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Lawrence D. Gorin
Lawrence D. Gorin, Lawyer.
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Tax preparer forgot to add penalty for early withdrawal ...

Customer Question

Tax preparer forgot to add penalty for early withdrawal from my 401k in 2006. IRS ontacted me and is requesting the money(early withdrawal penalty plus interest). Is Tax preparer responsible for paying penalty,since it was her fault penalty was not paid when I had the money?
Submitted: 9 years ago.
Category: Legal
Expert:  Lawrence D. Gorin replied 9 years ago.
NO, so far as IRS is concerned, it is the responsibility of the taxpayer (not that of the tax preparer) to pay the addition tax that is due.

HOWEVER, if you paid money to a "tax professional" (such a lawyer, accountant, licensed tax preparer, etc.) to prepare your return AND you provided to the tax preparer all of the information regarding the pre-59-1/2 distribution from the 401(k), the preparer was under a contractual obligation to do the job correctly and the failure to do so amounts to professional negligence (malpractice). You can then look to the preparer (and sue, if necessary) for the financial loss sustained by you as a result of the preparer's negligence. HOWEVER, the loss sustained by you is NOT the 10% penalty tax itself, since you would have had to pay this penalty assessment anyway had the tax preparer properly prepared your return to begin with. Rather, the preparer's error resulted in your having to pay interest to the IRS on the 10% penalty that was incorrectly omitted from the original return. And that is the extent of the "loss" you sustained as a result of the preparer's negligence.

Also, unfortunately, the fact that you had the money readily available with which to pay the 10% penaly assessment when the tax return was originally prepared and filed, and that it will now cause you financial hardship to now come up with the money, is of no legal conseqence.

Do note, however, that some (but not all) tax preparers sometimes include a "guarantee" (or promise), as an inducement to get your business, to do the job right the first time around and to pay any actual additional tax due as a result to a negligent calculation of your tax liability. So be sure to check the fine print of any written "guarantee" given to you by the tax preparer to see exactly what it says.

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Customer: replied 9 years ago.
Thanks so much. Your answer saved me a lot of time and additional frustration.
Expert:  Lawrence D. Gorin replied 9 years ago.
Actually, no further info is needed. I am just using this method to express appreciation for your kind words.


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