Still on the hook for unpaid tax, despite a preparer's mistake

Q: Because I work for a private religious school, I am technically self-employed and am responsible for my own payments to Social Security. I explained this to my tax-preparation firm, and even told them which form to fill out (Schedule SE). Still, they did not take out Social Security. Now I am getting a huge return, and I don't know what to do. I'm afraid I'll be audited, and I'm not sure that the tax preparer will cover any discrepancies. I don't want to break the law or do anything unethical, but I really could use the money.
Name withheld, via e-mail

A: That extra money could buy you a peck of trouble, says Charles Egender, immediate past president of the Maryland Society of Accountants. According to his interpretation of IRS Publication 533, which deals with this type of employment, if you work for a church or qualified church-controlled organization that chooses an exemption from Social Security and Medicare taxes, you're subject to self-employment tax if you receive as little as $108.28 in wages from that church or organization.

Why your tax preparer ignored this - and you - is anyone's guess. But Mr. Egender is pretty sure the government won't take this lying down.

"I would expect the taxpayer to receive a notice from the IRS for additional taxes due, along with penalty and interest," he says.

His advice: File an amended return (federal only, the state isn't affected) to correct the problem.

You should expect the original preparer to do this for you at no charge and pay any penalties and interest, since they dropped the ball. In that respect, Egender suggests taking up the matter with the manager of the preparation firm.

Q: I was told that to transfer the registration of an existing mutual-fund account to a marital or exemption trust (the current registration of the account is in the name of a family trust) I will need to restate the trust so that the name - XXX Family Marital (or Exemption) Trust - is on the face page. It seems like a lot of work considering the provision for distribution into various trusts upon the death of the first settlor is set forth in the existing trust agreement.
J.L., via e-mail

A: Your situation illustrates why estate planning can be complicated, says Robert O. Smith, a certified financial planner in Exton, Pa.

In this case Mr. Smith assumes that the mutual fund is titled in the name of the (revocable) family trust, that the grantor of this trust is also the trustee, and that upon the grantor's death, the trust instructs the successor trustee to divide the assets between a marital and an exemption trust.

If that scenario is correct, then once the successor trustee is duly appointed and recognized, a letter of instruction from the successor trustee is indeed needed to transfer the assets according to the terms of the family trust to the marital and exemption trusts.

The marital and exemption trust accounts should already have been established. But if the mutual fund is currently registered in the name of an individual, then you will need to have it reregistered into the name of the family trust. Otherwise, the mutual fund probably will not become an asset of the family trust and therefore never be distributed to the marital or exemption trusts.