Author Topic: A tax question for CPA's or tax professionals  (Read 3476 times)

Miss Prim

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A tax question for CPA's or tax professionals
« on: March 30, 2017, 08:51:48 AM »
Hi all.  I actually volunteered to do income tax returns for low income people this tax season.  I have come across a dilemma concerning a second home that was sold last year.

I am not quite finished with my taxes for last year, but in 2016, my sister-in-law and my husband and I sold a second home and purchased another one.  This home was never rented out.  My sister-in-laws accountant told her that she doesn't have to pay capital gains on the sale.  As far as I know, this is not true and when I pointed it out to her, she said she trusts her accountant and his "fancy" tax program and she got back money, so that is all she cares about. 

I usually try not to cheat on my taxes because I like to sleep at night, but I don't know of any way you could legally exclude capital gains on a second home.  Did I miss some change in the tax law or is her accountant full of shite?  I am wondering if her accountant actually figured that the IRS wouldn't catch this because as far as I know, nothing was reported to the IRS.  There was no mortgage on the house and the buyer paid cash for it.  We received a check from him for 42,000 for our half of the ownership.  We did buy another second home together and we now have a small mortgage on that. 

Any help would be great.                            Thanks,  Miss Prim

Sibley

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Re: A tax question for CPA's or tax professionals
« Reply #1 on: March 30, 2017, 09:28:11 AM »
Probably not right. You do your taxes right, and just tuck it away that your SIL is willing to look the other way at possible illegal/unethical actions. Move on.

CareCPA

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Re: A tax question for CPA's or tax professionals
« Reply #2 on: March 30, 2017, 09:31:06 AM »
The gain exclusion on homes is only if it is your main home, and you lived in it for 2 of the past 5 years. See:
https://www.irs.gov/pub/irs-pdf/p523.pdf

tralfamadorian

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Re: A tax question for CPA's or tax professionals
« Reply #3 on: March 30, 2017, 09:32:27 AM »
... her accountant full of shite...

Not a tax professional but this.

There are only two situations in which capital gains may be excluded:
121 exclusion
1031 exchange

From the information you gave, neither applies so there you go. 

GU

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Re: A tax question for CPA's or tax professionals
« Reply #4 on: March 30, 2017, 09:44:49 AM »
The gain exclusion on homes is only if it is your main home, and you lived in it for 2 of the past 5 years. See:
https://www.irs.gov/pub/irs-pdf/p523.pdf

This.  And just to avoid any confusion because another poster brought it up, if she acquired the home via a like-kind exchange, then you may not be eligible for the gain exclusion upon sale.

Cpa Cat

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Re: A tax question for CPA's or tax professionals
« Reply #5 on: March 30, 2017, 09:54:04 AM »
What is your basis in the home?

Miss Prim

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Re: A tax question for CPA's or tax professionals
« Reply #6 on: March 30, 2017, 10:24:29 AM »
Basis is around $42,000, don't have the figures right in front of me and that is taking off everything done to the place including stuff that is questionable as more maintenance and repairs than improvements.  Also took off everything we did before selling.  So, about $21,000 capital gains for each 1/2 (SIL owns 1/2). 

Why would a tax professional do that?  Does he not know that he is wrong, or just doesn't care?   Seriously, I was hoping that I was wrong about this as this is causing me to lose my ACA subsidy, because it is pushing our income up too high!  We did not plan on selling, but something came up for sale that was a lot bigger than our little place, and since this is a family cottage, we now have enough room for all our extended family. 

Thanks for all our your help.  I kind of thought I was right.

                                                                             Miss Prim

Proud Foot

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Re: A tax question for CPA's or tax professionals
« Reply #7 on: March 30, 2017, 10:38:11 AM »
How did her accountant calculate her basis?  Maybe I'm misunderstanding but if you received a check upon the sale for $42,000 and your basis is around $42,000 then there would be minimal capital gains.

Miss Prim

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Re: A tax question for CPA's or tax professionals
« Reply #8 on: March 30, 2017, 10:45:14 AM »
Sorry, I was not very clear in my post.  We sold the house for $84,000.  My SIL owned 1/2 and my husband and I owned the other half, so we each got a check for $42,000.  $84,000 minus purchase price and improvements is $42,000 gains divided by 2 so each need to pay capital gains on $21,000.

Sorry, it is confusing!                         Miss Prim

Edited to say, sorry, Total basis is $42,000 which would be purchase price plus improvements.

PS. I need to take a nap!  I have edited the numbers 3 times!
« Last Edit: March 30, 2017, 10:50:12 AM by Miss Prim »

CareCPA

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Re: A tax question for CPA's or tax professionals
« Reply #9 on: March 30, 2017, 11:07:14 AM »
...
Why would a tax professional do that?  Does he not know that he is wrong, or just doesn't care?   ...
I have run into more than one who was either ignorant or didn't care. Work I see (even from other CPAs), is often just blatantly wrong. It's incredibly frustrating to see other professionals either not have the education to do what they're doing, or not care enough to get it right.

