We continuously see new clients who had been using a tax preparation software package to prepare their personal tax returns and discover that preparation errors have been inadvertently made by the taxpayer. Whereas these software packages are ideal for a taxpayer with a couple of W-2s and are claiming the standard deduction, taxpayers with more complex returns can overpay their taxes by not using an available tax-savings strategy or miss making a tax election. While the cost of using a tax professional to prepare a tax return has been saved, the taxpayer is often unaware of the additional taxes or audit exposure associated with self-prepared tax returns.
The peace of mind knowing that a tax return was prepared properly by using a tax professional for tax preparation is just one benefit of using a tax professional. An experienced tax professional keeps his clients informed of tax law changes, tax planning strategies, and how to reduce the risk of IRS audit adjustments. When the client is contemplating a financial transaction, the CPA is available to provide guidance as to how to structure the transaction in the most efficient tax manner.
In a private letter ruling (PLR 201339002), an individual withdrew from three IRAs maintained at Bank A with the intent of depositing these funds at a later time into another IRA that would yield a better rate of return. 68 days later, the taxpayer opened a rollover IRA at Bank B but was informed that the rollover couldn’t be accepted as a rollover contribution because the 60-day period had expired.
When a rollover is not completed within 60 days, the entire amounts withdrawn from the IRA are subject to income taxes and if the taxpayer is not at least 59 ½ years old, an additional 10% penalty is due. Realizing that this was a costly mistake, the taxpayer asked for relief from the IRS saying that Bank A had failed to inform her of the 60-day requirement. The IRS refused to grant relief. The IRS determined that the taxpayer didn’t qualify for relief because “she didn’t show that the bank had a duty to inform her of the requirement” and the overall facts indicated that the ability to redeposit the amount was within her reasonable control during the operative time period. In tax law, not knowing about the rules generally isn’t a sufficient excuse for not complying with them.
This is a prime example of a taxpayer acting on their own which resulted in a simple non-taxable transaction being converted into a taxable transaction. This was a very costly mistake for this taxpayer that could easily have been avoided by consulting with a tax professional.
Note: Because each individual’s tax situation is different, if you want to learn more about the IRS’s rules regarding IRA rollover, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here. To learn more about various tax and business services, visit Tax Preparation Services and Small Business Accounting Services
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