How to Save $267,892 of Income Tax, Penalties and Interest

A new client came to us late last summer.

She dropped off a notice from the Internal Revenue Service (“IRS”). It indicated her and her husband owed $267,892 of back taxes, penalties and interest. I don’t know about you, but that’s a lot of money to me.

As we reviewed the paperwork she provided, it quickly became apparent she did not declare the sale of her primary residence. For a married couple filing a joint return, they can exclude the gain from the sale of their primary residence up to $500,000.  Single taxpayers are allowed one-half this amount or $250,000.

Sale of Primary Residence

For the year in question this couple sold their primary residence for $652,000.  At the closing the law firm handling the transaction gathered the necessary information to file IRS Form 1099-S. They filed this with the IRS and gave a copy to the taxpayer. The taxpayer failed to report this sale on their income tax return. The IRS picked up the gross proceeds reported on the 1099-S and billed the taxpayer.


Our Response

The first thing we need to do was get a Power of Attorney on IRS Form 2848.  This allowed us to represent the taxpayer in front of the IRS.

The taxpayer went back and calculated their cost basis on this home. The cost basis includes what they paid for the property and the improvements they made over the years. Unfortunately they lost money on this home.  Losses on the sale of your primary residence are not tax deductible.

Then we had to prepare an amended return on Form 1040-X for the taxpayer to file. With this filing we disclosed the sale, but were not entitled to any tax loss.

It took two subsequent letters and five months but we have finally resolved this matter.  No change to the taxpayer, the taxes, penalties and interest all went away.


Lessons Learned

While many taxpayers need to disclose the sale of their primary residence, it is very important to keep careful track of the cost basis of your home. Additionally, it’s important to reply promptly to any IRS notice.  If you are in over your head (by owing $267,892) engage a CPA or other tax professional to represent you.

Photo From Creative Commons

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

Tagged with: , , , , , , , , , , , , , , ,