Due Diligence - IRS Letter 4809

[Koss]

Preparer Penalties

Okay, so I need to read that article, and I need to get more up to speed on this.

Under what section of the Internal Revenue Code were the penalties assessed?

There must be some sort of appeal process.

BMK

[Jiggers]

The thing I don't understand is that no where is it mentioned that the taxpayer was assessed an adjustment and owed taxes where the return preparer didn't use due dilligence, according to the examiner, in the preparation of that return.

So how can there be a preparer penalty when the return was accepted as is?

I think our organizations need to get on top of this.

[Gary2]

The thing I don't understand is that no where is it mentioned that the taxpayer was assessed an adjustment and owed taxes where the return preparer didn't use due dilligence, according to the examiner, in the preparation of that return.

So how can there be a preparer penalty when the return was accepted as is?

Due diligence is a requirement that is separate from the correctness of the return. For example, suppose a client walks in and asserts a Schedule C-EZ with a bottom line of $15,000 of net profit. You enter it as a single line, no questions asked, resulting in a large EITC. You get audited and fined $500, because you can't prove you followed the simple process of asking how that number was calculated. The client also gets audited, and provides the IRS with the most beautiful set of double-entry books they've ever seen, along with legible, dated receipts identifying each and every expense, client lists, income receipts, bank deposit slips to match, etc. And guess what, when they push all the numbers through, they net out to exactly $15,000. They pass the audit.

[Snaggletooth]

This is what's going on

Gary 2, your scenario does not happen, because after doing this compliance investigation of the preparer, the auditor doesn't even go after the taxpayer. In many cases, can't even find them, and if they do they can't collect from them because the money is GONE, and they never have any more money until next refund.

This is ALL preparer centered, and unless NAEA or NATP can stop the trend, it will make auditors and collectors lazier and lazier, and run preparers like myself out of business. This is a trend with no downside for the IRS, so why would they stop unless they were forced to?

[Gary2]

Gary 2, your scenario does not happen, because after doing this compliance investigation of the preparer, the auditor doesn't even go after the taxpayer. In many cases, can't even find them, and if they do they can't collect from them because the money is GONE, and they never have any more money until next refund.

True, but not really related to the question I was addressing, which was how they could fine the preparer if the EITC was legit. The point is that a due diligence violation can exist whether or not the taxpayer can justify a given line item.

[joanmcq]

If they find the taxpayer, and there is evidence of EITC fraud, they cannot collect EIC for the next 5 years. Regardless of whether they qualify or not.

And they get to pay it back, or the IRS tries until the SOL runs out.

[Jiggers]

What I was concerned with about these so-called preparer audits is that what was being questioned would be sufficient documentation under due dilligence, but that the auditors are taking it a step further which is more than was is required.

And this wasn't just for EIC. How much further can the auditor go? I don't require logs for any travel. But I do require a signed statement that the taxpayer can justify the information that he gives me. But is that sufficient under these preparer audits?

And what about those charitable donations? Do we need to see all checks and/or required receipts? Client gives me a total for donations in my organizer or on his worksheet. Is that sufficient under these preparer audits?

What about travel and entertainment on a Schedule C? How much further do we have to request substantiation? We are given a total for meals and we use that. The same for other travel expenses. Is that sufficient under these preparer audits?

We have just so much time to prepare so many returns during tax season. If we have to add another 30 minutes to an hour for the preparation of these returns, our fees have to go up substantially. We explain to the client our fee increase, and he goes down the block to someone who doesn't do this and charges considerably less.

For the record, I do not do any EIC returns except for the one or two of my long-time clients that accidently get some EIC for various reasons. My add-on fee for any EIC is $60.00.

[JohnH]

I'd be surprised to find that any subatantial work to verify Schedule C deductions could be done in 30 minutes or so. The types of verifications you are talking about could easily take a couple of hours, even for a small Schedule C business. So I'd like to hear whether statements signed by the taxpayer are sufficient as well (assuming the taxpayer is otherwise believable).

BTW, I like the term you used for the EIC returns you prepare. I'm the same way - I just don't do them except for a couple of exceptions. I think in the future I'll refer to them as "accidental EIC" returns. It's accidental that they found themselves qualifying in the first place, and definitely accidental that I'm preparing a return with an EIC claim.

[JoshinNC]

Why would we turn away business?

