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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23195
Experience:  Taxes, Immigration, Labor Relations
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I am a foreign student in USA less than 5 years. My CPA filed

Resolved Question:

I am a foreign student in USA less than 5 years. My CPA filed a resident tax return, but IRS said I need file non-resident return. Do I have a option to file a resident tax return to claim the standard deduction and education credit, since I have more than 183 days in USA in the tax year? If not, is my CPA responsible for the accuracy penalty and interest incurred ?
Thanks!
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
The issue is that resident and nonresident aliens are taxed differently.
Resident aliens are taxed on their worldwide income and may use standard deduction and some additional deductions and credits. Nonresident aliens are taxed ONLY on income from US sources and may not use standard deduction - they may only itemize - and may not claim some deductions and credits - for instance - educational, credits are not allowed for nonresident aliens.
Students on F1 visa are generally considered nonresident aliens as long as they comply with their visa terms. That is not a matter of choice. Under the residency rules of IRC section 7701(b) most foreign students are considered to be "exempt individuals." That is, they are exempt for extended periods of time from counting days of presence in the United States for the purposes of determining whether they are resident aliens of the United States. Thus, most foreign students remain nonresident aliens in the United States for extended periods of time.
The exemption is allowed by the US-India tax treaty - students (only students!) may claim the standard deduction on nonresident income tax returns. Thus Indian students can claim the standard deduction the same way as US residents while other nonresident students could only claim itemized deduction.

LEV :

You relation with the CPA is based on the contract obligations. The IRS will held you responsible for additional taxes, penalties and interest charges. But you may request from the CPA a compensation for damages. If you will not be able to negotiate - you may sue the CPA for damages. In most similar cases - courts rule to compensate penalties and interest charges - but not tax liability.
The best path forward might be to ask the IRS to abate penalties, however it would be very unlikely that interest charges are abated. File a form 843 -http://www.irs.gov/pub/irs-pdf/f843.pdf
to request the "accuracy related penalty" be abate based on reasonable cause. If you provide the reason like "I forgot" - I do not think it will be considered as reasonable - so be careful when prepare an abatement request. Because that was not your mistake - but the mistake of your CPA - you have a good chance to provide a reasonable cause.
Here are instructions - http://www.irs.gov/pub/irs-pdf/i843.pdf
If the IRS accepts your reasons as reasonable - and agrees to abate penalties - at least part of the issue would be resolved.

Customer: Is the preparer has the absolute responsibility to pay the penalty and interest, and return the service fee I paid?
LEV :

There is no "absolute responsibility" set in the law.
Responsibility is based on the service contract and agreement between you and the service provider.
In case of disagreement -

LEV :

In case of disagreement - responsibilities of parties may be determined in court.

Customer: May I file complaint with IRS and AICPA for incompetency?
LEV :

You definitely could file a complain. However - if there is no fraud - most likely - your complain will have no expected results. And your complain will not affect responsibility to compensate damages - which is a civil matter between parties.
The best would be to negotiate.

LEV :

Here is information about filing a complain in Texas - http://www.tsbpa.state.tx.us/enforcement/filing-complaint.html

LEV :

To file a complian with the IRS against a tax return preparer - use Form 14157 or Form 14157A
http://www.irs.gov/pub/irs-pdf/f14157.pdf
http://www.irs.gov/pub/irs-pdf/f14157a.pdf

Customer: Thank you LEV! Actually, I am the preparer. I did not check this client's foreign student status for the 5 years rule. If he file complain, what is my defense? What is the worst and best possible results?
LEV :

Everyone may make mistakes - I assume that was a honest mistake - and should be admitted. As such - you may be proactive and agree to amend original tax return with no charge and compensate damages - penalties and interest charges. As part of that agreement - the client may file a form 843 asking to abate "accuracy related penalty" - most likely the abatement will be granted. Interest charges will not be abated. On the amended tax return - you will use itemized deduction - that will allow to reduce the tax due compare with the IRS assessment. Verify if the student is from India - if yes - standard deduction is allowed.

LEV :

If you would not be able to negotiate and the client will file a complain - you might better agree to refund all fees with admitting a honest mistake if the client agrees not to pursue any further actions.

Customer: A couple of hundred dollars is not a big deal to me. But this client is so rude and try to take advantage from others whenever has a chance. He tried to threat me by filing complain if I not pay him. That is the reason I want do some against his greedy. We are the professionals not slavers to those people.
LEV :

The issue is that the threat to file a complain without actual intention to do that may be classified as a criminal action. However it might be hard to proof the "actual intention.."
If the client is not ready to negotiate - you have no choice - just let all go.
You will be required to reply on the complain. In the reply you will state that was a honest mistake and that you offered the client compensation for damages and free amendment.
If he is rude - call the police - that will work against the client in possible litigation.
You may record the conversation and use it for self-defense later in the court. In Texas, you may record a conversation or phone call if you are a party to the conversation and no need to get permission from another party.
See here - http://www.dmlp.org/legal-guide/texas-recording-law

Customer: Thank you so much! This is the first time in my 15 years services. It makes me feel so bad.
Customer: Thank you again, LEV!
LEV :

Sorry for your situation. There is nothing life threatening. Mistakes might happen with everyone.
So try to negotiate - the worth case could be the court order to compensate penalties and interest charges - that you agree to pay anyway.

Customer: Yes. BTW, is the loser responsible for the legal cost of both sides?
LEV :

Generally legal costs are on the guilty party - most likely it will be on you.
But that would be up to court. You may argue in the court that compensation was offered and there is no reason for litigation. If he will demand too much - the judge might offer to split legal costs.

LEV :

In any case - negotiation would be the best outcome for both parties.

Customer: Thanks!
LEV :

You are welcome.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23195
Experience: Taxes, Immigration, Labor Relations
Lev and 5 other Tax Specialists are ready to help you

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Lev
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Taxes, Immigration, Labor Relations