Good - But Not Good Enough 07/25/2011
To hear an audio recording of the blog, click on the Play button (>) below. Transcript follows.
Tax professionals – accountants, enrolled agents, and lawyers – are no different than any other person. When they make a small mistake, they move on, confident that the error can be rectified without serious consequence. Getting it right 99 percent of the time is a pretty admirable record…most people would say.
But here's what you get if 99 percent is good enough:
· No phone service for 15 minutes each day.
· 1.7 million pieces of first-class mail lost each day.
· 35,000 newborn babies dropped by doctors or nurses each year
· 200,000 people getting the wrong drug prescriptions each year
· 2 million people dying from food poisoning each year.
Along the same lines, when it comes to taxes, making a small mistake can have disastrous consequences, as it did for Denise Ciotti, a Maryland taxpayer, who found herself stuck with more than $500,000 of tax, interest, and penalties after her accountant's “small” mistake.
Ciotti's train wreck occurred where bankruptcy and state tax law intersect. Ciotti filed a Chapter 7 bankruptcy in 2007, seeking to discharge tax debts. Among the debts on her bankruptcy petition, Ciotti listed tax liabilities owed Maryland for 1992 through 1996.
Ciotti’s State tax liabilities stemmed from an IRS audit adjustment. Under Maryland tax law (Md. Code Ann., Tax-Gen. § 13-409(b)), Ciotti was required to report the IRS audit changes to the Comptroller, because Maryland income is based upon the federal adjusted gross income. Ciotti and her accountant failed to report the changes to the Comptroller. Even so, the State learned of the IRS adjustment to Ciotti’s return through an interstate information sharing program. Based on the IRS’ shared information, the Comptroller adjusted her taxes, increasing them to a whopping $500,000, once penalties and interest were added.
Forced into bankruptcy, Ciotti sought protection from the Compliance division of the State and a fresh start. The State, however, had other plans for Ciotti, dragging her through litigation which lasted for two years and eventually reached the United State Court of Appeals for the 4th Circuit.
The State argued that Ciotti's taxes could not be discharged under the Bankrutpcy Code (11 USC 503(a)(1)(B)), which provides that a Chapter 7 discharge does not apply to a tax if a return or equivalent report or notice required from the taxpayer is not filed. The State argued that Ciotti had an obligation to comply with the State law and report to the Comptroller the IRS changes resulting in the tax increase. Because Ciotti failed to do so, her taxes could not be discharged, argued the State. Ciotti argued her taxes should be discharged, because the IRS shared the audit adjustment with the State, meeting, in her opinion, the requirement to provide an “equivalent report or notice.”
After winding its way through the Bankruptcy courts and the United States District Court, the Court of Appeals for the 4th Circuit agreed with the State. The Court of Appeals held that Ciotti's failure to report the IRS audit adjustment to the Comptroller prevented her taxes from being discharged.
Ciotti, or perhaps, more accurately, Ciotti's accountant made a small mistake. Perhaps Ciotti's accountant was unaware of the Maryland law requiring a taxpayer to report IRS audit changes; perhaps the accountant knew and forgot.
Getting it right 99 percent of the time is pretty good, but sometimes, that errant 1 percent is just enough to ruin a client's life.