Miss Prim

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Re: A tax question for CPA's or tax professionals
« Reply #10 on: March 30, 2017, 11:53:45 AM »
...
Why would a tax professional do that?  Does he not know that he is wrong, or just doesn't care?   ...
I have run into more than one who was either ignorant or didn't care. Work I see (even from other CPAs), is often just blatantly wrong. It's incredibly frustrating to see other professionals either not have the education to do what they're doing, or not care enough to get it right.

I agree with you frugalgrad!  The tests I took to be a volunteer tax preparer were very hard, but I studied like crazy to pass them so I could help people.  The woman who checked all of our tax returns was amazing in the amount of knowledge that she had, but she was kind of like me, worked in another field for her career, but liked doing taxes and had been volunteering for 8 years.  All the other preparers and I worked very hard to do accurate returns.  Obviously we were not CPA's but we were prepared to do taxes within the scope of the program.

I guess I will just pay my taxes owed and get on with it!

                                                                           Miss Prim

Cpa Cat

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Re: A tax question for CPA's or tax professionals
« Reply #11 on: March 30, 2017, 01:02:22 PM »
It comes up fairly regularly that someone will ask me why they have a different outcome from their friend/family member who has a very similar tax situation as them.

The #1 answer to why the outcome was different is that their tax return is not actually identical to yours. It's possible that your family members had a capital loss from a prior year, or there's an NOL on the return reducing their income, or a K-1 with a loss on it, or they make less than you think and some or all of their gains ended up in the 0% bracket. There are legitimate reasons why they might not be paying tax on a capital gain.

The #2 answer to why the outcome was different is that an error was made. Did they report the basis incorrectly? Did they misunderstand something their accountant said (just because they had a refund doesn't mean they didn't pay tax)? Was their accountant lazy and careless? The most likely source of the error would be the exact misunderstanding that happened in this thread:
"What's your basis?"
"We bought the house for $42,000."
"Great. Done!"

Far, far down on the list is "My accountant is committing tax fraud on my behalf because..." Because why? What's the incentive? Heck, these people aren't even aware that he's doing them this favor! He's like the secret tax fraud Santa Claus.

It happens and I acknowledge that. I just read a tax court cause over lunch about a preparer who got all his clients audited because he set up identical tax-fraud partnerships for a large proportion of them (previously a CPA, but his license was revoked in the 80s... also for tax fraud).  Those people exist, but there are other more likely explanations for us to entertain prior to "OMG TAX FRAUD!" and not just tax fraud, but in collusion and with the support of their accountant.

Without looking at their tax return, you'll never know the answer. And that's almost always the answer to these kinds of questions: Without looking at the tax return, we can't know.

CareCPA

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Re: A tax question for CPA's or tax professionals
« Reply #12 on: March 30, 2017, 01:11:26 PM »
I hope my reply didn't come across as implying fraud.
What I overwhelmingly see is incompetence, or lack of care.
I've had 3 or 4 returns come across my desk that were done by a different firm in the last two years. Each of them had an issue. I don't think the prior preparer was intentionally committing fraud, I think he just didn't look at these specific issues as he raced through tax season.

Cpa Cat

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Re: A tax question for CPA's or tax professionals
« Reply #13 on: March 30, 2017, 01:32:30 PM »
I hope my reply didn't come across as implying fraud.


Nope. But a previous post or two did.

And I don't want to imply that CPAs don't make mistakes.

I have a list of something like 10 returns from new clients that need to be amended because of errors/omissions from previous CPAs that I will go amend after tax season.

CPAs make mistakes all the time. And some of them seem to give some really jacked up advice.

NESailor

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Re: A tax question for CPA's or tax professionals
« Reply #14 on: March 30, 2017, 01:34:17 PM »
I hope my reply didn't come across as implying fraud.
What I overwhelmingly see is incompetence, or lack of care.
I've had 3 or 4 returns come across my desk that were done by a different firm in the last two years. Each of them had an issue. I don't think the prior preparer was intentionally committing fraud, I think he just didn't look at these specific issues as he raced through tax season.

I helped some friends do their own return after the paid preparer they've been using for year announced her retirement.  I'm a CPA but not a preparer (work in corp. accounting).  My friends' return from the prior year had a large credit on it for a pretty specific type of transaction.  Upon my review - they did not qualify.  No idea why the prior preparer gave that to them.  As far as I could tell the preparer did not benefit in any way.

Just weird.  Glad my name is not on that return.

GU

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Re: A tax question for CPA's or tax professionals
« Reply #15 on: March 30, 2017, 02:42:50 PM »
Depending on the size of the tax being avoided and how sure you are it is unlawful, it may be worth your while to turn her in and get paid a part of the recovery for yourself.

https://www.irs.gov/uac/whistleblower-informant-award

When people you know cheat on their taxes is means everyone else has to foot the bill for them in the form of higher taxes, less spending, and/or increase of the federal deficit/debt.  Tax fraud is not, as the say, a victimless crime.

This is a pretty ridiculous suggestion.  If a CPA says you don't have to pay tax on a gain, how the heck are you going to prove the taxpayer fraudulently failed to pay tax on it?  Wasting government resources to look into a minor, non-fraudulent, potential under-reporting of a miniscule amount of tax is more harmful to the public than this woman's possible understatement of capital gains.  As was noted below, none of us here know the whole story, she may have a legitimate reason. 

