Tax tip: Don’t leave $3.4 million of income off your 1040

June 15th, 2011 by Joe Kristan

A private equity player hired a tax preparer to do his 2006 return. He picked up his return showing $29.2 million of adjusted gross income on October 15, the final extended due date. Unfortuantely the preparers left a $3.4 million gain off of the return, even though they had his 1099 for it. In due time the IRS computer matching caught the omission, and the IRS hit the taxpayer with a $100,000 penalty for leaving off the gain.
The Tax Court said hiring a preparer didn’t get him off the hook:

Mr. Woodsum terminated the swap ahead of its set termination date because his watchful eye noted that it was not performing satisfactorily as an investment. That is, when his own receiving of income was in question, Mr. Woodsum was evidently alert and careful. But when he was signing his tax return and reporting his tax liability, his routine was so casual that a half million-dollar understatement of that liability could slip between the cracks. We cannot hold that this understatement was attributable to reasonable cause and good faith.

The case reminds us that the law holds the taxpayer accountable for what’s on the return, paid preparer or no. It also reminds us that it can be dangerous to wait to the last minute to file. A complicated return picked up on October 15 is a mistake waiting to happen.
Meanwhile, I suspect that the preparer’s malpractice carrier will be involved shortly, if it isn’t already.
More coverage:
TaxProf
Linda Beale
Russ Fox
Peter Pappas
Cite: Woodsum, 136 T.C. No. 29

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