Just charge a fee that is cominsurate with your potential liability. If that is a minimum of $500, $700, $1000, so be it. Notify the client up front of the fee, and if they approve it, feel confident in your work.

[MLINDER42]

Due Diligence

These audits are mostly about EIC I have not heard of any fines except for EIC.Both my preparers did over 400 returns with 75% having EIC.They do not have the manpower to check these returns so they want us to be the first line of defense.I believe that most of the 200 returns I refused to do this season went to under ground preparers.Some of them even came in to cash their refund checks and berate us for not doing the returns and complaining about the extra fee for cashing the checks.Our clients pay 2% outside people pay 3%..

[Black Bart]

Josh,

Why would we turn away business?

Just charge a fee that is cominsurate with your potential liability. If that is a minimum of $500, $700, $1000, so be it. Notify the client up front of the fee, and if they approve it, feel confident in your work.

It's an appealing plan, but only in theory it seems to me. I don't believe EIC customers could/would pay a $500 to $1,000 fee (maybe some large refund RAL guys). I know the rurales here wouldn't and I wonder about your NC boys (can't speak for MLINDER who's in -- DC, isn't it?).

The point is; if you charge that kind of CYA fee you ARE effectively "turning away business."

[Snaggletooth]

Real World

Bart, geez, where have you been??

And, again, out of Dogpatch comes more common sense. Where on earth will your customers endure a stiff price increase instead of going down the road to someone else? or worse still, buying TurboTax.

Many of the people posting have not read the NATP article. MLINDER, for example, would realize this is NOT about EITC. It is about auditing contributions, exemptions, business expenses, etc. although I don't believe EITC is excluded. Jiggers has the issue right on -- an hours' appointment should not turn into 4 hours just so the preparer (instead of the taxpayer) keep all the documentation.

Turning down all EITC customers has been suggested. However, EITC now ranges up to $49,000. For those of you in Boston, DC, San Francisco, etc. this may sound like poverty level, but in my town this is middle income. Most of my clients make much more, but even still, I would say that 25% of them get EITC, and what's worse, they are all kinfolk to the clients who make much more.

[JoshinNC]

I'm not a NATP member

is it possible to post a link to the article?

[MLINDER42]

Irs 4809

I read the article and as stated have had two audits.The people I am turning away are paying an average of $750 to have their returns done some are giving half of the refund to the preparer.I am in a very low income area so the refunds including state average $7500.

[Gary2]

I took advantage of a free three month NATP membership offer to look at the article, which is mostly a set of letters from members concerning their preparer audit experiences. The base note doesn't represent it fairly, because a good number of the cases are of the form "The auditor spent such and such time with me, and I passed with flying colors." Some go on to complain about it being a waste, or how they stressed out over it, or how it takes too much time during busy season. One (John F. Wilcox) concludes with "I could look upon this experience in a negative light .... But, these letters are actually a good thing. They keep us on our toes .... The Service is simply looking out for the citizenry, after all."

In the Kentucky case, the base note errs in its summary. This anonymous tax business owner, with four offices, was fined $15,000 from audits of two of the offices in 2009, and then an additional $8,000 from more recent audits (I'm guessing either 2011 or 2012) of the same two offices. Unfortunately, this writer doesn't describe the specifics beyond "5–7 full days writing us up for every nit-picking thing." I'm inferring that this person, with four offices, has a number of employees signing the returns, which should put the dollar amounts in perspective. I can't tell if the amounts represent just the owner's fine, the preparers' fines, or the sum of both.

Paul's case (Paul Stern) is the only one that I read as having enough information to conclude that the IRS agents might be going overboard. He says "We are required
to ask single parents where the other parent is, how much they contribute, and who watches the child...." As it happens, these are stock questions provided by our software, so they're no big deal for me; I always ask them and record the answers when they come up. On the other hand, while these questions are reasonable, I'm unconvinced that they're all required by the "incorrect, incomplete, or inconsistent" standard. I view that as a defect in the IRS regulations - the regulations should make it easier to derive required questions such as these. Mr. Stern's defense seems to be that the IRS doesn't ask these questions when auditing the taxpayers, and that nobody was apprised of these requirements (which is half-true - they're not in the regulations or other formal material, but they are on the IRS's EITC Central web site).

His $23K fine was apparently computed as $500 for him as preparer and $500 for his wife as owner. I doubt we'll find out how his appeal turns out, but it could be interesting, especially if he fights tooth and nail, with counsel, rather than negotiating a reduced amount.