This case has the potential to alter the entire landscape of the tax preparation business.
IR-2010-082 states that the IRS has barred a CPA from future IRS practice for failure to exercise due diligence in the preparation of his clients’ tax returns:
WASHINGTON — The Office of Professional Responsibility (OPR) has prevailed in an agency appeal involving issues which include the due diligence responsibilities of a CPA under the Rules of Practice before the IRS (Circular 230). The May 28th decision of the Appellate Authority has upheld the Administrative Law Judge’s (“ALJ”) disbarment of CPA Tim W. Kaskey finding, among other things, that Kaskey failed to exercise due diligence in preparing tax returns for a corporation and its husband and wife shareholders.
Kaskey is a CPA and tax advisor who also prepared individual and corporate tax returns.
OPR alleged that Kaskey failed to exercise due diligence under Circular 230, section 10.22 when he failed to determine the correctness of the representations he made to the IRS on the tax returns of a corporation and its married shareholders. OPR also alleged that Kaskey’s misconduct included a failure to comply with the requirement to advise clients of potential penalties and any opportunities to avoid such penalties by disclosure contained in Circular 230, former section 10.34(b) (now section 10.34(c))
When Kaskey failed to respond, or appear, at the administrative proceeding, the ALJ deemed the allegations against Kaskey admitted and entered a default judgment for disbarment. Kaskey appealed. On review, the Treasury Appellate Authority agreed that disbarment was proper.
Kaskey defended against the due diligence allegations by arguing that his clients had misrepresented their income to him. The Appellate Authority observed that there was “a great deal of evidence reflecting the lack of due diligence by [Kaskey] in the preparation of these returns… [and that] “it was inconceivable that [the individual taxpayers] could pay their living expenses based on the income reported on their returns.”
I don’t know enough to render an informed opinion as to whether or not disbarrment was appropriate in this case, but I have several questions and concerns:
- Did Laskey receive what amounts the “death penalty” merely for his lack of due diligence or was he punished at least in part because he failed to appear at the initial administrative hearing? If the latter is true, does this constitute IRS retaliation which is prohibited by the anti-retaliation provisions?
- Taxpayers oftentimes have non-taxable sources of income that do not appear on the federal income tax return. Consequently, it is conceivable that the income reported on the return prepared by Mr. Laskey was, in itself, insufficient to pay the taxpayers’ living expenses, but that in now way means that the taxpayers failed to report all of their taxable income or that they overstated their deductions.
- Is this case a precedent for requiring tax preparers to audit their clients books and records before they prepare and sign their tax returns? For example, if the client gives you inaccurate gross income and expense figures and you rely on those figures to prepare the return, are you automatically assumed to be in violation of Circular 230 and, therefore, disbarrable?
And if you still harbor any doubt that the IRS has instituted a new “meaner and rougher” approach toward taxpayers and their tax preparers, listen to OPR director Karen L. Hawkins gloat about the IRS’s victory in this case (emphasis added):
This is yet another decision highlighting that practitioners have a duty to the system as well as to their clients. Practitioners who do not take this duty seriously can expect to be held accountable. Practitioners who think OPR isn’t serious about due diligence should take heed. Practitioners may not ignore the implications of information already known, and must make reasonable inquiries if the information furnished by a client appears to be incorrect, inconsistent, or incomplete.¹
Apparently it’s not enough that Mr. Laskey has lost his livelihood, Ms. Hawkins wants to make him a poster boy for wayward practitioners on top of it.
NOTE ON TAX PREPARERS’ DUE DILIGENCE OBLIGATION:
I agree that tax preparers have a duty to make reasonable inquiries when information furnished by their clients appears to be incorrect. But this duty is to their clients, not, as Ms. Hawkins says, to the system. In short, tax preparers have an obligation to their clients to ensure that they file accurate returns. There is no conflict in these cases because honest tax preparers and honest taxpayers share the same goal.
However, if a client comes into my office and says he doesn’t necessarily want an accurate return prepared, but merely wants a big refund, I will refuse to represent him. And because I refuse to represent him and similarly dishonest taxpayers, I am justified in assuming that those taxpayers I do represent have given me accurate information about their income and expenses.
I have said this before and I think it bears repeating here:
Tax preparers are advocates for their taxpayer clients and do not work for the IRS. Even if they could somehow be forced into service by the government, they would not be paid enough to perform pre-audits of their clients’ books and records.
The recent attempts by the IRS to impose greater responsibilities and duties on the part of tax preparers amounts to the conscription of those preparers as IRS auditors and, I believe, is an abuse of power.
If the government is going to make tax preparers be their clients’ auditors, they ought to pay them for it, rather than force them into service by threatening to take away their livelihoods.
23 responses so far ↓
1 Mary O'Keeffe // Jul 6, 2010 at 7:52 pm
Here is some additional information for you:
https://docs.google.com/viewer?url=http://www.irs.gov/pub/irs-utl/tkaskey-default_decison_and_order_redacted.pdf
Apparently Mr. Kaskey also had a habit of ignoring his own personal responsibility to file his own income tax returns. In September 2009, he had yet to file his own tax returns for the years 2001 through 2005.
2 Ed Zollars // Jul 6, 2010 at 8:02 pm
As Mary notes, the actual OPR decision seems to rely much more on this guy’s inability to file his own returns (his defense was he was too sick to do his own for a large number of years, but it was noted he did a whole bunch of other returns).
