How Do You Really Know If You Filed A Tax Return?

Here is what caught my attention:

The Internal Revenue Service … determined a deficiency of $541,552 in petitioner’s 2012 Federal income tax and an accuracy-related penalty of $107,995.”

This is the Whitsett case. She is a doctor and specializes in blood transfusions. Way back in 1982 she and her husband bought 4,000 shares of Immucor, Inc stock for $11,000. She kept it after the divorce.

Fast forward to 2011 and someone agreed to acquire Immucor for $27 per share.

She had almost 20 years for the stock to split and split again; she now owned 63,594 shares.

By my math 63,594 times $27 = $1,717,038.

How I wish I had those problems.

Come tax time she takes the paperwork to her accountant, whom she had used for decades. She showed him paperwork accompanying her $1.17 million check, captioned “Corporate Action Advice.” It said that …

·      The “payment date” was August 19, 2011

·      The “tax year” was 2012

·      The sale was “processed” on January, 2012

I have no idea what this “action advice” was trying to say. As a tax CPA, I report someone’s financial life to the IRS one year at a time. It is critical to me to know whether this sale took place in 2011 or 2012. Whoever wrote this “advice” must have been crazed or did not command the language.

COMMENT: If I were the CPA, I would be on the phone to shareholder services. Or I would ask you to call. Either way, we are investigating.

QUESTION: There is one more thing that could help with determining the tax year. Can you guess what it is?

Dr W’s accountant takes a look at the paperwork and decides that 2011 is the proper year to report the gain.

The accountant was also under the impression that she had been reinvesting dividends. He does a calculation (totaling $628,437), adds it to $11,000 and determines that her “basis” in the stock was $639,437.

And her gain is $1,077,601 (1,717,038 – 639,437).

He extends her return and has her send an extension payment of $154,776.

The return was extended until October 15, 2012. For some reason, he did not finish it on time. Instead he finished it in February, 2013. He sent Dr W a copy of her return as well as a letter explaining that he had “filed the return electronically.”

Happens all the time.

COMMENT: Except that a step is missing. Do you know what it is?

There was $5,393 due, and the Dr sent a check.

All done, right?

Nope.

The Dr gets a Form 1099-B reporting the sale of the stock in 2012.

COMMENT: Now he has to amend her 2011 to remove the sale.

The accountant reviewed the paperwork and decided that nothing needed to be reported in 2012, as she had reported the sale the year before. As if to provide an exclamation point, he did not even show the sale on her 2012 return with zero gain, if only to avoid tripping the IRS computers. He was pretty certain about his game. 

COMMENT: This is not done. Even if I was absolutely convinced that the 1099 was in error, I would report it on your return and then find a way to back it out. The IRS simply matches A to B; in the event of a mismatch, the IRS computers send out an automatic notice. The notice does not pass human eyeballs until you respond (or eventually, should you fail to respond).

Late in 2013 the IRS sent the Dr a notice asking where her 2011 return was. They were showing a credit of $165,562 but no return.

For some reason the Dr sent another check for $5,393. Why? Who knows.

She asked him about that 2011 return. He assured her that he filed it electronically.

COMMENT: If the IRS is asking, you did not file. You may have thought you did, but you are not going to win this fight. Send them a copy. Some practitioners even include a legend such as “Information Only – Previously Filed.” You can attach a note to this effect. No one is going to read the note and – more likely than not – you will receive a notice for late filing, but there is no harm.

Her accountant was so sure, however, that he sent the IRS nothing. Not a letter. Not a call. Nothing. What could possibly go wrong?

By October, 2014 the IRS sent the Dr a notice for big-time taxes due for 2012. Remember that - according to the IRS - she sold that stock in 2012.

In February 2015, the accountant backed down and admitted that the sale should have been reported in 2012. He also blew the calculation of her stock basis by adding $628,437 for reinvestments. Turns out that she had not reinvested. He promised to amend the 2011 and 2012 returns.

He amended nothing.

Finally – and fed up – she hired an attorney.

On April 10, 2015, the attorney amended the 2011 return, removing the sale of stock. 

QUESTION: Do you recognize the significance of the date: April 10, 2015?

Without the stock sale, she had a gigantic overpayment for 2011, which the attorney applied to 2012 and the stock sale.

The case, by the way, was not about the story we have just told. No sir. The case was because the IRS wanted gigantic penalties from Dr W.

Huh?

From their perspective, she refused to file a 2011 return, even after being reminded.

And – on top of that – she left out a big stock sale on her 2012 return.

If that was all you knew, she would look pretty bad.

From her side, the IRS looks like a bully. She reported the stock gain and paid the tax A YEAR EARLY.

Granted, the paperwork was a disaster, but the money was there before its time. If anything, the IRS should pay interest for banking her money.

The Tax Court fortunately reversed the penalties against Dr W. They felt she had acted with “reasonable cause” and “in good faith.” She relied on a long-standing tax advisor. He went off the rails, but how was she to know?

Remember that the penalty was over a hundred grand.

Back to our questions:

(1) The accountant should have questioned why he did not have a Form 1099-B for 2011. Anything can happen and paperwork gets lost, but the lack of one made me curious immediately.

(2) The accountant is not allowed to release her return without written permission from Dr W. Why? Because it not his return, that is why. He should have requested her to sign an authorization and mail it back to him before filing anything.

(3) The significance of the date is the statute of limitations. The original due date for a 2011 return was April 15, 2012. Add three years and make it April 15, 2015. If she wanted to get her 2011 refund (and she did), she had to get her amended return in by April 15, 2015. She made it by 5 days.

I am not sure what happened with the accountant. Was there a foul-up with his software? Did he attempt to electronically file but not recognize that the attempt failed? Why did he ignore a Form 1099, knowing that those things are chum-in-the-water for the IRS? Why did he not recognize that the statute of limitations was closing on a hundred-and-fifty grand?

And why not just send another copy of the return to the IRS and be done with it?