Anyway to get this penalty off? Is it worth fighting?

Back in the days of Corona quarantine (April 2021) an unsupervised employee of mine missed a zero (out of five consecutive zeros) on a 1099-R. I did not see the backup before the return was efiled. Employee claims that he missed the zero because the paper came through the fax unclear and being that there were no taxes withheld he assumed the lessor amount. IRS sent a letter with penalties. Client paid the amount owed and the interest but also enclosed a letter from me asking for an abetment saying it was the first time the client made such a mistake, it was at the height of Corona, things were hectic etc. IRS wrote back that we failed to establish reasonable cause for understatement of income.

I could write back saying that client had reasonable cause and the taxpayer acted in good faith. Problem is that doing so would be squarely placing the blame on me and I'm uninterested in establishing myself as a unreliable tax preparer to the IRS. If it is going to cause me problems and audits of other clients I would rather just pay the fine for him (it IS my firm's mistake) and hope the issue get forgotten OTOH if the IRS catches a client of mine in a mistake they may turn their attention to me either way so perhaps I'm better off fighting it.

I am not going to to tax court over this.

How would you respond and proceed?

Welcome to the forum!

Firstly, it is imperative to establish a thorough review process to reduce the likelihood of such issues happening in the future. Otherwise, this situation could be the first of many.

Secondly, it is standard practice for the tax professional to pay both the penalties and the interest on behalf of clients in cases in which the penalties are the fault of the tax professional (as is the case here).

If the taxpayer was in compliance for the three tax years prior to the tax year in which the penalties/interest were assessed (ex. no penalties assessed in those prior tax years, etc.), then you may be able to request a "First-Time Abatement" (FTA) for federal income tax purposes (you must specifically request "First-Time Abatement" and not just abatement).

FTA is different than reasonable cause abatement as you are not required to show reasonable cause or provide any explanation whatsoever. You may request an FTA by obtaining a Power of Attorney and calling the IRS using the Tax Practitioner Line (FTAs may be granted by phone up to certain penalty amount thresholds -- apparently a few thousand dollars). Otherwise, you may also send a letter to the IRS requesting FTA.

Man oh man, been there, done that, to the tune of a $9,000 penalty. Our fault, the return wasn’t filed timely because our admin thought our fee wasn’t paid, but it was, months before the return was filed…late. Curses! The client was gracious, beyond gracious, and took the blame for half of the penalty.

If you are willing to pay the penalty, I would do so and move on. I liked the letter approach though, mentioning this was the client’s first of this type of mistake, I would’ve thought that would have done the trick. IRS has grown cold to such letters, or they are just rubber stamping “no” on penalty abatement requests.

Two things, you don’t have reasonable cause, the IRS will take the tact that reliance upon a tax advisor won’t cut the mustard. Secondly, I really don’t think the IRS keeps tabs on preparers the way you are assuming, however, I am not privy to OPR records, of course, but I really wouldn’t worry about it. OPR is looking for overt, intentional fraud, on returns we prepare. Mistakes are just that, mistakes, and hopefully anomalies.

Here’s what I’d do, and I am literally preaching to the choir. Don’t let a return get filed by staff before it has at least two sets of eyes on it, and make a policy to do so; literally write down the policy in your policy handbook and adhere to it. If OPR wants to launch an investigation (not likely), you’ll have your written policy, and a log (make a note you reviewed the return within the return notes). OPR will know you are not a willy nilly preparer, throwing caution to the wind. You are a careful and thorough preparer supervisor that every now and then….makes a mistake. Don’t beat yourself up over this, and know the Govt has much bigger fish to fry. Haven’t you heard? They are “Building Back Better!” Heavy sarcasm implied.

And, a side note, the FTA program does not apply to the Accuracy Related Penalty, if this is the issue at hand.

This seems to be exactly what FTA is meant for. You can still ask for it. https://www.thetaxadviser.com/issues/20 ... y2013.html

That article states the following, “ For individual and business taxpayers, the estimated tax and accuracy-related penalties cannot be waived under FTA.” An uderstatement of income of this magnitude would probably be the bulk of the client’s penalties, an accuracy related penalty, in my estimation.

Geez Len, it’s 11pm your time (EST right?); it’s too late to be posting. Wait, what am I still doing up? I gotta go to work tomorrow! Jeepers!

Back in the days of Corona quarantine (April 2021) an unsupervised employee of mine missed a zero (out of five consecutive zeros) on a 1099-R.

it IS my firm's mistake

Looks like client would have estimated tax payment penalties due on April 15 regardless; distribution of at least 100,000 with no withholdings.

However, it was your responsibility to correctly calculate the tax due and to verify any questionable documents.

I agree with AlexCPA that your quality control system has some holes in it.

Back in the days of Corona quarantine (April 2021) an unsupervised employee of mine missed a zero (out of five consecutive zeros) on a 1099-R. * * * Client paid the amount owed and the interest but also enclosed a letter from me asking for an abetment saying it was the first time the client made such a mistake, it was at the height of Corona, things were hectic etc.

Assuming that the penalty is the 20% accuracy penalty under 6662, I would recommend appeal. Reg. 1.6664-4(b)(1) states in part:

1.6664-4. Reasonable cause and good faith exception to section 6662 penalties * * *
(b) Facts and circumstances taken into account.---(1) In general.---The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. (See paragraph (e) of this section for certain rules relating to a substantial understatement penalty attributable to tax shelter items of corporations.) Generally, the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer. An isolated computational or transcriptional error generally is not inconsistent with reasonable cause and good faith. * * *

Edit Note: See #18 below.

EADave, I realized FTA would not apply when I woke up in the middle of the night. Oh well.

dave 829, that's great advice for OP.

