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E&O potential claim

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#1
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I just had an e-mail from a client's new tax preparer informing me that last year I overlooked taking a General Excise Tax Credit on the purchase of two vehicles. The credit would be about $2500. With everything else happening, I don't feel like I'm in a position to just refund to them $2500 and it's too late to go back and amend the tax returns to apply for the credit. I haven't talked to them yet, but I have pulled out my E&O contract. The carrier is closed for the day now. Is this the kind of thing an E&O polcity will cover? I know I need to talk to them, but it would help put my mind at rest if that is a possibility. I've never filed a claimn and I think I'm so knackered by this right now, I'm not making sense of the policy.
 

#2
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Why is it too late to amend?
 

#3
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It has to be claimed by 12 months after your taxable year. This should have been on a 2018 return, and claimed or amended return by 12/31/19.
 

#4
Wiles  
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I wouldn't take any actions, including contacting your insurance company, based on an e-mail from another preparer. They are not a party. The fact that the prior client did not reach out to you directly gives me a clue they don't have the time/guts to pursue the claim.

I am not familiar with the Hawaii GET filings. It seems that if something was filed, then you would have 3 years to amend. Was it your responsibility to file this 'something'?
 

#5
sjrcpa  
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Our E&O carrier wants us to notify them of anything that might possibly lead to a claim.
That said, what is your policy deductible? Ours is way more than $2,500.
 

#6
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I'd at least notify E&O of the risk--mine requires me to notify them as soon as I find out of something that could lead to a claim (guessing sjrcpa and I use the same E&O). Simply notifying them does not do any harm with your rates.

My deductible is $1k, so it would be a situation of verifying the credit should have been claimed, then talking with the client instead of the new tax preparer, and weighing deductible and potentially higher E&O premiums vs. paying directly. For $2500, I would probably just pay the client. Do you know why the client left? That could come into play, as well, particularly if it was not an amicable split.
 

#7
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Agree with the consensus.

Don't respond to the new preparer's email.

Notify your E&O insurance carrier of the situation.
 

#8
JAD  
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I usually agree w/ ManVsTax, but disagree on this one.

Do the right thing. Email new preparer and tell him/her that you will respond to former client directly.

If your deductible is less than $2,500:

Contact former client and tell him/her that you understand that there is a mistake, and you are following up on the issue. You will be in touch with insurer and will get back to client. Don't say sorry yet.

Notify E&O carrier. They will decide whether to pay up or defend you. If they pay up, then tell former client that you apologize for the inconvenience.

If your deductible is more than $2,500:

Contact former client and tell him/her that you understand that you made a mistake, and you are sorry. Write the check for $2,500. You don't have a choice, and you need to do the right thing so that you can wake up with yourself in the morning.

Unless this isn't totally your fault. Did you have the information to know that client was entitled to the credit, such as knowing that the client purchased two new cars? If your fault is questionable, then maybe a conversation with former client is in order, with some lesser amount paid in settlement.
 

#9
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The new preparer is also the client's paramour with whom he had a baby last year. She has started preparing taxes and, from what he told me, has done so in the past, I'm just not sure how much. It was my responsibility to prepare a proper tax return, which would include completing the form to aply the excise tax credit. It was an amicable change over.
 

#10
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CornerstoneCPA wrote:I'd at least notify E&O of the risk--mine requires me to notify them as soon as I find out of something that could lead to a claim (guessing sjrcpa and I use the same E&O). Simply notifying them does not do any harm with your rates.

My deductible is $1k, so it would be a situation of verifying the credit should have been claimed, then talking with the client instead of the new tax preparer, and weighing deductible and potentially higher E&O premiums vs. paying directly. For $2500, I would probably just pay the client. Do you know why the client left? That could come into play, as well, particularly if it was not an amicable split.


An E mail is grounds for a potential claim? I would say not, if the client contacted me, I would agree.

But in my experience HOW THE HECK are we supposed to know if they bought a car worthy of a credit?

All clients of mine that purchased Electric vehicles have told me. Im curious how this over sight happened.
 

#11
Wiles  
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Agreed. Do you have a client questionnaire that asks about this? Did they answer no or blow off the questionnaire?
 

#12
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southparkcpa wrote:
An E mail is grounds for a potential claim? I would say not, if the client contacted me, I would agree.

But in my experience HOW THE HECK are we supposed to know if they bought a car worthy of a credit?

All clients of mine that purchased Electric vehicles have told me. Im curious how this over sight happened.


The new tax preparer is the former client's paramour. That would be reason for me to think a claim could arise. If a truly independent tax preparer sent the e-mail, it is still "notice" that an E&O claim could arise since you are now aware of a potential mistake. That is why I said I would first want to verify eligibility for the credit. If valid, then I would alert E&O.

I've had clients claim they were entitled to vehicle credits when they clearly did not satisfy the requirements. Agree with you though, I've never had one NOT tell me if they purchased a vehicle (or anything else) that they believed entitled them to a credit--salesmen are fantastic at giving tax advice in an attempt to close a sale. I remember a salesman telling my client all the details of a Sec. 179 expense for their $100k Range Rover. :roll:
 

#13
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CornerstoneCPA wrote:
southparkcpa wrote:
An E mail is grounds for a potential claim? I would say not, if the client contacted me, I would agree.

