Wednesday, September 24, 2014

Don’t Underestimate the Value of a CPA


Over the last several years, many taxpayers have been going the do-it-yourself route when it comes to
tax preparation. While that may be a great option for many people, if you have an IRA or other retirement assets, you may want to consider sticking to your trusty CPA who can provide accounting services beyond the do-it-yourself computer programs. In Tax Court case, Bernard v. C.I.R. (T.C. 2012) 104 T.C.M. (CCH) 136, a married couple failed to correctly report their IRA distributions on their tax return. They used a popular tax preparation software program but, unfortunately, such programs cannot always determine whether or not the user is properly inputting data.
The petitioners in this case
mischaracterized $99,334.82 of their IRA distributions, incorrectly reporting them as proceeds of a sale and longterm capital gains. They also failed to report six additional IRA distributions totaling $26,637. The IRS determined a deficiency of $44,643 and a section 6662 penalty of $8,179. The case went to trial.

The petitioners received a deficiency notice from the IRS but erroneously claimed that because capital gains within their IRAs increased the value of those accounts, they were entitled to report the IRA distributions received as capital gains. Had the petitioners relied on the professional advice of a certified public accountant and a retirement distribution expert, they would not likely have encountered
such problems. The Tax Court stated that: “Petitioners did not rely on relevant authorities or competent tax advisers or otherwise make reasonable efforts to assess their proper tax liability.”

The retired couple in this case learned a lesson the hard way that ended up costing them nearly $10,000 in penalties and an unknown amount in litigation costs. Don’t forget they are also liable for the income tax owed on the deficient amount of IRA distributions that should have been reported as ordinary income in the first place.

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