Refund from tax preparer - if/how to report

Forum|Forum|1 year ago
December 22, 2024
2 replies
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My tax preparer will refund me say $X dollars for the mistakes he made in prior years that could not be corrected/amended. I am willing to pay taxes on this amount out of my own pocket. However, since he will not issue me 1099 form since he said this by his research is not taxable:

1. Can I still report this as income?

2. If so, what support do I have?

3. Any other things to beware?

Thank you very much,

Eleanor

Best answer by ZWu1

I came across this Tax Adviser article. Please click on the link and go to the section, "Tax treatment of indemnity payments" and read the entire section. It may not be right on point for you, but I think you'll find it useful.

My read is that the IRS and the Tax Court have different views on the taxability of the tax preparer indemnity payment. The IRS believes the amount is generally taxable.

My suggestion is for you to hire a trusted CPA to prepare your tax return. If the CPA doesn't believe the indemnity payment to be taxable, disclosure it in your tax return.

I had written a much more detailed reply, but Intuit rejected it and I lost my reply.

https://www.thetaxadviser.com/issues/2017/jul/tax-preparer-mistakes-penalties-treatment-indemnity-payments.html

Tax preparer mistakes: Taxpayer penalties and the tax treatment of indemnity payments

By Edward J. Schnee, CPA, Ph.D.

July 1, 2017

This is such a relevant piece of info. Directly answering the question and thanks so much!!

DoninGA

Employee

Did you enter the amount paid to the preparer as a business expense? If not, then there is nothing for you to report on your tax return for the refund.

ZWu1Author

No I didn't. The refund is tax money I over-paid that cannot be claimed back by filing anything with IRS. What are the cons if I do report that as income?

DoninGA

Employee

@ZWu1 wrote:

No I didn't. The refund is tax money I over-paid that cannot be claimed back by filing anything with IRS. What are the cons if I do report that as income?

It just a refund that was paid back to you from the tax preparer. There are no consequences with the IRS since it is not any type of income that has to be reported on a tax return.

rjs

Employee

Why do you want to report income that a tax professional told you is not taxable?

You can report phantom income as "other income" without a 1099 or other document. It would be the same as if someone made a taxable payment to you in cash with no documentation. However, you cannot report it as income if the additional income makes you eligible for any tax credit, deduction, or other benefit that you would otherwise not be entitled to. It's safest to not report made-up income on your tax return.

ZWu1Author

Because I am not sure what he said is 100% correct, and my friend who is a very experienced CPA said I need to report it as income. (BTW, this won't affect any tax credit, benefit, etc).

The refund is taxes I overpaid in past years that cannot be corrected by filing any forms, etc. Besides different opinions I heard, I also do not want risks/audits in the future as the amount is large. So paying taxes is safest per my friend.

But I have only got 2 opinions so far, totally opposite ones. What are the cons if I do report it as income?

Opus 17

Employee

Regardless of the reason why the tax preparer chooses to give a refund, it is a refund of the user fee, not a refund of tax money from the IRS. Discounts, refunds and coupons are between you and the service provider and are not taxable income unless you previously deducted the preparer fees as a business expense, in which case the refund is business income.

The downside of reporting it as taxable income when it is not, is that you pay extra taxes that you don’t have to pay.

If you want to pay taxes on money that is not taxable income, why did you come here asking for advice?