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How Doing a Little Investigative Work Helped a Client

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I’m not saying that I don’t make mistakes. I certainly make my fair share of them.

I complete all 4,000 tax returns that go out of my office every year. How our tax return process works is that I do the return, then that return goes through a review process, where three different people look it over and check for different things. If everything passes that test, the return then comes back to me and I look at the differential between the previous year and current year. If there is a large differential of income or expense, I contact the client and ask why. After all, if the return is going to be examined, it will be based on that differential.

When I have been satisfied, I keep their explanation in their tax file. I then check the return for things like elections to make sure they are made. Finally, I put the finishing touches on the return, adding policies, director’s meetings, whatever the return calls for, and then the return is encrypted and sent out to the client.

Even after all of that, I make mistakes. However, I saw something this year from another accountant that left me shaking my head.

When I meet with a client for the first time, I ask them to bring me the last three years’ tax returns because these are the open years, meaning these are the returns that the IRS can examine. This client was a C corporation and they had a net operating loss (NOL) in 2015.

Just to review the rules of NOLs, they are supposed to be carried back two years unless an election is made to forego the carryback period, and then they are carried forward for 20 years.

The company paid $15,000 in taxes in 2013, $7,000 in taxes in 2014, and had an NOL of $89,000 in 2015. The preparer elected to forgo the carryback period. The question is why? If the $89,000 NOL was carried back to 2013, there would be a refund of $15,000. Then if the remaining NOL was carried forward to 2014, there would have been a refund of $3,000. Where we stood now, this $89,000 had to be carried forward to 2016, which also had an NOL. The previous accountant knew of the current NOL, or should have known of it, because he did the accounting work for the client.

It’s not like I can call the old accountant and ask him why he carried this NOL forward. I wouldn’t receive that phone call well if it was me. Even with professional courtesy, the call could come off as condescending and the preparer might suspect that I was asking the client to file a malpractice case against him.

So, the question that I had to research was: Can I amend the 2015 tax return and nullify the election? This lead me to Internal Revenue Code Section 172(b)(3):

Section 172(b)(3):

(3) Election to Waive Carryback Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

So, the election is irrevocable. Not wanting to let it go, I had the client sign a Form 8821, Tax Information Authorization, so I could pull a transcript of the return to see if the election had been attached.

It was my lucky day. The return had not been filed. That is to say, the IRS had no record of the return being filed. Not believing this, I called the Tax Practitioner Priority Line, waited on hold for an hour, and hoped that I didn’t get the “courtesy disconnect.” Sure enough, the return had not been filed. I called the client and once I explained the situation to him, he was excited.

The client called the former accountant, and as it turned out, the return was to be filed in September. The accountant had emergency shoulder surgery and was out of the office until after e-file closed out. So, this return had not been filed. He offered to e-file the return, but the client adamantly declined.

What was my lesson from all of this? In this case, we were talking about leaving $18,000 on the table. That is a lot of money. Just because I received a return showing that the carryback period was waived doesn’t mean that it was.

I guess that a little investigation doesn’t hurt anyone. Hope the client doesn’t mind my bill.


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