Question

Walters, a business owner, filed tax returns for 2001, 2002, and 2003 using the cash basis.  In 2004, Walters hired Erlich, a CPA, to prepare his income tax for 2004 using the accrual basis.  While preparing the 2004 return, Erlich examined the prior years’ returns.  Based on Erlich’s suggestions, Erlich prepared revised returns for the prior years, and Walters submitted these to the Internal Revenue Service (IRS), claiming an $18,000 refund.  Instead of receiving the refund, the IRS claimed Walters owed $134,000 in unpaid taxes and fines. Erlich told Walters that the IRS was mistaken and that he could clean up the simple problem for a fee of $1000.

After granting several extensions, the IRS notified Walters that Monday, October 5, 2008 was the deadline for filing a protest to the proposed assessment.  On Saturday, October 3, Erlich called Walters to his office to sign the protest.  When Walters arrived, Erlich produced a written contract with a fee agreement whereby Erlich was to receive $1000 plus 8 percent of any monies saved on the assessment.  When Walters refused to sign the new fee agreement, Erlich told him that the protest had to be in the mail that afternoon to reach the IRS by Monday and that if the protest were not filed on time Walters would be liable for the $134,000 plus additional fines that had accrued since 2005.  Walters signed the fee agreement, and the protest was filed on time.  After reviewing the protest, the IRS reduced the assessment to $21,000.  Erlich sent Walters a bill for $10,040.  Walters sued to have the new fee arrangement rescinded.  What legal theory will Walters argue?  Who wins?  How much does Walters owe Erlich for the service of preparing the protest?

Answer 1

a) Walter will state that he has filed income tax for past three years on cash basis instead of Accrual basis due to which he has overpaid the taxes by 18,000 for which he is liable to receive the refunds, whereas IRS is calculating taxes incorrectly.

1) When he filed a claim to receive 18,000 back IRS claimed that instead of refunds, Walter needs to pay $134000 plus fines as he has paid less taxes.If this is the case why he has not received any notice in last three years.

2) When he re-submitted his claims IRS reduced this assessment to $21,000, it clearly states that they are calculating incorrectly, since according to them now amount declined from $1,34,000 to $21,000.

b) So it clearly shows that IRS is doing fraud by cheating Walter as they stated to Pay $1,34,000, so according to us it is clear case of incorrect data presented by IRS, hence Walter will win the case.

c) Walter Owe $10,040 to Elrich for the services of preparing the protest.