Update school warning

[thomtax]

The following was one paragraph of an email ad that I received promoting an update school. It does not look good for dealings with the IRS, if this is true and not just promotional hype.

"Become a "prepared preparer" by learning how recently released preparer regulations apply to you! Are you prepared for the new world of sanctions? Congress believes the IRS should collect $80 million in penalties from "return preparers" over the next ten years! Attorney Charles Rettig (Hochman, Salkin, Rettig, Tosher & Perez, P.C.) will bring you up-to-speed with the information you need to know!"

LT

[Bees Knees]

On May 25, 2007, the preparer penalties increased from $250 per return to the greater of $1,000 per return or 50% of income derived from the return...increased to $5,000 per return for reckless or intentional disregard of rules.

It doesn't take a rocket scientist to figure out this means Congress wants IRS to crack down on preparers who do not follow the rules.

One area I believe they are going to focus in on is those who claim mileage, meals, entertainment, and travel without adequate documentation to prove the deductions. If your client doesn’t show you something in writing, you are suppose to disclose that on the return. That is one reason why the 2106 and 4562 asks whether the taxpayer has written records to prove the deduction.

I plan on asking that of every client and if they say no, I will tell them I have to disclose that on the return. I’m not going to risk a $1,000 penalty for not doing so.

[equinecpa]

I'd like to shift as much of the burden as possible to my clients. Do you think engagement letters can cover this ground?

You got my attention when you mentioned mileage...so do you think it is our duty to run through all of these questions with our clients? If they give us a sheet with say the following:

Business mileage: 5000 miles

Are we obligated to find out "how" they got to that number? Gosh, when I think of this...this could apply to everything on a schedule c. My clients might list $230.21 in office supplies but they should have support for this shouldn't they? I don't want to see it...

So how about samples of engagement letters that might shift the burden some?

Carolyn

[JG EA]

And Bees are you now taking the position that verbal reconstruction is now illegal (tax wise anyway)? I was taught that if we reconstruct clients miles then indeed it is written.Are you saying that I'll be fined for this if I check the written records box?

Other side of the coin: If client just "knows" he drove more than 4000 miles say and that is a very safe estimate he says and I mark no written records box are you saying I'll be fined.

Also: If you just ask if the client has written records (if I don't have them sign anything) and they say yes and you don't actually see those records and I mark Yes to written records will I be fined? I also have the above question by equinecpa. If it is written just on a piece of paper from the client.

[Black Bart]

What constitutes "disclosure"?

I don't have many people at all who actually keep such records -- a few truckers with those log books of days on the road for the meal allowance and a couple of traveling salesmen who post a mileage diary each day. All others are pretty well winging it.

But (except for the above-noted people) I always check YES on the question "Do you have evidence to support your deduction" (the evidence is that they told me they drove it) and then NO to "If yes, is the evidence written?" So...is that disclosure?

P. S. Do all your clients keep travel records? I can hardly believe that mine are the exception because I once tried keep one myself and it's maddening. I abandoned it after two weeks' writing 1/2 mile to the post office and back, 2 miles to John Client's, etc., etc.

[Bees Knees]

And Bees are you now taking the position that verbal reconstruction is now illegal (tax wise anyway)? I was taught that if we reconstruct clients miles then indeed it is written.Are you saying that I'll be fined for this if I check the written records box?

No I'm not saying we will be fined. I don't know. Imagine this conversation:

IRS auditor: "Let me see the mileage log."

You: "Here it is."

IRS auditor: "Did your client keep this log during the year, or did you tell the client to re-construct the log after finding out about the audit?"

You: (Not wanting to lie) "It was re-constructed."

IRS auditor: "Then you lied at the time you filed the return checking the written records box?"

You: "I knew the client could re-construct written records if ever audited."

IRS auditor: "You lied. Mileage denied."

[JG EA]

Good point. What I meant was that I write down the names of the jobs and ask the client how many miles it was round trip at the time of the appointment. (Of course this only works with just a few jobs that the client can remember then and there).

What about the other senarios.

Client has income and expenses on one page and total miles written there.

Client does not have the miles written down anywhere but you ask do you have written records.

If they do not have written records anywhere, I think you are saying it is disclosed if we check No to it is written as Black asked.

[S T]

Another Scenario

Since we knew this was coming as preparers, last year for tax year 2007, a form was devised for the taxpayer to complete. On this form was a listing by vehicle , odometer readings, beginning and end, a column for business use, a column for commute, and a column for personal.

Also that "This information is true, correct and complete to the best of My knowledge (taxpayer) signed and dated by the taxpayer.

The taxpayer was to complete this form and sign and date it and return to me for my file in order to complete their 2007 return.

Guess, the form needs to be revised to "include" And, I (the taxpayer) have the appropriate logs/records to substantiate the information provided on this report and will be furnished upon request.

If the t/p signs this statement, can we check the "yes" box, or would it be better to check the "no" box to protect ourselves. We still haven't seen the logs/records, we just have a form in file signed by the taxpayer that they have the log/records.

Seems like I better devise an additional form for the meals/entertainment and travel portion as well.

Thoughts or suggestions would be welcomed.

