Grounds to sue Tax Preparer?

[zerobounds]

This is in Texas.

So my wife has a LLC and we had changed to a tax preparer from our previous CPA and he advised us that the previous method of filing by the CPA was completely wrong and we were due a much larger refund. After filing and getting the refund, we assumed that the information and methods he used must have been correct since the IRS approved it. (Yes, that was a stupid assumption, as we now know.)

Additionally, he recommended that we amend the returns that the CPA filed for the last 3 years, very confidently asserting that this was the correct course of action even when I skeptically asked if this was most definitely correct and legitimate he was quite sure of himself and assured us that this was totally normal.

Now the IRS has audited us, found massive, wild errors in his returns and completely false and erroneous things that we never even supplied him to report on our return and incurred the maximum 40% penalties on 3 years worth of income, along with interest on top of the CPA fees we paid to represent us in the audit (and explain how horribly awful the filings and amendments were done). This is abysmal for our financial situation, since we're young and don't have a stockpile of 2 years worth of income to throw at the IRS to handle these fees.

So what approach can we take toward this? I'm assuming our Tax Preparer is either very stupid or just accustomed to ripping off the IRS with his client's tax returns. Should we be asking him on a professional level to simply handle the fees or should we just approach it from a legal standpoint and see a Tax Lawyer or something? Does the IRS care if the tax preparer does this? I know we are responsible for the information on the return but I expected that paying a professional tax preparer would be a safe course of action and that we could trust this work. Clearly not the case and has resulted in huge fines. The CPA representing us in the audit recommended that the tax preparer not be involved so we haven't even had any communication with him regarding the audit.

Any feedback would be appreciated.

 

[OHRoadwarrior]

Can you sue? Sure. Can you prevail? Maybe. By your own admission

Now the IRS has audited us, found massive, wild errors in his returns and completely false and erroneous things that we never even supplied him to report on our return

. You should have reviewed the returns before they were filed and request the unsubstantiated activities be removed.

 

[zerobounds]

Yes, I'm aware of that now. I am looking for some advice on the way forward.

Thanks

 

[OHRoadwarrior]

Hang loose. We have a few members more experienced with business tax than I am. They should be by.

 

[BigMouthWino]

This is in Texas.

So my wife has a LLC and we had changed to a tax preparer from our previous CPA and he advised us that the previous method of filing by the CPA was completely wrong and we were due a much larger refund. After filing and getting the refund, we assumed that the information and methods he used must have been correct since the IRS approved it. (Yes, that was a stupid assumption, as we now know.)

Additionally, he recommended that we amend the returns that the CPA filed for the last 3 years, very confidently asserting that this was the correct course of action even when I skeptically asked if this was most definitely correct and legitimate he was quite sure of himself and assured us that this was totally normal.

Now the IRS has audited us, found massive, wild errors in his returns and completely false and erroneous things that we never even supplied him to report on our return and incurred the maximum 40% penalties on 3 years worth of income, along with interest on top of the CPA fees we paid to represent us in the audit (and explain how horribly awful the filings and amendments were done). This is abysmal for our financial situation, since we're young and don't have a stockpile of 2 years worth of income to throw at the IRS to handle these fees.

So what approach can we take toward this? I'm assuming our Tax Preparer is either very stupid or just accustomed to ripping off the IRS with his client's tax returns. Should we be asking him on a professional level to simply handle the fees or should we just approach it from a legal standpoint and see a Tax Lawyer or something? Does the IRS care if the tax preparer does this? I know we are responsible for the information on the return but I expected that paying a professional tax preparer would be a safe course of action and that we could trust this work. Clearly not the case and has resulted in huge fines. The CPA representing us in the audit recommended that the tax preparer not be involved so we haven't even had any communication with him regarding the audit.

Any feedback would be appreciated.

The bad news: The IRS will pay you any refund you claim. This is not an indication that the IRS ever "approved" of the methods utilized to obtain the refund. Ultimately you are liable for whatever tax you legally owed.

The good news: If you relied on a licensed tax preparer you will not be liable for penalties an interest. Only the tax refunded to you and/or the unpaid taxes you owe.

I suggest you contact the tax-payer advocate's office for your area for assistance. You may also find the following bulletin interesting:

http://www.irs.gov/uac/Tax-Return-Preparer-Fraud-1

 

[LdiJ]

The bad news: The IRS will pay you any refund you claim. This is not an indication that the IRS ever "approved" of the methods utilized to obtain the refund. Ultimately you are liable for whatever tax you legally owed.

