When your tax preparer drops the ball with your return, they’re supposed to fix it and pay the extra amount, right? At least that’s what H&R Block promises.
Well, I found out the hard way that even when the tax prep giant lives up to its “Peace of Mind” guarantee, you can still get stuck writing a big check to Uncle Sam.
Here’s what happened: A few years back, I decided to have H&R Block do my taxes. I had always been kind of old-school about filing my taxes before then — no TurboTax for me, just pencil and paper — simply because my taxes just hadn’t been all that complicated. Maybe I’d change jobs during the year and have multiple W-2s. Perhaps I’d make a donation to some disaster relief fund. But typically, my taxes weren’t all that tough to do.
That changed when my wife and I sold our first house and bought our new one. That just added a layer of complexity to the tax preparation that I didn’t want to deal with, so I took it to a nearby H&R Block.
They treated me well, handled everything professionally and got things done quickly — or at least as quickly as you could handle a complicated tax return. Things went so well that I even went back to the same lady at H&R Block the following year to have her handle that return.
But six months ago or so, I got a note from the IRS saying that I still owed them about $700 in back taxes. The problem sprung from that first return that H&R Block had done for me, and I wasn’t pleased. Remembering the guarantee, I contacted the lady who had prepared that year’s return. Once I presented her with all the information, she owned up to the mistake and set about making it right. No complaints on my part because the company lived up to its guarantee that it would pay any excess tax bills that came as a result of their mistake on a return. I got a check from H&R Block in a few weeks, paid the IRS bill and forgot about it.
Fast forward to a few weeks ago. I checked the mail and was surprised to see a tax form from H&R Block. Why did I receive it? Turns out the IRS views that $700 as what they call “miscellaneous income” — even though H&R Block was merely living up to an agreement it made with me — and miscellaneous income is taxable income, so the IRS wanted a cut.
I was shocked when I opened the envelope, but only for a moment. I knew that miscellaneous income over $600 — including guarantees such as this one, as well as forgiven debt — are taxable and will result in a 1099 form. (We’ve written several stories about this here at CreditCards.com.) For forgiven debt, you’ll get a 1099-C; for the H&R Block guarantee, I got a 1099-MISC. Still, the end result is the same — you owe the IRS.
When you boil it down, it’s a great deal for the government. They get the $725 that I rightfully owed them on my return plus
the amount of tax I’ll pay on the miscellaneous income. And while that extra
amount may not be too large in my case, imagine if the mistake involved
$7,000 or even $70,000 instead of $700.
Still, I didn’t remember H&R Block making any mention of the guarantee’s tax implications, so I did a little digging to see if they had. I found this in the fine print:
“Federal law states that if your tax liability is paid by someone else, the amount of that payment becomes taxable income to you. Therefore, you will need to include your Peace of Mind payment on your tax return next year. If the payment is $600 or more, you will receive form 1099-MISC from H&R Block next year. H&R Block is not responsible for the payment of any taxes you may owe on such income.”
So when I do my taxes in a few weeks, I’ll have to factor that extra money in, whether I like it or not.
Still, this has driven home an important point. Whether you’re settling a big debt, receiving a new car from Oprah or just having someone make good on a mistake they made with your taxes, know that Uncle Sam will want to take his cut. After all, even if you forget about that amount that you got paid, the IRS will not — guaranteed.