But in my experience HOW THE HECK are we supposed to know if they bought a car worthy of a credit?

All clients of mine that purchased Electric vehicles have told me. Im curious how this over sight happened.


The new tax preparer is the former client's paramour. That would be reason for me to think a claim could arise. If a truly independent tax preparer sent the e-mail, it is still "notice" that an E&O claim could arise since you are now aware of a potential mistake. That is why I said I would first want to verify eligibility for the credit. If valid, then I would alert E&O.

I've had clients claim they were entitled to vehicle credits when they clearly did not satisfy the requirements. Agree with you though, I've never had one NOT tell me if they purchased a vehicle (or anything else) that they believed entitled them to a credit--salesmen are fantastic at giving tax advice in an attempt to close a sale. I remember a salesman telling my client all the details of a Sec. 179 expense for their $100k Range Rover. :roll:


or the "I bought an energy effcient washing machine and the sales person told me I can get a credit"......
 

#14
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A little more research - well a lot more research, this morning. One of the vehicles was purchased very late in 2018, and I have an e-mail from the client telling me it wasn't used for business untill 2019. That helps. The one vehicle is eligible for the credit.
 

#15
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southparkcpa wrote:
or the "I bought an energy effcient washing machine and the sales person told me I can get a credit"......


Basically. There is a solar panel company here that has wanted to "educate me" (their words) on available tax credits for installing solar panels. I know what they are, and they are distributing a bunch of BS to their customers by saying the credits can offset 90% of the initial cost. There is a reason I did not and still do not engage with them.
 

#16
irc162  
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Are you absolutely positve the client was entitled to the credit? It sounds like this happened awhile ago. Its easy to forget the circumstances---inlcuding factors that might have limited the taxpayer's ability to claim the credit.

I always get a sinking feeling when I get one of those "You made a mistake on my tax return" calls or emails. But often, when I go back through the file, I realize that it wasn't a mistake at all, even though it might look that way to a third party.
 

#17
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irc162, the client should have gotten the credit for one of the vehicles, but since the second one wasn't put in service until 2019, it doesn't qualify for the 2018 credit.
 

#18
dsocpa  
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Communicate with the client after you have researched the exactly what the surrounding circumstances may have been. Was this an oversight or out right negligence? Possibly some miscommunication. I wouldn’t go rushing to the assumption you are entirely, or even partially, at fault actionbsns. And the client might work with you, maybe split the amount of the credit he would have received for the 2nd vehicle, refund a portion of the fee he paid, I don’t know but get a feel for how he wants to remedy the situation first before filing a claim, etc. Save yourself a potential premium increase and assumption that you are entirely at fault here. I hate admitting I made a mistake but even more I hate when someone else makes one and tries to cover it up. If you had a good relationship I think your former client will appreciate your honesty. It shows a great deal of integrity to say “I made a mistake” and that trust is what keeps clients coming back. After all, depending on what your engagement letter says, he was supposed to look at the return before actually signing it.
 

#19
Joan TB  
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Action: you reference IRS 162, but apparently this credit is about the Hawaii GET. Does the vehicle have to qualify under IRC162 in order to be eligible for the Hawaii GET?

Since apparently only one of the vehicles would be eligible for the credit, now the supposed ~$2500 claim is down to half... ~$1250? That helps.
 

#20
Joan TB  
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DSOCPA: You said "After all, depending on what your engagement letter says, he was supposed to look at the return before actually signing it."

Can't imagine what the engagement could possibly say that would relieve the TP from the requirement to review the tax return. That is why I review the returns with my client before they sign. Some want a lot, some want a little, but the offer is always there. My business model (here in my small town) is almost all locals who come to my office. I am happy to handle it this way.

If a preparer was doing lots of returns via the internet, I certainly would NOT recommend having such wording in the engagement letter!
 

#21
dsocpa  
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You are absolutely correct Joan TB. What I was trying to say, and may not have gotten across, is that fact could help with the E&O carrier, should the matter escalate, but more important not to beat yourself up. Although it is a given the client is supposed to review the return before signing, we all know that doesn't always happen. It sounds as though actionbsns relationship with the client was a good one and to be fair I would give him a chance to resolve together. Sometimes clients surprise us - pleasantly.
 

#22
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As my lawyer always likes to say, include it in a contract if for no other reason than to further muddy up the waters enough to make a client not pursue a claim, or to drop it once their own lawyer dives into the signed contract's language. Between my E&O carrier's engagement letter, IRS due diligence and required information forms, and additional agreements I have decided to include, my engagement packet for individuals is 33 pages. I do not feel the least bit bad about it or find it unreasonable--it is high risk and there are a lot of terms associated with it. Just as lack of understanding of the law is not an excuse for violating it, neither is not reading a contract's language unless it was clearly written to be confusing.

When I send the returns to my clients, I tell them they need to review and to let me know if they have any questions. Based on lack of questions, overall, I am certain almost none of them even glance at it, other than to know what they owe or will be refunded. SMH
 


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