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Due Diligence Penalties

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    Due Diligence Penalties

    It seems to be getting tougher than ever to handle tax returns as the IRS seems to be makings the tax preparer liable for taxpayers' misrepresentations. Do other tax preparers have a due diligence check list that they have created to cover yourselves that you might be willing to share?


    "CPA Disbarred for Failure to Exercise Due Diligence and Compliance Problems
    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.
    “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,” said Office of Professional Responsibility (OPR) Director Karen L. Hawkins said.
    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.”

    “Practitioners who think OPR isn’t serious about due diligence should take heed,” added OPR Director Hawkins. “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.”
    The Appellate Authority’s and ALJ’s opinions are available on the IRS Website; search “OPR”.

    #2
    Engagement Letter

    The Kaskey case involved returns for a Corp and its husband and wife shareholders. What you gave us was short on details but the finding of the court was that Kaskey should have known that the income on the return he was preparing was insufficient to cover expenses that he knew or reasonably should have known that they had. For example, I have a client who is a pharmacist with a stay at home wife and at last report four kids. I do the taxes at their home and they own a relatively new Land Rover, a relatively older Land Rover and an older Jetta. They live in a relatively large footprint three story home in a development where their home is typical of what you'd find. I don't believe he could sustain this lifestyle without making close to what he makes. If he tried to claim that he made significantly less I would start to ask questions. I would make notes of the answers and if I decided to do the return I would write out the questions and answers in the engagement letter which I was already going to require him and his wife to sign. I get my engagement letter from one of my professional organizations and I don't feel at liberty to share it but various organizations have templates for you to work with.

    There are also not a whole lot of issues where we are likely to get in trouble.

    We had better make sure that the income reported on the return is explained if it is obviously insufficient to cover expenses we know or reasonably should know that they have or if it is not reasonable for someone in their line of work.

    We had better meet the requirements regarding EIC but the good news is that these days the software should have everything we need.

    We had better see their receipts for charitable contributions.

    We had better see their logbook for mileage or check the boxes to indicate that evidence does not exist or it does exist but is not written.

    If we take a sufficiently doubtful position on a return we had better disclose everything. In general when I tell a client I will have to disclose I am instructed to change the return so that disclosure is not necessary or I am told that my services are no longer required.

    Comment


      #3
      The CPA did not file his own income taxes for 5 consecutive years. He did not respond when summoned. He did not respond to auditors while representing the client.

      Here's the skinny:

      Last edited by BHoffman; 07-06-2010, 04:14 PM.

      Comment


        #4
        assets might pay for the lifestyle

        Originally posted by erchess View Post
        ...I don't believe he could sustain this lifestyle without making close to what he makes. If he tried to claim that he made significantly less I would start to ask questions. I would make notes of the answers and if I decided to do the return I would write out the questions and answers...
        Especially during this recession, they don't always currently make close to enough to sustain the lifestyle. The lifestyle could come out of assets or other individuals in the household. You've got the right idea about asking questions and making notes of the answers.

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