As well, he apparently did a corporate return claiming officer salaries for the taxpayers (apparently accepting their word that was paid) but then didn’t report any wages on the personal returns (apparently arguing they didn’t indicate they received any and he should be able to accept that fact).
3 Mary O'Keeffe // Jul 6, 2010 at 8:04 pm
Also, according to the link you provided above, Mr. Kaskey “failed to respond or appear at the [ALJ] administrative hearing.” All in all, if the IRS asserted facts about his failure to file his own returns and his failure to respond or appear at the hearing are accurate, it seems to me that the IRS is quite justified in terminating his right to represent other taxpayers before the IRS. His record on the Florida Dept of Business Regulation website also suggests a difficulty:
https://www.myfloridalicense.com/LicenseDetail.asp?SID=&id=D4B712A7897BD8670787A6A77A140226
4 Mary O'Keeffe // Jul 6, 2010 at 8:23 pm
Here is the opinion on his appeal:
https://docs.google.com/viewer?url=http://apps.irs.gov/pub/irs-utl/opr_appeal-_kaskey_final.pdf
Given the record, it seems to me that terminating his rights to represent other taxpayers before the IRS is entirely reasonable, indeed rather minimal, a virtual slap on the wrist.
The bottom line of the opinion does not even rule out the possibility that he might ultimately manage to work his way back into the good graces of the OPR.
5 Peter // Jul 6, 2010 at 8:39 pm
Mary, thanks for the info.
The reason he was disbarred is not because of his failure to file, but rather because he believed his client was honest. Even Hawkins says so.
The failure to appear at the initial hearing should be irrelevant on appeal.
We do not work for the IRS and they can’t make us do their job for them without paying us.
6 Peter // Jul 6, 2010 at 8:42 pm
Taking someone’s livelihood away is no slap on the wrist. Show some compassion. He probably had a bad childhood.
7 Peter // Jul 6, 2010 at 9:43 pm
Ed,
Thanks for the clarification. Maybe he deserved it, but the Director of OPR should be gloating about it.
8 Mary O'Keeffe // Jul 6, 2010 at 9:56 pm
Ms. Hawkins didn’t say that he was disbarred because “he believed his client was honest.” She said he was disbarred because “among other things,” he “failed to exercise due diligence.”
The record does not show that he offered any defense to the charge that he failed to exercise due diligence.
Certainly his failure to file his own returns and his failure to respond to the IRS complaint in a timely manner does not strike one as very “diligent.”
In any case, the IRS hasn’t taken away his livelihood. He retains his CPA (though he might want to get his record straightened out at the Florida Dept of Business Regulation.) He can still prepare tax returns and offer tax advice and do all the other things that CPAs are entitled to do.
The only thing he can’t do is represent his taxpayers before the IRS, but under the circumstances (given what the IRS apparently thinks of his reputation), perhaps that is just as well.
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10 Peter // Jul 6, 2010 at 11:49 pm
Mary,
Taking away someone’s livelihood is excessive punishment.
A 90 or 120 day suspension, a heavy fine, mandated extra CLE all could have been imposed on Laskey instead of permanently preventing him from making a living.
Again, the death penalty seems harsh here even though Laskey is clearly in the wrong for failing to file his returns and failing to appear at the initial OPR hearing.
11 Peter // Jul 6, 2010 at 11:55 pm
Mary,
I am not in the habit of assuming my clients are my clients are lying to me and you shouldn’t be either, even if we do prepare returns at the pleasure of the IRS.
If I ask a client if he gave to charity last year and he says to me “yes, I donated $5,000 to my church,” I take the deduction because I believe him and because it’s his return.
I have no affirmative duty to examine his receipts.
The IRS wants to make you and me their field auditors because it lacks the resources and the efficiency to do the job itself.
We do have a duty to comply with the tax laws ourselves and we should immediately respond to any inquiry about our fitness to practice.
12 ThisIsNotMyRealName // Jul 8, 2010 at 8:13 am
Peter, I agree that you take the $5,000 deduction. Don’t you also inform the client that the IRS requires a receipt or letter for donations totaling more than $250, and that in case of an audit proof of the amount will need to be shown? That’s the kind of information we get paid for. It’s also usually easier for the client to get the proof now, rather than when the audit actually occurs.
13 TaxMan // Jul 8, 2010 at 12:45 pm
I agree that disbarment is an excessive penalty. Based on the OPR director’s statements about the case, it seems obvious to me this is meant to set a precedent that although it’s not required to do a professional review of your clients, you better anyway as “due diligence.” This just makes me sick! I agree some sort of punishment was warranted but not disbarment.
14 Peter // Jul 9, 2010 at 8:11 am
ThisIsNotMyRealName,
I agree, you tell your clients what the law requires, but you don’t have to personally investigate them to make sure they are doing it. We don’t get paid enough for that. And even if we did, it’s not our jobs to be dubious of our clients’ claims.
15 Howard // Jul 9, 2010 at 11:54 am
Due diligence is a murky minefield. The definition has never been clear. When I ask IRS officials about it I usually get comments like use the smell test.
The problem is the IRS use it’s heavy hand in defining due diligence make all tax preparers into quasi-auditors. In a world where numerous taxpayers do not have good records and may have had expenses or income that have to be estimated preparer could be put in increasing jeopardy. The end result will be a greater number of nonfilers as preparers back away from these situations.
It would be far better if the IRS concentrated on education to narrow the gap in the definitions of such terms as “due diligence”.
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