Paying the penalties for tax payer when proseries did not calculate the 1098 mortgage interest over $750K

[onestop73]

Due to technical calculation error on the software (Proseries) side not calculating the limited interest of the mortgage loan of that greater than $750K, the deduction was submitted incorrectly; now I have to reach out to the client to explain this. Unfortunately for me, this is going back to 2023 & 2024.  Would you as the preparer pay the penalties associated with the error? What are your thoughts and approach on the matter.

*We pay the highest software system, they continuously push other products through the system, yet, we have to catch these errors ourselves. Why can't the system direct us to the worksheet the moment we enter the balance greater than $750K?

[dascpa]

Two issues here - you should have been aware of the rules and noticed the error in the final tax return review.  But we all miss things.That being said, it has always been my policy that if I screw up, I pay the penalty and interest, you pay the tax, becuase you would have paid the tax anyways if done correctly. Before you pay it, try to get out of it. I do not know if FTA (first-time abatement) will work on this particular issue (since I never had this issue) but it's worth a try.  https://www.irs.gov/payments/administrative-penalty-relief.

[onestop73]

Yes, fully aware of it, I am a one-man band running this show, and this one slipped by. I just caught it, this year as the deduction looked high, but surely understand, my responsibility. Thank you for the suggestion on the FTA as I was not aware of that. I will surely attempt, if not I guess, I will need a second job somewhere to pay for these penalties. I wonder if Walmart will hire me.

Thanks for taking the time to respond.

[Just-Lisa-Now-]

"Why can't the system direct us to the worksheet the moment we enter the balance greater than $750K?"

If youre entering an ending balance, aren't you already on the limitation worksheet?

I only have a couple of these, but, Ive just figured the limitation manually and just plug it in the appropriate amount directly on the Sch A.

[sjrcpa]

If first time abatement doesn't work (and it can only be used for 1 year), try reasonable cause.

[onestop73]

I was not on the mortgage worksheet before, this was my first time jumping into it, when I saw it was not calculating correctly.

I was referring when we are entering the 1098 worksheet, where it asks line 2 outstanding mortgage principal; the moment we enter balance over $750K, I would think it could trigger to direct us to the worksheet and note in red fields the other parts, so it could alert us. You would think the techy crew would create a workflow, such as the EITC, the moment it qualifies for such credit, it triggers the 8867. Since the fee for this software keeps going up, I would think it should come with more whistles and bells. 

*Not yelling at anyone, as it was my mistake, and I will own it, and learn from it. Wished the system was more advance. 

[BobKamman]

Has a penalty even been proposed or assessed yet?  Has IRS initiated an audit, or did you catch the error?  Penalties are not assessed when tax is paid with an amended return.  Just interest.  

[sjrcpa]

So IRS caught it, sent a notice and  a bill?

Or you caught it now and will amend the returns?

If the latter, there may not be penalties for coming forward voluntarily and correcting the error.

[onestop73]

They have not caught it, I was working on the 2025, and noticed the high itemized deduction, and dived into the calculation. Then decided to review all the ones going back to this origination loan 2023 and prepared the X now, and will be reaching out to client soon, SMH. Like everything, we learn with mistakes, one I will surely remember.

[BobKamman]

Well, it's a mistake to be asking about penalties when they aren't going to be assessed, but we understand.  Now get back to work on those amended returns.  

[Just-Lisa-Now-]

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@onestop73 wrote:

I was not on the mortgage worksheet before, this was my first time jumping into it, when I saw it was not calculating correctly.

I was referring when we are entering the 1098 worksheet, where it asks line 2 outstanding mortgage principal; the moment we enter balance over $750K, I would think it could trigger to direct us to the worksheet and note in red fields the other parts, so it could alert us. You would think the techy crew would create a workflow, such as the EITC, the moment it qualifies for such credit, it triggers the 8867. Since the fee for this software keeps going up, I would think it should come with more whistles and bells. 

*Not yelling at anyone, as it was my mistake, and I will own it, and learn from it. Wished the system was more advance. 

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Ahhhh, ok, Ive never used the 1098 worksheet before.  I just plug the amount in directly on Sch A.

[onestop73]

Yes, will do, thank you! Love my community and support here.

[Joe6]

I have had the same issue. I disagree that you should have "caught this". This should be simple math. The program quite clearly says it is used to calculate the limitation. If you have to go thru each and every calculation to make sure it is correct them the software was both defective and useless and fails of its essential purpose.

I use the IRS worksheet

Given that i pay the penalty and interest on these type of issues. Though you could make an argument that they had use of the money so the interest is on them. I have had tax folk go both ways on that.