The good news: If you relied on a licensed tax preparer you will not be liable for penalties an interest. Only the tax refunded to you and/or the unpaid taxes you owe.

I suggest you contact the tax-payer advocate's office for your area for assistance. You may also find the following bulletin interesting:

http://www.irs.gov/uac/Tax-Return-Preparer-Fraud-1

The bolded is not accurate. The taxpayer is always liable for all interest and penalties. An honorable tax professional will cover penalties (and perhaps interest) if they make mistakes, but that does not absolve the taxpayer from the responsibility. This is also not something that the taxpayer advocates office can help with. Their job is to predominantly help resolve problems when the IRS is the wrong or is being unreasonable.

OP, you stated that the CPA that is helping you with the audit does not want you to contact the other tax professional. I could speculate as to the reason why, but in all reality it would be best to ask the CPA specifically about that. I am not going to advise you about any possible action against the tax professional without knowing why your CPA doesn't want you to make any contact with them.

 

[zerobounds]

The bolded is not accurate. The taxpayer is always liable for all interest and penalties. An honorable tax professional will cover penalties (and perhaps interest) if they make mistakes, but that does not absolve the taxpayer from the responsibility. This is also not something that the taxpayer advocates office can help with. Their job is to predominantly help resolve problems when the IRS is the wrong or is being unreasonable.

OP, you stated that the CPA that is helping you with the audit does not want you to contact the other tax professional. I could speculate as to the reason why, but in all reality it would be best to ask the CPA specifically about that. I am not going to advise you about any possible action against the tax professional without knowing why your CPA doesn't want you to make any contact with them.

Thanks for the info.

I think it was because we needed some documents from him, but I can clarify tomorrow when we speak to the CPA again. I really doubt the PTP will be inclined to pay for the mistakes, they were completely deliberate and unfounded rather than 'oops' that he feels inclined to repair for the sake of his reputation.

 

[BigMouthWino]

The bolded is not accurate. The taxpayer is always liable for all interest and penalties. An honorable tax professional will cover penalties (and perhaps interest) if they make mistakes, but that does not absolve the taxpayer from the responsibility. This is also not something that the taxpayer advocates office can help with. Their job is to predominantly help resolve problems when the IRS is the wrong or is being unreasonable.

OP, you stated that the CPA that is helping you with the audit does not want you to contact the other tax professional. I could speculate as to the reason why, but in all reality it would be best to ask the CPA specifically about that. I am not going to advise you about any possible action against the tax professional without knowing why your CPA doesn't want you to make any contact with them.

Not necessarily. I would refer you to the IRS Publication on Relief from Penalties:

http://www.irs.gov/irm/part20/irm_20-001-001r-cont01.html

Generally if the tax preparer gave advice on the substantive tax issue the IRS will give relief from the penalties, but you have to ask for it.

 

[csi7]

The only thing I can suggest is to ensure you have all the written evidence of the original tax returns, the amended returns (with tax preparer's signature and document verification), the timeline for all of this research, and then sit down with the numbers, from start to finish, for the differences in the numbers will help you with the tax advocate. The tax advocate will work with you, so the more information you have ready at hand concerning your tax situation, the better they will be able to provide you with the accurate information. (In my case, our audit revealed that we were entitled to more tax refund, and we received it, after the investigation was completed)

If you are having financial difficulties due to the timeline of submission which it sounds like you are, you can obtain help from organizations that work to reduce the tax penalties from your tax preparer making the unsubstantiated claims that you were owed more money. You will have to research to find the best one for your particular situation.

Any criminal law investigation into this matter does not change the civil law investigation into this matter. They are two separate issues, however, if that is happening in your case, you will have to be diligent about obtaining information and keeping track of who you contact, contact information, date, time, location, and be professional in your communication.

 

[LdiJ]

Not necessarily. I would refer you to the IRS Publication on Relief from Penalties:

http://www.irs.gov/irm/part20/irm_20-001-001r-cont01.html

Generally if the tax preparer gave advice on the substantive tax issue the IRS will give relief from the penalties, but you have to ask for it.

Sorry, but you are applying apples to oranges. I have been a tax professional for more than 25 years, and the OP did not do the necessary due diligence to be absolved from penalty.

20.1.1.3.3.4.3 (12-11-2009)
Advice from a Tax Advisor


1.
Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC 6664(c) for the accuracy-related penalty under IRC 6662. See IRM 20.1.5, Return Related Penalties, and Treas. Reg. 1.6664–4(c).

