TAX TALK
More Tales of Woe Resulting from “Getting What You Paid For”
By Timothy E. Kelly,and Kevin W. Rego
Last month we discussed the misery of police officers and deputy sheriff’s who allowed themselves to be talked into excluding their ordinary wages, or even their non-disability retirement from income based upon their workers compensation disability percentage by dishonest or incompetent tax preparers. We spoke of how the IRS is able to assess tens of thousands of dollars in back taxes, interest and penalties by going back multiple years, and creating a monstrous tax liability from which not even bankruptcy may provide a refuge.
This month’s horror story is similar, in that in each case we have seen its terrible effects, the police officer in question was cutting corners by seeking a less expensive alternative to hiring a competent attorney.
In the two recent cases we encountered, it all began with a causal statement. The statements were essentially identical. Recently divorced, the officers in question, referring to their ex-spouses, told us proudly and with a smile, “That **** may have gotten a piece of my pension when I pull the pin, but (he/she) won’t get a dime for a long time because I’m not retiring until I’m (fill in advanced age well beyond 50 here).”
Well, it doesn’t quite work that way. “Did your attorney tell you this?” we ask. “No, I did not have to pay for an attorney, I went to a [some type of non-attorney consultant] who helped me fill out the forms,” is the predictable response.
Better fasten your seatbelt. The law says your ex starts getting paid when you reach normal retirement age, which for the vast majority of us is fifty, and not at some later date if you choose to delay retirement. But wait, it gets better. Because you are not yet retired, your retirement system won’t be paying your ex, you yourself will be paying your ex out of your own pocket. But wait, it gets better still. It’s not even deductible! So if you do not buy out the ex, or have him/her withdraw their proportional share and do with it whatever they want, chances are you will be required to pay them out of your very own after tax dollars when you hit retirement age!
Tax Court Declines to Accept “Do It Yourself” (DIY) Defense
It did not quite work out the way it was supposed to. In the United States Tax Court, in Lam v. Commissioner, T.C. Memo. 2010-82 (Apr. 19, 2010). Mrs. Lam sought to save some money and prepared the family taxes using one of the best known self-operated tax software programs. The name of the software is mentioned in the case but is not relevant for our discussion. Making a similar argument as that successfully used by the current Secretary of the Treasury, the Lams asserted they were entitled to rely on the contents of the software box and should not be assessed penalties for negligently preparing their tax returns.
The Tax Court found that the “box” did not qualify as a tax professional, and therefore the Lams were wholly responsible for the positions taken in their tax returns.
So be forewarned, if you have a simple return, DIY software is usually adequate, but every tax professional has stories of DIY software producing results which either substantially understated or overstated real tax liability. Legions of IRS examiners audit these returns because they so often represent “low hanging” fruit. Not only are there easily picked-up egregious errors on many self-prepared returns, but it is likely the taxpayer will show up without some annoying representative who actually knows the tax law. Examine your tax position each year, and look carefully at the cost-benefit analysis involved in deciding to forgo professional advice in one of the law’s most complex areas.
Tim Kelly is an attorney certified as a specialist in taxation law by the Board of Legal Specialization of the State Bar of California, a distinction held by less than 500 of the state's 200,000 attorneys. He is a retired police sergeant with 30 years experience and an honors graduate of the McGeorge School of Law.
Kevin W. Rego is also an attorney an attorney certified as a specialist in taxation law by the Board of Legal Specialization of the State Bar of California, and is admitted to practice before the IRS and all California courts. He is an active police officer with nineteen years experience and a graduate of the Santa Clara School of Law. Tim and Kevin practice in the area of individual tax planning and litigation, appearing on a regular basis before the IRS, the US Tax Court and federal district courts in California and throughout the nation. They may be contacted at tim@timkelly.com
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