Super Bowl LI offered us many surprises this year, not the least of which was the New England Patriots’ incredible comeback. However, as a practicing CPA and attorney working exclusively in tax representation, I was taken aback with something else, as I’m sure many tax practitioners were: H&R Block, Jon Hamm and IBM’s “Watson.”
Oh yeah, tax professionals were watching that. We watched H&R Block’s multimillion-dollar ad pitch, featuring the original Mad Man, waxing lyrically on IBM’s Artificial Intelligence genius, with promises of great refunds calculated by an authority far greater than any mortal tax professional. It sounded impressive, to say the least.
Well, before we hang up our pocket protectors and our Dixon Ticonderoga No. 2’s, may I be so bold as to offer any nervous tax professionals some anecdotal thoughts, along with our secret weapons that “Watson” simply doesn’t have in his arsenal of IT code. I offer the concepts of “customer service,” “caring” and our ability to fit square pegs into round holes.
A couple of years ago, an investment advisor sent me a client who had her return prepared by “pre-Watsonian” H&R Block for review. She left her job, panicked, and withdrew a few hundred thousand dollars from a 401(k). The client was not yet 59 ½ years old. As I was reviewing the tax return, it looked accurate. The 10 percent penalty alone was a new Lexus. There was a 1099-R. It showed the amount of the withdrawal and clearly indicated “early distribution with no known exception.” I began sliding the return back to the client, advising her that it’s best to seek counsel before making such a withdrawal in the future, frustrated that this could have been avoided. I felt bad that I had no offer of hope. The client then proceeded to tell me it wasn’t a problem, and she was in the area because of an appointment with her attorney nearby.
Well, as an attorney, I simply asked if everything was OK. Great question! As it turns out, she was in a car accident, got shaken up, couldn’t focus at work, left her job, tried to go back, couldn’t focus and left her job for good, applying for disability (hence the need for the lawyer). Pay dirt! I took the return back, removed the penalty, attached a Form 8275, described the events and the disability exception to the penalty subject to examination, and prevailed. Now by any review of just the documents in that case, the original return was accurate. We simply dug deeper.
The now defunct TaxMasters prepared seven years of delinquent returns for another client, with 1099-R’s from one of the largest life insurance companies in the world, fully taxing disability income. The client owed over $250,000 in taxes, interest and penalties over that period. Again, the returns were accurate based upon the third-party data. Our office was asked to assist. After speaking with the client, who paid the premiums and was the owner/beneficiary of the policies, we reached out to the life insurance company (they originally resisted, as our position contradicted their 1099-R’s). We eventually got an acknowledgement that the disability benefits were not taxable. We amended the returns, eliminated all taxes owed, again prevailing on an eventual examination.
Finally, there is the case of the farmer. He literally lost the farm and was subject to discharge of indebtedness income on the farm debt. The agricultural bank that issued the 1099-C also prepared the original tax return (I guess we’ll save that conflict for another day). Same pattern as the others: a 1099-C was issued, and this was a very large tax bill. A law firm invited us in to review the case. Sure enough, we believed the debt was excludable under I.R.C. §108, not just because of the insolvency of the client, but also because the debt was qualified farm indebtedness. We amended the return and again survived an examination, prevailing on the merits.
The practitioners reading this have similar stories, without doubt more interesting and with better analysis than any of the above. But I hope it reinforces the point that we need not fear Mad Men, Jon Hamm, H&R Block, IBM or Watson, for that matter. Watson can’t “feel” the situation. Watson doesn’t sense the despair of the client. Watson doesn’t ask why a client is going to see a lawyer. Watson doesn’t stay persistent in chasing a life insurance company for history on an old claim. And Watson most certainly doesn’t know what to do when the IRS issues a letter of examination, or a statutory notice of deficiency. Tax professionals have something that artificial intelligence cannot replace. We guide. We counsel. We communicate. We ask. We care.
Wasn’t that a great game?