Examples of real tax fraud are getting paid under the table and hiding the money in a Swiss bank account or collecting sales tax from a customer and pocketing it.  Following advice from a CPA on a complicated tax provision is not tax fraud, even if the CPA is wrong. 

Sibley

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Re: A tax question for CPA's or tax professionals
« Reply #16 on: March 30, 2017, 02:56:27 PM »
Depending on the size of the tax being avoided and how sure you are it is unlawful, it may be worth your while to turn her in and get paid a part of the recovery for yourself.

https://www.irs.gov/uac/whistleblower-informant-award

When people you know cheat on their taxes is means everyone else has to foot the bill for them in the form of higher taxes, less spending, and/or increase of the federal deficit/debt.  Tax fraud is not, as the say, a victimless crime.

This is a pretty ridiculous suggestion.  If a CPA says you don't have to pay tax on a gain, how the heck are you going to prove the taxpayer fraudulently failed to pay tax on it?  Wasting government resources to look into a minor, non-fraudulent, potential under-reporting of a miniscule amount of tax is more harmful to the public than this woman's possible understatement of capital gains.  As was noted below, none of us here know the whole story, she may have a legitimate reason. 

Examples of real tax fraud are getting paid under the table and hiding the money in a Swiss bank account or collecting sales tax from a customer and pocketing it.  Following advice from a CPA on a complicated tax provision is not tax fraud, even if the CPA is wrong.

I'm rusty, but I believe that following poor advice from a tax preparer isn't a defense. Taxpayer signed the return and attested to it's accuracy, I'm pretty sure that it's really hard to prove that you didn't know. May or may not get called fraud, but taxpayer would still have to pay the tax.

GU

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Re: A tax question for CPA's or tax professionals
« Reply #17 on: March 30, 2017, 04:11:24 PM »
Depending on the size of the tax being avoided and how sure you are it is unlawful, it may be worth your while to turn her in and get paid a part of the recovery for yourself.

https://www.irs.gov/uac/whistleblower-informant-award

When people you know cheat on their taxes is means everyone else has to foot the bill for them in the form of higher taxes, less spending, and/or increase of the federal deficit/debt.  Tax fraud is not, as the say, a victimless crime.

This is a pretty ridiculous suggestion.  If a CPA says you don't have to pay tax on a gain, how the heck are you going to prove the taxpayer fraudulently failed to pay tax on it?  Wasting government resources to look into a minor, non-fraudulent, potential under-reporting of a miniscule amount of tax is more harmful to the public than this woman's possible understatement of capital gains.  As was noted below, none of us here know the whole story, she may have a legitimate reason. 

Examples of real tax fraud are getting paid under the table and hiding the money in a Swiss bank account or collecting sales tax from a customer and pocketing it.  Following advice from a CPA on a complicated tax provision is not tax fraud, even if the CPA is wrong.

I agree with your argument in spirit.  Namely, it is not worthwhile to report people for truly petty amounts or in cases where one is not actually sure of the circumstances.  Hence, I bolded the first portion of my original post, here.  Apologies if anyone thought I was rushing to judgment.

I agree that we don't know the full story.  But, I'm not sure I follow that that mistreatment of 21K in income would necessarily be "miniscule." I also don't think I agree with your somewhat nebulous division between tax fraud and "real tax fraud."  It reminds me of the running gag in Arrested Development where George Sr. committed "light treason."

I also don't think I agree that following the advice of a CPA provides safe-harbor.  Tax liability is tax liability.  If someone under reports income or over claims deductions and exemptions, and 3rd party finds out about this, the non-compliant filer could get ratted out.  Some people aren't even aware of this fact.  In these matters, it pays to tread lightly,  follow honest competent advice, and keep one's mouth shut.  The number of times I hear people blatantly say something to the effect of, "But, such and such was in cash, so there's no tax on it..." (But, I digress).

The primary IRS whistleblower program is aimed at cases in which the amount in dispute exceeds $2 million. If the taxpayer is an individual, the individual's gross income must also exceed $200,000 for any taxable year at issue in a claim.  If you don't meet these thresholds, entry into the whistleblower program is discretionary at the IRS's behest, the whistleblower's reward is reduced, and the IRS is unlikely to pursue a small claim unless there are really juicy allegations of fraud (as opposed to "so-and-so's accountant gave her advice I disagree with").  The tax owed on $21,000 of capital gains would anywhere from $0 - $4,200, depending on the individual's bracket.  This is "miniscule."  It would cost the IRS more than $4,200 in time and resources to shake it out of the OP's sister-in-laws pockets. 

And there is most definitely a distinction between negligent noncompliance and fraud.  If underpaying your taxes, even by accident, were "fraud," everyone at some point, and probably a majority of taxpayers in a given year, would be fraudsters.  Of course getting bad advice from your CPA doesn't excuse you from owing the tax.  You'd have to pay the tax, plus interest on it, if caught on audit, and probably a penalty too, although you might be able to get the penalty abated for reasonable cause.  But it would not be fraud, a serious offense that could result in large penalties and/or jail time.