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TAX TIP: READ YOUR RETURN!

April 03, 2008

This might seem like a self-serving thing for a tax preparer to say, but it's true: no matter how much you pay somebody to do your return, it's still your return. You are responsible for what's on it, and if it's grossly wrong, it's your problem.

A dentist from Sonora. California learned this hard lesson yesterday in Tax Court. Ronald Neufeld gave his business records, which he kept using the Quicken software program, to a preparer recommended by his brother in law. Something must have gone badly wrong. Mr. Neufeld's returns reported federal tax of $35,668 for 2001 and 2002, but the IRS figured it at $181,145. In imposing over $21,000 in penalties on Mr Neufeld, the judge spelled out the rules taxpayers are held to in relying on preparers (citations omitted, emphasis added):

The case law sets forth the following three requirements in order for a taxpayer to use reliance on a tax professional to avoid liability for a section 6662(a) penalty: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the tax adviser, and (3) the taxpayer actually relied in good faith on the adviser's advice. However, by itself, unconditional reliance on a preparer or adviser does not always constitute reasonable reliance; the taxpayer must also exercise "diligence and prudence."

...

With respect to the third prong of the [requirements], petitioners did not rely in good faith on Mr. Fisher's advice. Petitioners did not meet with Mr. Fisher or otherwise discuss with him their 2001 and 2002 joint Federal income tax returns or 2002 amended return, and they did not examine their returns before signing and submitting them to the IRS. Taxpayers have a duty to read their returns to ensure that all income items are included. Petitioners did not ensure that all of the income from Mr. Neufeld's dentistry business was included in their 2001 and 2002 joint Federal income tax returns.

So when your return comes back from the preparer, look it over and ask questions if something looks wrong. Preparers make mistakes too; if you don't read your return, the preparer's mistake could become your problem.

In a footnote, the Court identified a serious flaw in Mr. Neufeld's due diligence:

At trial, Mr. Neufeld stated that when he met Mr. Fisher for the first time, he thought he was a competent accountant and tax-preparer because "He had certificates on the wall and lots of them. He seemed to be really organized. It was a nice office. And so I had no reason to believe or to doubt his competence."

If a neat office were necessary to be a competent tax guy, I'd still be bagging groceries.

Check the Tax Update daily through April 15 for more 2008 filing season tips.

Cite: Neufeld, T.C. Memo 2008-79

Tags: tax court.

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