can’t. This CPA is a fault. Not because he gave a wrong estimate. But because he gave ANY estimate prior to the completion of a balanced set of books.

It sounded like only "income and expenses" were provided and these books could never be balanced. That is why I don't do Corp without a full right-up first. Even if page 4 does not have to be completed. I send them on their way if they resist providing all infomation.

[breckgirl5]

BreckGirl, I've wanted to ask a question but decided to let this banter fly back and forth for awhile. The question is just one of many disconnects which tell us "something's wrong with this picture."

So your husband is told he has a refund, even filing married and separate. (Irrelevant what you do with it - it's your money, foolish or wise and benevolent, whatever. Doesn't matter)

Why does he file separate? You tell us from the start that he owes back taxes. However, if he has a refund, surely someone (including the CPA) should know that the refund will be applied to back taxes, and therefore will not be forthcoming to finance any vacation.

My question is as follows: If anyone thought he had refund enough to cover these back taxes and finance a vacation, then why didn't you file joint? For most Americans, filing joint saves at least another $2000-$3000 or more versus filing separate. Married filing separate is the highest tax rate of all status.

The disconnect is that the very reason for filing separate was eliminated by the refund itself. And you must have known his purported refund was enough to pay back taxes or you wouldn't have relied on it to take a vacation.

Somewhere in this chain there is a broken link, big time. You may not be aware of it. It will be interesting to see how your meeting with the CPA turns out. Our suspicion is that he is really not that stupid, and there has been misinformation. Please update us after you have your meeting.

You have been beat up pretty bad for visiting us. We normally are not this hostile, and frankly, some of the harshest comments have come from otherwise cordial people. But none of us can put 2 plus 2 together, and we know from experience when gears are not meshing.

Okay, bear with me because I am NOT an expert in these matters. I will answer all of your questions to the best of my ability.

First of all, 2006 was the first year we filed as married anything. We got married in 2006.

I chose MFS because of the back taxes owed by hubby. I was afraid that if we did MFJ, I would lose MY refund due to him owing from 7 & 8 years ago. We hired an ex-IRS agent as a consultant regarding the back IRS debt. He told us to be very careful and keep all finance/bank accounts separate. I felt that MFS would just keep things cleaner and I would actually get my refund rather than it being taken. I believe the consultant also suggested MFS so that I could keep my refund.

In 2006 I knew I would be getting a refund as I always do. I was guessing that hubby would owe something. Having just shut down his real estate biz, he was struggling. So, I made the decision to pay his 2006 taxes with my refund. I was waiting to find out the amount of the bill so I could pay it. Then, I heard he did not owe, and in fact he was due a refund. I knew we would never actually get the refund... but at least I would not have to pay more taxes with my refund.

Someone mentioned injured/innocent spouse. I've looked into that, but I think that's only for when the debt was incurred during the marriage, not before. I'm not really "injured," as I knowingly married someone with back tax debt.

I'm surely open to more suggestions about how to handle this. I'm just trying to be cautious.

[breckgirl5]

It sounded like only "income and expenses" were provided and these books could never be balanced. That is why I don't do Corp without a full right-up first. Even if page 4 does not have to be completed. I send them on their way if they resist providing all infomation.

Bob W, I believe what hubby provided was his W-2 and all payroll info from PayChex.

PayChex also made some quarterly payments to the IRS in 2006, so all of that information was given to CPA.

Hubby then provided CPA with all business espenses and back-up and a list of withdrawls (dispersements) made from the corporate account.

I do blame hubby for not making those dispersements more obvious. He claims that his old CPA told him that he could take them out without being taxed. (?????) I don't know what the heck he was thinking and I'm not happy about it.

[breckgirl5]

The $75 is peanuts for both you and the CPA. You should pay his full bill and then politely tell him you think he should cover the penalty & interest when you get the follow-up bill from IRS.

Hubby tells me that the penalties have already been estimated in the total amount owed. He says CPA included this in his calculations... therefore we are paying them now. Does that sound incorrect somehow? Should hubby expect a letter from IRS?

[Bees Knees]

I do blame hubby for not making those dispersements more obvious. He claims that his old CPA told him that he could take them out without being taxed. (?????) I don't know what the heck he was thinking and I'm not happy about it.

Hubby did nothing wrong. S corp distributions (as well as sole proprietor withdrawals) are tax free.

The tax is paid on the profit of the business, regardless of whether or not distributions are made. The error your CPA made was in trying to estimate taxes due without considering the S corporation income statement and balance sheet. Obviously, that wasn’t done by you or your husband. The CPA reconstructed it from spreadsheets when he finally got around to doing the taxes. Telling you he missed a dispersement on the spreadsheet is irrelevant. You haven’t been told the whole story. S corp dispersements have no effect on taxable income.

[taxmandan]

Someone mentioned injured/innocent spouse. I've looked into that, but I think that's only for when the debt was incurred during the marriage, not before. I'm not really "injured," as I knowingly married someone with back tax debt.

Not true, injured spouse filing is often used when the new wife learns of the back taxes/child support/ etc that hubby owes. Doesn't have to be marrital tax debt. Innocent spouse is for marital tax issues, but not injured spouse. The ex-IRS person should have known that. Injured spouse would definately slowed down the processing of the return, and the calculation that theIRS uses to determine your refund is convoluted and difficult to know for sure what the refund will be. But it would have been my suggestion to you to file injured spouse.

[dsi]

Also, if distributions taken from your S-corp are in excess of basis, then the excess is taxable income. This and other items such as equipment purchased, loans, etc aren't know until the corp return is completed.

[BOB W]

Bob W, I believe what hubby provided was his W-2 and all payroll info from PayChex.

PayChex also made some quarterly payments to the IRS in 2006, so all of that information was given to CPA.

Hubby then provided CPA with all business espenses and back-up and a list of withdrawls (dispersements) made from the corporate account.

I do blame hubby for not making those dispersements more obvious. He claims that his old CPA told him that he could take them out without being taxed. (?????) I don't know what the heck he was thinking and I'm not happy about it.

Yes, I believe there is room for error on both sides, but a true professional would anticipate such an error when it comes to posible poor/mixed info being supplied. Not to mention taking on a corporate business account with only EOY income and expenses info only.

Now the question comes up as to who set up this type of EOY arraingment? If it was the CPA's > shame-shame-shame. Or was it your husband's due to trying to save accounting fees> Shame-Shame- Shame.

[Bird Legs]

Another Question

Because of all the various explanations & answers being supplied, could this original post be a hoax - Joke?
Just wondering.