CPA Is Not Legally Required to Pay Interest for Error in Tax Preparation
Q: We had a professional tax preparer, a certified public accountant, do our 1997 income tax return. In August, we received a letter from the IRS that we owe more tax plus interest because the CPA failed to notice that I was not eligible for a child-care credit because I had a cafeteria plan from my work to pay day care for our son. If the CPA made a mistake, isn’t she obligated to at least pay the interest the IRS charged us? We hired a CPA because we wanted to make sure that our income tax return was done correctly.
A: Legally, no, she’s not required to pay the interest. That’s your signature on the tax return, and you’re ultimately responsible for what’s on it, which is why it’s important to carefully review your returns and ask questions.
Your CPA could argue, perhaps convincingly, that she shouldn’t pay the interest because you owed the extra tax in any case; her error gave you an interest-free loan of the money that should have been paid to the government. Because you had the benefit, why should she pay?
Other tax preparers, however, might cough up the cash. Some do so to retain a valued customer; others would feel vaguely guilty that they didn’t ask a fairly obvious question. After all, dependent-care benefits are fairly common, and they typically reduce or preclude taking a child-care credit.
Everyone, even highly paid professionals, can make mistakes. But mistakes are more likely in areas that are unfamiliar--if, for example, your CPA does mostly corporate work or deals largely with small businesses and then tries to tackle a return outside her specialty. That’s why it’s important to interview your tax preparer before employing her; you can find out if she handles other clients like you. If you can’t work something out with your CPA, take your business elsewhere. But make sure to discuss in advance who will pay for what if another mistake is made.
Qualifying Question on SEP-IRA
Q: I was disappointed with your response to the question regarding qualifications for a simplified employee pension-individual retirement account, or SEP-IRA. You told us who could qualify, but how about those of us who don’t? Like the original questioner, I am a freelance professional in the entertainment industry. The majority of the time, I am paid through payroll companies as the writer described. What are the options for temp workers who are paid through payroll companies and are thus not allowed to participate in 401(k) programs?
A: You’re going to remain disappointed, I’m afraid, because your tax-favored options are few. You can contribute $2,000 a year to a traditional IRA, which is deductible because you’re not covered by a retirement plan at work. Alternatively, you can contribute as much as $2,000 to a Roth IRA; your contribution is not deductible, but your withdrawals in retirement are tax-free.
Beyond that, you’re pretty much on your own. You can set up a regular brokerage account and designate it for your retirement; you won’t get any tax break, but with steady contributions and smart investments you can still build up a sizable nest egg. You can reduce taxes on your investments by choosing growth stocks that don’t pay dividends or index mutual funds, which have little of the buying and selling that tends to result in taxable income.
You can also investigate variable annuities, which offer tax deferral until retirement age. Beware of annuities that charge high fees, and make sure you look for strong performers; most have surrender fees that make it expensive to get out if returns lag. You’ll find a primer on annuities at https://www.latimes.com/insure101; make sure to check out the low-cost offerings at T. Rowe Price, Fidelity and Vanguard as well.
New Vows Cancel Ex’s Benefit
Q: You recently responded to a woman who was concerned because her ex-husband could qualify for Social Security benefits based on her work record. But wouldn’t those benefits end, or not be available in the first place, if the ex-husband remarried?
A: Absolutely. Of course, it doesn’t affect the woman who wrote either way, because her benefit isn’t reduced or enhanced based on what her ex-husband does. As I explained, any former spouse who was married at least 10 years can receive as much as half of the ex’s benefit amount if both members of the erstwhile couple are at least 62. The ex’s benefit amount is not reduced to provide this sum, however, but stays the same. As you note, the ability to draw such benefits ends if the person who is getting the benefit based on an ex’s record gets married again.
Had the ex-husband written instead of the ex-wife, I would have mentioned the loss of benefits with remarriage. If our lady’s opinion of her ex is at all based on fact, he would probably want to remain unhitched just to get the benefit and annoy her.
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Liz Pulliam Weston regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
