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TaxBuzz experts Q & A: What are the most horrific tax return disasters you have encountered with new clients?

by
Lee Reams II
on
1/3/2017
TaxBuzz experts Q & A: What are the most horrific tax return disasters you have encountered with new clients?

With tax season starting up later this month, we reached out to our network of CPAs and tax professionals who shared some of the biggest mistakes taxpayers make when it comes to tax time. Some of these mistakes are simple and easily preventable if you are working with a qualified professional.

Phoenixville CPA Christi Bender works with small businesses and individuals throughout Pennsylvania. Chisti shared some of her most unpleasant client dilemmas.

"I represented a client this year in a large audit. She is a single parent and had significant medical expenses for her daughter...the problem was her daughter was not a dependent on her return. So, even though her out of pocket costs for her daughter were over $10,000 and her daughter was still covered on her insurance - she couldn't take advantage of those deductions. The tax savings had been significant - and they were all lost. She was devastated. I have also had a number of clients come into my office who haven't filed returns in more than 4 years. These situations are always difficult because the reason that they stopped filing was usually financially motivated - and often emotionally painful as well. When they finally got to the point that they needed to file the resulting penalties and interest - in addition to the actual taxes owed - was overwhelming. The stress I watch these clients go through is horrible...and there is very little I can do to help them if they haven't been keeping good records, which is always the case."

Joshua Standley from DKK Accounting LLC highlights the need for professional help when it comes to rentals.

"Rental returns can be a nightmare. Many clients don't understand how to depreciate their rental dwelling and believe their DIY tax software is competent enough to handle it. Also, many business clients come to me and their records are a mess. Being organized can help more than you think."

Round Hill tax professional Terry O'Neill EA offered the following sage advice:

"Tax return disasters typically come to me via a letter from the IRS. That is, to say, a prospective client who finds him or herself in hot water has almost without exception prepared their own return(s) on DIY software or used other means to their temporary advantage. The result is a Notice from the IRS disagreeing with the taxpayer's earlier conclusions. One case, in particular stands out. This taxpayer had claimed ten exemptions on her W-4 withholding, Federal and State, for four consecutive years. She was only entitled to two. The result was little to no withholding from her paycheck. When April 15th rolled around she simply did not have the funds to pay the tab and ignored the subsequent and frequent Notices of demand for payment. When the IRS finally ran out of patience and levied her bank account she came to me for help. She was assessed over $60,000 in back taxes, in addition to owing the state over $23,000. She also had to suffer the embarrassment of the IRS going directly to her employer and issuing a "lock down letter" (this forces the employer to withhold taxes from a paycheck at zero exemptions until the debt has been paid in full). Although it's obvious this taxpayer found herself in this predicament of her own volition, if she had come to me in year one the snowball would have melted long ago."

Stevenson Ranch CPA John DePasquale saved a DIY prepared return by getting involved before it was too late.

"This year I had a new client, an engineer that was preparing his own taxes using Turbo Tax. He and his wife made good money, so they were in AMT. They also owned a couple of rental properties. On April 15 right after he e-filed his taxes, he realized he made a mistake to the tune of $17,000. He prepared his own amended return to get back the $17,000. The IRS to add insult to injury then sent him a notice and bill for an additional $45,000. One of their unexplained adjustments to tax. He was potentially out over $60,000 because he tried to save a few bucks preparing his own taxes. I was able to contact the IRS reverse the $45,000 assessment and get him the $17,000 back."

Hamilton Ohio CPA Lisa Foster highlights a common mistake we see when it comes to retirement account withdrawals.

"Taxpayers will take an early distribution from their retirement accounts and are not aware that they have to pay a 10% penalty tax, and they are not aware that taxes withheld from the distribution may not be enough to cover all the taxes due on the distribution. They should always consult with a tax preparer first."

Florham Park tax preparer Keith Ehrich from Ehrich Consulting Group summed up another DIY doozy:

"Which one do I choose...The most recent one was someone who was taking the 403(b) pre-tax amount and placing it on line 21 (other income) as a negative number. He then proceeded to take the home office deduction for both the taxpayer and spouse who were teachers. I asked the taxpayer if he had receipts to these expenses on the home office deduction even though he can't take the deduction and he replied with, "no". I'm pretty sure those number were made up."

Ocala CPA Elizabeth P Davies, CPA from Taxes Untangled, Inc. shared the following:

"Taxpayers don't understand how one mistake can snowball into a massive mess. As an example, a business expense can be categorized into 2 different areas. They can be either an employee business expense or a true business expense if self-employed. The employee business expense is a miscellaneous itemized deduction with a limitation of 2% of adjusted gross income. The self-employed business expense is a deduction on Schedule C - Sole Proprietorship. By deducting an employee business expense on the Schedule C, the taxpayer is overstating the expenses of that business and therefore reducing the self-employed taxes (social security and medicare taxes) and the related income tax."

As you can see, making even one small mistake can lead to tax bills in the tens-of-thousands of dollars. With the tax code changing in the coming years, seeking professional tax advice may be more valuable than ever.

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Lee Reams II

Lee Reams II

CEO

I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.

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