Tax Horror Stories Part III

The horror stories – bad experiences with previous tax professionals and the consequences of their mistakes for my clients, the taxpayers – continue. On the one hand, I’m grateful to be in a position to accept new clients and very proud to know what to look for and find the errors (sometimes egregious mistakes) that were made on their past tax returns. I’m thrilled when I can get money back for my clients and when, with regard to situations that have been going on for years, I am able to intervene and put an end to the damages. But, on the other hand, the stories I hear continuously still make me sad.

Here are two brief stories that are very different, but both awful in their own way. One of our new clients came to us as most do, unhappy with the tax professional she was working with. This client is a professional in the health care realm, but also a wonderful artist/painter. She was unhappy because she wanted to create an LLC and make her art into a legitimate business. Her CPA told her, though, that she should not do so because her painting was simply a “hobby” and that it wasn’t a good idea since she (the client) had been losing money for years. (Arcadia Financial Services will support you in your dreams, and will encourage you to become an LLC – or whichever appropriate filing status will get you the best tax savings – and we believe there are huge tax savings available when you do turn your passion into a business.)

Another client received a 2022 Notice CP2000 from the IRS saying she owed $15,459 for taxes due and penalties and interest for substantial understatement of income. This was due to a rollover of a pre-tax annuity that had been rolled into a pre-tax traditional IRA account at a national brokerage firm in the amount of $54,136. The tax return was done by a national tax preparation company.

The issue, and the reason our client received a tax bill for $15,000, was that the custodian for the annuity sent the client a 1099-R that listed this as a normal distribution, code 7, instead of a direct rollover (code G). While the annuity company was to blame for the incorrect coding, and the tax bill that resulted, the tax preparer did nothing to identify the problem and did not ask questions to clarify what actually happened. We questioned the taxpayer and found out the following:

1. The transaction was a direct rollover to another custodian
2. The taxpayer revealed the new custodian
3. The new custodian forwarded the documents showing receipt of the funds  into the taxpayer’s account with the new custodian

We subsequently provided the IRS with all of the documents and the taxpayers’  2022 tax Account was corrected and the client was released from the amount  due.

We are getting ready to complete the investigation into and the amended returns for our client who has $189,000 riding on the outcome. This is a complicated situation, going back a number of years, but we are near a resolution and will report that soon. Please come back! In the meantime, call us at Arcadia Financial Services. These stories should prove that we will provide individualized and thorough representation to get you the lowest tax bill possible under the law.