Sandy

[erchess]

BB - I have always taken "you" on a tax return question to refer to the taxpayer. So a question that is worded "Do you have....?" is addressed to them. I have like the rest of us found out that I cannot just ask the question and mark the answer the way we all used to. At first I had the idea that it was enough if they signed a statement that they had the record book but increasingly I am leaning toward the idea that I not only need to see it I may need to retain a copy. I am hoping that Bees Brad and company will give us some concrete guidance and maybe even (if signed statements are enough) tell us the language that needs to go in the statements or even incorporate them into the organizer.

[travis bickle]

Disclosure

But (except for the above-noted people) I always check YES on the question "Do you have evidence to support your deduction" (the evidence is that they told me they drove it) and then NO to "If yes, is the evidence written?" So...is that disclosure?

I think the Service has actually given us some reliable guidance on this. Please note this paragraph pulled from the IRS website (here is the actual url for this paragraph http://www.irs.gov/taxpros/article/0...9707,00.html):

=====BEGIN
If a taxpayer brings a tax organizer to an appointment with a tax return preparer and the organizer reflects that the taxpayer made certain dollar amount of charitable contributions, does a preparer need to see documentation of the payments?
A preparer may rely in good faith without verification upon information furnished by the taxpayer if it does not appear to be incorrect or incomplete, but may not ignore the implications of information furnished to the tax return preparer or actually known to the tax return preparer. The preparer, however, needs to inquire about the existence of documentation in accordance with the appropriate reporting and substantiation requirements. See Example 8 in the Notice.
=====END

I realize that this example is talking about charitable contributions, but the underlying premises are the same (1) client brings in information; (2) we examine the information; (3) we ask the client specific questions about the information; and (4) we inform the client that the service may question items that appear "abnormal" and to therefore be prepared to substantiate the claim or face the music. For example,
P: "I see that you are claiming a larger than normal amount of miles this year. What happened?"
C: "My sales area expanded and has been keeping me busy."
P: "Right. Do you have records concerning your business miles?"
C: [Answer goes here]
P: "Are your records in a written format?"
C: [Answer goes here].

Once we have done the above, we have "done our job" in that area.

And, I am certain that the contributors here "do their job"

[Bees Knees]

Page 5 of TTB organizer that I send to every client asks those mileage log questions. If the client fills that out in his/her own handwriting, and the written records box is checked yes, I won't go any further. I have done my due diligence.

If, on the other hand, they don't fill that out, or don't show me a written log book, I am going to ask those questions this year for every client wanting to claim mileage. If they say no, they have two options:

1. Re-construct a mileage log and let me see it before completing the return.
2. Understand I am answering the question "no" on their tax return which may increase the possibility of an audit.

I am also sending each client who claimed mileage last year one of those TTB 2009 pocket calendars which has a mileage log book in it. I will explain in my annual letter the requirement to keep a written log, and if they choose not to, that will be disclosed on their tax return.

I'm not doing this because of any specific information I have read. I am doing this because I don't want to risk the $1,000 penalty.

[tpert]

Page 5 of TTB organizer that I send to every client asks those mileage log questions. If the client fills that out in his/her own handwriting, and the written records box is checked yes, I won't go any further. I have done my due diligence.

If, on the other hand, they don't fill that out, or don't show me a written log book, I am going to ask those questions this year for every client wanting to claim mileage. If they say no, they have two options:

1. Re-construct a mileage log and let me see it before completing the return.
2. Understand I am answering the question "no" on their tax return which may increase the possibility of an audit.

Not that it is statistically significant, but I have a friend who claims he has answered "No" to the written records question on over 90% of the returns that had mileage for the last 30 years and is not aware of any of his clients being audited or changed.

I have generally used a third alternative to what you are offering. If my clients do not have written logs or at least call books and records to identify the clients they visited and where and when they visited them, they don't get any mileage deduction or if they have some but not all records, they get some but not all mileage (consistent with what they can prove).

Am I the only one who has been doing this?

[JohnH]

I have my own mileage summary sheet which I ask the client to fill in and sign. At the bottom of the sheet, I have repeated the mileage questions verbatim from the Schedule C. Whenever I email the sheet to a client or hand it to them, I tell them to be sure and check the proper answers to those questions, and that I will transfer that same info to the tax return. That mileage summary sheet is the same info that goes into my support files. I have also always understood the questions to be directed to the taxpayer. However, I'm beginning to rethink the issue in light of discussions of this type - I still plan to have them fill in the sheet but I may start asking them to show me the log and I may make copies of a few representative pages.

[Bees Knees]

Not that it is statistically significant, but I have a friend who claims he has answered "No" to the written records question on over 90% of the returns that had mileage for the last 30 years and is not aware of any of his clients being audited or changed.

Actually, I have answered "No" on a number of returns over the years for a variety of reasons when I know the client is pulling the numbers off my ceiling. I have never had a client get audited over it.

However, the point is if they do get audited and the mileage is denied or reduced, I believe I am off the hook because I disclosed on their return the fact that there were no written records to support the mileage claimed.

[Bees Knees]

Not that it is statistically significant, but I have a friend who claims he has answered "No" to the written records question on over 90% of the returns that had mileage for the last 30 years and is not aware of any of his clients being audited or changed.

BTW, just a side note. Part IV with the written mileage log questions did not appear on the Schedule C until 1993, which is 15 years ago, not 30.