Preparers and Due Diligence

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IRS has posted its directory of searchable preparers with PTINs  who are CPA’s, attorneys or enrolled agents or who have opted in to its voluntary certification system under the Annual Filing Season Program; the link that allows you to search the directory is available here. The directory allows people to “research tax return preparers near you or to determine the type of credentials or qualifications held by a specific tax professional.”

The directory allows you to  limit searches to differing types of preparers and allows you to search by zip code. I ran a search and was able to find some local preparers. The directory does not include preparers who have a PTIN who are not attorneys, CPAs, enrolled agents or Annual Filing Season Program participants. It is a good tool that will allow the public to do some due diligence before hiring a preparer.

EITC Due Diligence: Indexed to Inflation

One item that slipped by me from late last year was the indexing of certain penalties to inflation; that came in as per the Tax Increase Prevention Act of 2014 in December. Not all penalties are indexed, but the due diligence penalty for EITC preparers is. The penalty will bump up to $505 per failure in 2015.

EITC Due Diligence: The Taxpayer With No Deductions and Rounded Income

IRS has been releasing items that make up the dirty dozen list of tax scams for 2015. One that made it this year is falsifying income to qualify or goose the amount of refundable credits. As IRS states,

Some people falsely increase the income they report to the IRS. This scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income, usually in order to maximize refundable credits.

In fact, IRS has published on its web site a lot of informal information about preparer due diligence, including a list of common due diligence questions and a summary of the due diligence rules as fleshed out in regs. There are training videos and power points discussing scenarios, including a presentation that relates to a person coming in with exactly $12,000 of income from a house cleaning business. The person reports no expenses and has no written records.

In certain cases the amount of the refundable credit will far exceed any tax liability so IRS may be skeptical when there are no records or information returns associated with the self-employment income. The EITC presentation points to an old revenue ruling that stands for the proposition that a taxpayer must report all income and deductions associated with a self-employed business (Rev Rul 56-407). Bottom line, IRS suggests preparers need to do some digging if someone comes in with a rounded amount of self-employment income, no deductions and no records. ( I note that many house cleaners are likely W2 employees and it is possible that the supplies etc are truly paid for by the homeowners so maybe there are no deductions to be had).

Due diligence is so fact and circumstance-specific; it is helpful for sure that IRS is announcing via its web site areas where it thinks a preparer is under a duty to make inquiries. I think that the advice it is giving in this area could probably benefit from input from preparers and others, and FAQ’s in web sites and power points are not the kind of reasoned guidance that in my mind is needed in this area.

I suspect that with increased IRS audits and visits of preparers we may see some more guidance, or at the very least some case law fleshing out the standards as these penalties can really add up at $505 per mistake.

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Current angst over supposed Form 3115 requirement for virtually all business returns might be of interest here.

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