Tax Lawyer's Blog

“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”

- Thirteenth Amendment to the United States Constitution -

CPA Kip Dillinger writing for Tax Notes says that a war is brewing between tax preparers and the IRS about how much due diligence is required before a tax preparer can sign a client’s tax return (emphasis is mine):

Recently there has been evidence that seems to confirm that we practitioners will have a battle with the IRS over what is considered adequate due diligence regarding return preparation. This looming battle may not be pleasant, and tax practitioners likely will be displeased with the outcome.

There’s plenty of evidence, anecdotal and otherwise: 

• More than a year ago, Treasury and IRS representatives,  encouraged by repeated comments from former Office of Professional Responsibility (OPR) Director Michael Chessman, asserted that Circular 230 practitioners had a duty not just to ask their clients if they had signature authority over a foreign bank account, but to have a specific conversation with every taxpayer client concerning the foreign account reporting requirements — even if there was no evidence the client had an account and even when the client had indicated ‘‘no’’ or ‘‘none’’ by checking a box in a tax organizer submitted for  return preparation. The unpleasantness of questioning a client’s veracity aside, this requirement (which  to date is still awaiting clarification) imposed onerous  time burdens on the tax practitioner.
• The national taxpayer advocate’s annual report to Congress for 2009 discussed the possibility, if not the likelihood, of imposing additional due diligence requirements on preparers (this was of course framed as a consumer protection issue). Although the report has not always carried great weight with Congress, Treasury, or the IRS, one can safely assume that when it comes to using the return preparer as an enforcement tool, it will receive the Service’s full attention.
• In January the IRS sent letters to 10,000 return preparers explaining a variety of due diligence responsibilities regarding return preparation, and in nearly all cases, the letter was followed by a meeting  between an IRS agent and the preparer at the preparer’s office that often lasted about three hours. The letter, and often the visiting IRS agents, misrepresented the due diligence requirements imposed on practitioners — by, for example, asserting that a preparer had a duty to verify client-submitted information for trade or business (Schedule C) income and to review bank statements to verify reported gross receipts. The AICPA brought the misinformation about verification  to the attention of the IRS, which promptly published a clarifying FAQ on the Web page describing the project. 
• As a tax professional who defends other tax professionals and teaches professional standards, I have seen a fair amount of evidence across the country that IRS examiners are asserting preparer penalties in instances when the preparer isn’t required to verify the specific items and appears to have properly  counseled the taxpayer about the rules and recordkeeping requirements for claiming the items on the returns. Return preparer penalty assessments have also been proposed in situations when the client understated business income gross receipts for the information provided to the return preparer — again, when it appears the return preparer had little reason to question or challenge the client’s provision of gross receipts on a tax organizer information sheet.

It would seem that the IRS is acutely aware that it is incapable of efficiently and cost effectively carrying out its own stated mission. Consequently, it is cynically attempting to draft private tax preparers and compel them, without compensation and against their will, to carry out that mission for it.¹

This is unacceptable and must be stopped.

Footnotes:

¹  The imposition on tax preparers of additional due diligence requirements will result in more work for tax preparers and, therefore, higher fees for the preparation of tax returns. Since this additional work is required by the IRS, perhaps it should use positive reinforcement and compensate tax preparers for doing it. This is absurd, of course. A tax preparer who is paid by the IRS would have a clear conflict of interest and no taxpayer in his right mind would hire him. But the same conflict exists when the IRS uses negative reinforcement to get tax preparers to do its bidding. 

Related Posts:

• IRS Disbars CPA for Relying on Client’s Income and Expense Numbers
• May Tax Advisors Tell Their Clients to Form S Corporations to Reduce Their Chances of Audit?
• 11th Circuit Case: Tax Preparer Escapes Death Penalty
• Tax Return Standard: Substantial Authority v. More Likely than Not
• 31 Congressmen Ask Geithner to Ease Up on Tax Preparer Regulations

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