I am not going to to tax court over this.

Based on your post, Tax Court is not an option. You need a "ticket" to get into Tax Court and you don't have one yet.

There is a case exactly on this issue not more than 10 years ago where the CPA firm missed a 1099. CPA firm could not blame themselves because taxpayers are supposed to look over their return before signing. This is not reasonable cause.

https://www.journalofaccountancy.com/is ... fense.html

Is reading the amount incorrectly the same as an omission?

Maybe if missing the zero is the essense of mistaking 10k for 100k. Is it not safe to say that whatever the amount was- that 90% of it was omitted. Would this be readily idefiable by the taxpayer had the taxpayer reviewed their return? If so, then blaming the CPA may be off the table.

OP hasn't told us of the magnitude of the omission. Just that the preparer "missed a zero." If, for instance, the 1099-R showed a taxable distribution of $130,000, and the preparer entered $13,000, then this is a rather large error that can't be blamed on the preparer. Recent court cases have held that if the error would have been discovered had the taxpayer made a "cursory review" of the return before it was filed, then you can't use reliance on the preparer as reasonable cause to avoid the penalty.

Thank you for your responses .

It was entered as $5,300 instead of $53,000. They are an elderly couple with very minimal other income aside from social security .

I do usually have an internal control system. The person doing the initial tax return data entry also adds up all the numbers on a separate Excel spreadsheet with different columns based on what the totals for each line on the tax return should be. The person who reviews the return marks the total in green if it equals the amount on the line on the tax return that the total was supposed to flow to. This was neglected due to the Corona chaos when this return was being done. Anyone who feels that this is generally a poor system of internal control should please advise.

I also look over the three year comparison and other such worksheets for possible error signs but $5,300 on a 1099-R is actually more consistent with their usual income than $53,000

OP said he missed one zero out of five consecutive zeroes. Now it seems to be he missed one out of three consecutive zeroes. Not s bad, but still same issues.

Actually is was five there were two zeros after the . for zero cents

Penny saved, penny earned.

I'm going to reverse myself on this. $47,700 of omitted income for clients who have "very minimal other income aside from social security" hits the "cursory review" bell, so I don't recommend appeal. Let your E&O insurance pay for the penalty and chalk it up to a learning experience that returns need to be more carefully reviewed so that such errors don't occur in the future.

Anyone who feels that this is generally a poor system of internal control should please advise.

I don’t love it. If the preparer wants to go back through his inputs, and mark the computer screen with green checkmarks, fine. But then he can eliminate those markings. The reviewer should be reviewing the documents and putting the ultimate green-markings on the computer screen. I don’t see the need for a spreadsheet. Anyway…a few thoughts:

1. What exactly does a “cursory review” entail?
2. The couple is elderly.
3. The elderly taxpayer will assert that he did give the return a cursory review. (And you can detail out what that cursory review specifically entailed).
4. The elderly couple retained a qualified tax professional.
5. Return was prepared in the middle of Corona Chaos.
6. The preparer’s firm has review system. However, due to Corona, and employees working remotely (most likely), there was an internal miscommunication as to the status (reviewed or not) of the return.
7. It was an honest oversight. It was a key-punch error. There was no willful attempt to evade. (This matter would obviously be caught by the IRS since it involving a 1099-able transaction. So it is clear it is an honest mistake).
8. The amount input in question was similar to the “usual” 1099R amount. (And you can provide a history. And you can likely state that the numbers on the return your firm prepared were consistent with the 3-year history).
9. The penalty was promptly paid.
10. The size of the penalty would be detrimental to the elderly couple’s financial well-being.
11. The taxpayer has an excellent tax payment and filing history (at both the federal and state levels).
12. Find a way to throw in something like, “The taxpayer exercised ordinary business care and prudence.”

Query: Was a tax projection done for this client?

Query: Was there a sizeable refund with respect to this return?

Query: What was the Fed withholding on the $53,000 1099R? Does that amount exceed $5,300?

Query: How long has this guy been a client? If a long time, then mention that. And mention that there’s been no similar issues in the past. Thus, not only did the taxpayer use a qualified firm, he used a qualified firm that he has a solid history with.

So, to answer your question: Yes, you can fight it. This stuff is highly subjective. Part of this depends on the mood of the person that reviews your submission. But as you can see, you need to spend some time with it. You want to throw as much as possible against the wall, and hopefully, some of it will stick. Read the two-part article (Tax Adviser) on the Accuracy Related Penalty.

I'm going to reverse myself on this.

Well, we are dealing with an elderly couple here…

I’d also like to know the details of the $53,000…as in the date(s) on which it was distributed.

Could it be that a sizeable chunk took place very early in, or very late in, the year…such that the taxpayer thought said large chunk hit in a prior year or in the succeeding year?

We are dealing with elderly taxpayers here…

What might be clear as day to me and you might not be so clear to an elderly couple. (Especially if memory issues are at play). And I do believe the “review your tax return” standard is applicable to the specific taxpayer, not to a hypothetical “prudent person.”

1. What exactly does a “cursory review” entail?

There are examples in Owen, T.C. Memo. 2012-21
https://scholar.google.com/scholar_case?case=15760875854440835811&hl=en&as_sdt=6&as_vis=1&oi=scholarr

and Slough, 144 T.C. 306 (2015)
https://scholar.google.com/scholar_case?case=17681485042655403819&hl=en&as_sdt=6&as_vis=1&oi=scholarr

and Walton, T.C. Memo. 2021-40
https://scholar.google.com/scholar_case?case=1610479900723106146&hl=en&as_sdt=6&as_vis=1&oi=scholarr