Credit for Prior Year AMT - BIG ERROR

Technical topics regarding tax preparation.
#1
BFStax  
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My client just sent me an audit notice from IRS asking for proof of AMT paid in prior years. They are adjusting the 2020 1040 $10k + $3k in penalties/interest. I explained the following sequence of events:
1. The first year return I prepared for them was 2017.
2. During the first year prep I asked for copies of 2015 and 2016 returns.
3. On 2015 return it had a credit carryforward of $110,000 on form 8801 and 2016 had another carryover to 2017.
4. I prepared 2017-2020 returns based on this information.
5. After speaking with client about the audit notice I requested copies of prior years to try and track down when this credit happened.
6. On 2012 1040 there is a small AMT tax of $450
7. On 2013, I discovered what appears to be a huge error. Form 8801 line 19 "2012 credit carryforward. Enter the amount from your 2012 Form 8801, line 28". On this line is $122,051. The problem is on the 2012 return there is NO form 8801. This amount matches exactly to form 6251 line 28. Big difference between 8801 line 28 (credit carryforward) and 6251 line 28 (AMTI).


All returns 2012 - 2016 were prepared by the client on TurboTax.
Total AMT credits taken in 2013-2020 is $51,000.

I can't imagine that form 8801 is prepared by the taxpayer inside of TurboTax. It's possible that TurboTax itself made this error.

For starters, I am going to place a call with my insurance carrier and notify them of the situation.

But my questions are about my own liability and what the taxpayer should do. Looking back, I should have asked for copies of those earlier returns to try and find this extremely large credit to make sure it was accurate. An AMT credit that size seems too big. But on the other hand, these are filed tax returns and am I responsible for verifying every single line on prior tax returns? How far back am I supposed to go? I prepared 2017 based on the information I had and for all I knew the client might have been extremely rich with wildly successful businesses before he hit hard times and came to me for tax help.

Thoughts on how to proceed?
 

#2
AlexCPA  
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Try to relax. In my view, you did your due diligence in reviewing the prior year returns from tax years 2015 and 2016 and reasonably relied on the information provided. Accordingly, my perspective on this matter is that you have extremely limited, if any, liability in this situation.

Per your point, we as tax preparers cannot verify every single amount included on prior year income tax returns. That said, given that taxpayers who use TurboTax and other self-preparation programs are notorious for screwing up their AMT/AMT credits (especially when switching from/to having a professional preparer), it's always helpful to inquire about the nature and specific triggering events that resulted in the AMT credit.

I would explain the situation to the client, indicate that you relied good faith on their prior year income tax returns (which were incorrect) and gauge their reaction. Depending on how they see the situation, that could determine how this matter plays out.
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#3
EADave  
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Just to add to Alex's excellent response, I would also inquire as to the source of the AMT Credit. It's possible there was an event that created the large AMT carryover. I've had a number of clients that work for a specific company that were granted ISOs, some dating back before 2010, which created massive AMT events, as they exercised and held the ISOs beyond the end of the year. Some were TurboTaxers, and TurboTax did not seem to handle the carryover properly from what I recall, whether or not in the client's favor.
 

#4
AlexCPA  
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EADave wrote:Just to add to Alex's excellent response


Thanks for the kind words! :D
Even more of my antics may be found on YouTube:
https://www.youtube.com/channel/UCXDitB ... sMwfO19h7A
 

#5
BFStax  
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EADave wrote:Just to add to Alex's excellent response, I would also inquire as to the source of the AMT Credit. It's possible there was an event that created the large AMT carryover. I've had a number of clients that work for a specific company that were granted ISOs, some dating back before 2010, which created massive AMT events, as they exercised and held the ISOs beyond the end of the year. Some were TurboTaxers, and TurboTax did not seem to handle the carryover properly from what I recall, whether or not in the client's favor.


The source of AMT was mostly unreimbursed employee expenses on form 2106 of $13k and state taxes on Sch A of $20k. AGI was only $142k. AMT in 2012 was $442. That's it. No stock options exercised or anything like that that I know of, at least not reported on the tax return. It just seems very strange that AMTI was mistaken for AMT credit carryforward!

We can't troubleshoot TurboTax and I tell my prospective clients that all the time, but this just seems crazy. Am I missing something? I'm still waiting for my insurance carrier to respond to see what their thoughts are.
 

#6
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To have an AMT credit c/o, the item generating the AMT credit must be a deferral ( items affecting more than one year of tax) item, e.g. excercised ISO stock options or depreciation. AMT exclusion items ( items affecting only one year of tax) do not generate an AMT credit such as state and local taxes and misc itemized deductions(prior to 2018). See instructions for Forms 8810,66251 for years prior to 2018. Does not appear client had AMT credit c/o.
 

#7
novacpa  
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Don't look a gift horse in the mouth, if you are lucky its 2020 only. Pay it Pronto.
What to do about the other open years, ah--duty to recommend to amend.
I don't see any liability to you.
Go buy a 750-Johnny Walker, enjoy it-send a big bill.
 

#8
BFStax  
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TAXMASTER wrote:To have an AMT credit c/o, the item generating the AMT credit must be a deferral ( items affecting more than one year of tax) item, e.g. excercised ISO stock options or depreciation. AMT exclusion items ( items affecting only one year of tax) do not generate an AMT credit such as state and local taxes and misc itemized deductions(prior to 2018). See instructions for Forms 8810,66251 for years prior to 2018. Does not appear client had AMT credit c/o.


Exactly, from what I see they don't have these deferral items.

novacpa wrote:Don't look a gift horse in the mouth, if you are lucky its 2020 only. Pay it Pronto.
What to do about the other open years, ah--duty to recommend to amend.


I actually made a typo in the first post. It's for 2019. 2020 actually has a very similar credit of $10k. This was my first thought too, which is to be thankful it's only one tax year they are auditing and to pay and amend all other years. It's still a whopping tax bill overall of $50k for all years.
 

#9
mariaku  
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Check what your engagement letter for their 1st year as your client said. Mine normally says: "Prior year review:
We will not verify elections or carry-forward items represented in prior tax returns prepared by others before you became a client in our office. Likewise, we will assume that your previously-prepared income tax returns are complete and accurate and will not audit or otherwise verify information contained in them. Our review of the prior year’s tax return will necessarily be limited and may not find all errors. We will, however, bring to your attention any errors that we find. If you ask us to prepare amended tax returns and address any other matters arising as a result of any error, and we agree to amend the returns, we will confirm this engagement in a separate agreement."
 

#10
BFStax  
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mariaku wrote:Check what your engagement letter for their 1st year as your client said. Mine normally says: "Prior year review:
We will not verify elections or carry-forward items represented in prior tax returns prepared by others before you became a client in our office. Likewise, we will assume that your previously-prepared income tax returns are complete and accurate and will not audit or otherwise verify information contained in them. Our review of the prior year’s tax return will necessarily be limited and may not find all errors. We will, however, bring to your attention any errors that we find. If you ask us to prepare amended tax returns and address any other matters arising as a result of any error, and we agree to amend the returns, we will confirm this engagement in a separate agreement."


This is pretty good and I will add something similar going forward. As of right now, my engagement letters do not have anything to this effect. I spoke with my insurance provider who confirmed I have zero liability. Client has already decided to pay 2019 and amend 2020. I recommended amending all years but they are deciding if they want to do 2013-2018.
 

#11
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Interesting error. I wonder if it is TurboTax carrying forward the wrong number, or if the taxpayer started from scratch for 2013 and typed in the wrong number?

I have seen some very interesting things done via TurboTax self-prepared returns that I cannot attribute to TurboTax error.
 


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