2.
However, in very limited instances, reliance on the advice of a tax advisor may provide relief from other penalties when the tax advisor provides advice on a substantive tax issue.


Example:

The employer researched all available IRS publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were "contract labor" or "employees." As a result, the tax advisor advised the employer that the workers were "contract labor." However, the IRS later determined that the workers were "employees" and not "contract labor."



3.
Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer’s responsibility to file, pay, or deposit taxes cannot be excused by reliance on the advice of a tax advisor.

4.
Because the IRC and Treasury Regulations sections that provide penalty relief criteria for erroneous advice from a tax advisor are generally limited to the accuracy-related penalty, relief from other penalties must meet the reasonable cause standards. See IRM 20.1.1.3.2, Reasonable Cause.

You stated:

The good news: If you relied on a licensed tax preparer you will not be liable for penalties an interest. Only the tax refunded to you and/or the unpaid taxes you owe.

That statement is simply not accurate. You did not state that waiving of a penalty was only available in very limited circumstances nor did you indicate it was only the accuracy related penalty that could be waived in those limited circumstances, nor did you even indicate, initially, that the taxpayer had to ask for it. All you stated was if they relied on a licensed tax preparer they would not be liable for penalties and interest.

Now, its quite possible that the CPA they are working with will attempt to convince the IRS to waive some of the penalty that will be applied to this taxpayer's case, and its even possible that the IRS agent working the case will choose not to apply all penalties that could be applied, but none of that is a guarantee that all penalties will be waived...particularly in a case where the taxpayer exercised no due diligence. The IRS also never, in my 25 years of experience, waives interest.

 

[LdiJ]

The only thing I can suggest is to ensure you have all the written evidence of the original tax returns, the amended returns (with tax preparer's signature and document verification), the timeline for all of this research, and then sit down with the numbers, from start to finish, for the differences in the numbers will help you with the tax advocate. The tax advocate will work with you, so the more information you have ready at hand concerning your tax situation, the better they will be able to provide you with the accurate information. (In my case, our audit revealed that we were entitled to more tax refund, and we received it, after the investigation was completed)

Once again this is not something that would fall under the purview of the Taxpayer's Advocates office, unless you are using "advocate" in a different context.

If you are having financial difficulties due to the timeline of submission which it sounds like you are, you can obtain help from organizations that work to reduce the tax penalties from your tax preparer making the unsubstantiated claims that you were owed more money. You will have to research to find the best one for your particular situation.

Do NOT even consider using an "offer mill" that advertises on television.

Any criminal law investigation into this matter does not change the civil law investigation into this matter. They are two separate issues, however, if that is happening in your case, you will have to be diligent about obtaining information and keeping track of who you contact, contact information, date, time, location, and be professional in your communication.

I agree that criminal and civil are different, but this is unlikely to be a case where the IRS would have any remote interest in bringing criminal charges against the OP.

 

[BigMouthWino]

LdiJ,

I certainly respect your contributions to this forum; however, I think it is doing the OP a disservice to not advise that OP request relief from the penalties based on bad advice from the tax preparer. If the IRS does not waive the penalties the OP is no worse off, but if OP does not REQUEST relief from the penalties there is ZERO chance of them being waived.

 

[csi7]

Yes, however, the CPA may be hesitant to share information due to the possibility of the criminal charges facing the tax preparer.

 

[LdiJ]

LdiJ,

I certainly respect your contributions to this forum; however, I think it is doing the OP a disservice to not advise that OP request relief from the penalties based on bad advice from the tax preparer. If the IRS does not waive the penalties the OP is no worse off, but if OP does not REQUEST relief from the penalties there is ZERO chance of them being waived.

If appropriate, the CPA working with the taxpayer will advise the taxpayer to do so. However, once again, my initial response was based on what you said...which was totally inaccurate. This taxpayer is in a very tricky position and is working with a CPA. Giving totally inaccurate advice that may contradict any strategy being developed by the CPA would be very irresponsible.

 

[BigMouthWino]

If appropriate, the CPA working with the taxpayer will advise the taxpayer to do so. However, once again, my initial response was based on what you said...which was totally inaccurate. This taxpayer is in a very tricky position and is working with a CPA. Giving totally inaccurate advice that may contradict any strategy being developed by the CPA would be very irresponsible.

The taxpayer should INSTRUCT their CPA to request relief from the penalties. There is no harm in asking. And OP if the CPA refuses to follow your direct instructions I would find a new one.