How to protect ourselves?

[NotEasy]

I have done a few First Time Home Buyers Credit (the $7,500 one which has to be paid back in the future) and I am getting uneasy about doing it. The reason is that I keep wondering what will happen if they refuse to pay it back in the future and try to blame it on me that I have not explained clearly enough to them that the $7,500 is just an interest-free loan. They may have spent all the money and become desperate so they will just try to lay the blame on the tax preparer, you know. Does anyone here do something extra to protect yourself? I am thinking to make them sign a form which lays out the rules and, in particular, the fact that the $7,500 is just a interest free loan and has to be paid back in the future. Will it help if something happen in the future?

Opinion?

[DaveO]

I go to great lengths to explain the so called credit to my clients and would not even suggest that people who are "on the edge" fincancially consider taking it. After that I don't view it any different from any other return. They signed it and they are responsible for the contents. I can't imagine the IRS or any court finding a preparer liable in any way for simply following the rules and correctly applying the federal tax code.

[BP.]

Good question, NotEasy, as others here share your concern. Don't know how protective this is, but after I've explained the repayment requirements, I've written directly on the Form 5405 the repayment details, and then have client sign & date beneath it. At least I can show it was discussed w/client. Agree w/DaveO on responsibility & liability.

[taxmandan]

I have a form that details the requirements of the credit/loan and after I read it to the client they sign that they understand that it has to be paid back. Can't attach it here due to the limits of the board on size of files.

[JohnH]

I think you have good reason to be concerned.

As I've said before, I think anyone who's eligible for the credit should certainly claim it, but I'm not touching any of them myself. I sent one to HRB just a few weeks ago. I simply told her there were too many pitfalls and I'm not interested in assuming any liability (real or imagined) for this thing now or in the future.

While I agree with DaveO with respect to actual liability, I don't agree completely that it's just like any other return. This thing is different. I just know deep down inside that some of these clients are going to be a royal pain in the future and many preparers are going to regret the extra few hundred dollars those particular returns put in their pockets. It isn't just the matter of actual liability, but it's as much the fact that when they get in trouble over the repayment they're going t look for a scapegoat, and the tax preparer is the ONLY person they can blame. There's no other agency which certifies the credit or is in any way a party to the trsansaction, so it's all on the taxpayer and the preparer to keep up with it. Some preparers will be having problems with this credit 3-8 years in the future (unless Congress changes the rules and forgives the repayment)

In thinking this over, I'd definitely agree with BP's idea of having them sign the form and maybe something else to accompany it. I'd probably also send them a special reminder about the repaymenr responsibility, at least at the beginning of the first year the repayments are to begin. I'd do that even before I knew whether they are a returning client. And if I found that they didn't return in the future for some reason, I'd probably send them a reminder via certified mail.

[Jesse]

http://www.irs.gov/newsroom/article/0,,id=187935,00.html

I print out the First-Time Home-buyer Credit Information Center Questions and Answers at the above link - it's two pages and provide the taxpayer with one copy.

Right next to the question:

"Q: When must I pay back the credit?"

I make the taxpayer(s) sign and date.

[AZ-Tax]

It goes beyond the $7500 credit ....

We have clients who love and understand the fact they can deduct their cost of their vehicle 1st yr (sect 179) but dont understand recapture and blame us for it. "You never told me about this recapture thing". I have my clients sign forms, custom letters etc. I had a client last year in a partnership for which the client had a huge write off if the client materially participated in the partnerhship. I had nothing in written form but only verbal from the partnership admistrator that my client materially particpated. I had my client sign a letter stating they materially participate and that if the deduction if dissallowed, I reserve the right to charge my client to amend my client's tax return and my client's was responsible for any penalities, interest and the additional taxes. My client is an attorney.

I am a big CMA or CYA tax preparer.

[David1980]

There's a lot of stuff that gets blamed on taxpreparers as it is. I'm not worried about it, but haven't done many. I imagine if you were in an area where a significant percentage of your clients were getting it, you'd have much more to worry about. I'm sure if every single return you prepared had the credit you'd have very big worries .

[taxea]

1. you show them the ruling in writing. If they agree you have them sign the page. You keep the signed original and staple a copy to their tax return.

I am willing to bet the the repayments will be a line on future tax returns which means they will have to adjust their W-4's to cover the tax/payment.

I just don't see any way that a preparer would be held liable. taxea

[JohnH]

Just don't forget to keep all that CYA paperwork in your files for 15-18 years, even if the client goes somewhere else (or maybe ESPECIALLY if they go somewhere else)

[Burke]

The information presented on the IRS website states "a memo field will be present on taxpayer record and repayment will be tracked over the 15-yr repayment period," and also that the IRS will know "through self-reporting and third-party information" whether they have sold the home. So, they will take care of non-reported paybacks apparently. Whether or not they can accomplish the second item is debatable, IMO, since the sale would not be reported unless it was over the limits. Maybe they have secret ways.....
Again, it is up to the TP to be compliant, but I like the suggestion of having them sign a statement or initial this print-out for my records. Other than that, I am not going to worry about it. I am willing to bet money it will be eliminated anyway in the future.