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?
