Sometimes we just don’t know what we don’t know
Real knowledge is to know the extent of one’s ignorance. - Confucius.
Knowing when to seek help or ask a question is a valuable trait.
Unfortunately, Adele Accountant discovered too late that, when you venture outside of your home jurisdiction, state and local tax traps lie in wait.
| The bottom line is, if you are not absolutely sure - and perhaps even if you are - consider seeking confirmation that your understanding is correct. |
Bigfee, Inc., was a longtime client based in Adele’s home state of Ignorance. Bigfee decided to purchase the assets of a manufacturing company located in Neighboring state.
Bigfee’s president asked Adele if she would be able to continue to prepare all of their tax returns, including state and local returns required by Neighboring state. Adele checked a few reference materials and assured Bigfee that she could prepare all of the returns. She said there was no need to engage a Neighboring accountant.
Five years passed and all appeared to be well. That is, until Bigfee received a personal property tax return notice from the Village of Greed. The taxing authority alleged that no personal property tax returns had been filed since Bigfee purchased the company five years ago.
Furthermore, had the returns been filed, a certificate of exemption for manufacturing equipment would have exempted all such personal property each year for the five preceding years. So, not only did Adele fail to prepare the required returns, but Bigfee also lost the opportunity to claim the exemption. The additional avoidable tax liability was approximately $200,000. Penalties could not be abated, and amended returns would not fix the problem.
Shortly thereafter, Adele received a demand letter from Bigfee. Adele contacted a local accounting firm, but by that time it was too late to resolve the problem. Sometimes we just don’t know what we don’t know. This is especially true in the state and local tax arena where obscure taxes and rules abound. Hindsight being 20/20, it is easy to say that Adele should have sought the advice of a local accountant at the outset of the engagement.
Was it ignorance, apathy or some other reason that kept her from doing so? The upset client might be inclined to conclude that Adele was at best ignorant, or perhaps even greedy. Did Adele simply not want to take the risk that another accountant would steal her client, or at least divert a portion of the fees away from her firm? It was a costly oversight, one to which she could offer no defense. In addition to paying damages, her firm lost Bigfee as a client.
Adele’s case is by no means exceptional. Even with the various research tools available to return preparers, such errors are surprisingly common. Accountants preparing state and local returns for filing with taxing authorities outside of their home jurisdictions may overlook certain taxes, fail to file required returns or schedules, or neglect to properly claim available credits or exemptions.
Typically, assuming that the tax was avoidable, there are few defenses available to prevent a finding of liability and damages. Sometimes, even within one’s home jurisdiction, there are areas of state and local taxation, particularly involving credits, that may warrant outside assistance. The bottom line is, if you are not absolutely sure - and perhaps even if you are - consider seeking confirmation that your understanding is correct.
He who asks a question is a fool for five minutes; he who does not ask a question remains a fool forever. - Chinese Proverb
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