Due Diligence - IRS Letter 4809

[Edward]

Received NATP TAXPRO JOURNAL (SPRING 2012) today. Am amazed over the article on above subject, relating to 21,000 IRS letters (4809)sent to tax professionals. Some of the fines issued were of special interest - Like the Kentucky preparer @ 15,000, and then later reduced to 8,000. Too, "Paul's Story" seems to be the worst - like a total fine of 23,000. Can you imagine receiving a fine of that amount? In another instance, the preparer said the agent was finished with his audit in minutes & said that he couldn't understand the basis for the audit to begin with; while another preparer said the agent couldn't understand why they were doing an audit, etc etc. Wouldn't you think these type audits should be more or less "standardized" rather than like an "all-out fishing expedition" - but it appears that each auditor had there own personal idea of what they were going to look for. Sounds strange as the lead sentence of the article mentioned that the visit was supposed to be more of an Educational Nature, rather than an all-out fishing expedition.

[Koss]

Due Diligence

I have not read the article you are referring to.

But I think there's a difference between a "visit," as described in IRS Letter 4809, and an EIC due diligence audit.

BMK

[MLINDER42]

Irs Leter 4809

I have had two of my preparers have EITC audits.The first one just looked at Schedule C and CEZ returns and fined the preparer for not having enough back up paper work for the returns.Fine $3100.Second audit they pulled a 100 returns where the dependents were nieces,nephews,grandchild or brothers/ sisters they wanted written proof that we asked why the parents of the child had not taken the dependent.After three days they said our fine was $5100 I said I would not accept that and wanted to see his manager.He returned with his manager the next day and I said we could go over each return with the preparer and she may know the reason and where does it say must be written.They met by themselves for a few minutes then said would you accept $3300. fine.I agreed paid them and they left.I than increased the fees for every EITC return $50.00 and made the preparers write down all the info.I also raised the per return bonus $5.00 for each EITC return for the extra time it is going to take.

[taxea]

I have had two of my preparers have EITC audits.The first one just looked at Schedule C and CEZ returns and fined the preparer for not having enough back up paper work for the returns.Fine $3100.Second audit they pulled a 100 returns where the dependents were nieces,nephews,grandchild or brothers/ sisters they wanted written proof that we asked why the parents of the child had not taken the dependent.After three days they said our fine was $5100 I said I would not accept that and wanted to see his manager.He returned with his manager the next day and I said we could go over each return with the preparer and she may know the reason and where does it say must be written.They met by themselves for a few minutes then said would you accept $3300. fine.I agreed paid them and they left.I than increased the fees for every EITC return $50.00 and made the preparers write down all the info.I also raised the per return bonus $5.00 for each EITC return for the extra time it is going to take.

I have the TP read and initial each page and sign/date the third page. I also have the parent that would qualify sign a F8332.

[MLINDER42]

Irs Letter 4809

Most of the time the parents of the child are not in the picture.Farther is unknown mother is either dead, on drugs,or in jail.During the audit had 21 year old taking two younger brothers asked where parents were?Did not know who farther is mother went to pick up cigarettes eight months ago never came back.Showed this to auditor to see if it was enough info not to be fined?He shook his head in disbelief but said if we had it in writing
and signed we would be ok.So now we must embarace the client to give us family secrets.

[spanel]

I have the TP read and initial each page and sign/date the third page. I also have the parent that would qualify sign a F8332.

That wont work on an EIC audit.. 8332 is for claiming a child that DOES NOT live with you.. for EIC they have to live with you more than 6 months.

Chris

[Nashville]

Doing Audits

I read the same article in NATP and was concerned that these visits expected the preparers to AUDIT (in effect) the taxpayers. In particular, going beyond the preparation and insisting on supporting documentation. That's what an audit is.

And from the size of some of these penalties, it is becoming more and more apparent that if the IRS can get away with it, they will much prefer to audit preparers and collect penalties than audit taxpayers and collect taxes.

If this ever happens to me, I will stop doing taxes. I don't lie or cheat for my clients, but I'm not going to spend 4 times as much effort trying to jump through IRS hoops as I do preparing the return.

[JohnH]

I think a first prudent step is to refuse to prepare returns claiming the EIC, except in very limited circumstances. I've told more than one client that I'm just not geared up for EIC work and encouraged them to go to HRB, JH, or anywhere other than my office.

On the other hand, anyone who does prepare these types of returns should build a hefty premium into their pricing to allow for penalties, regardless of how much due diligence they do. The handwriting is on the wall.

In a broader sense, I suspect this may just be the tip of the iceberg. I believe IRS would like nothing better than to make tax preparers an extension of their audit division across the board. If they can accomplish this through the back door via the threat of penalties, they will continue to expand this lucrative route. They've already succeeded in making tax preparers take on the role of data entry clerks, may as well keep enhancing the role.

[Nashville]

John has it right

I believe IRS would like nothing better than to make tax preparers an extension of their audit division across the board.

In fact the current commissioner has stated that they'll get preparers to be "our first line of defense" against fraudulent claims and unsupported deductions.

They continue to pretend, at least vocally and on the surface, that they don't expect preparers to "audit" taxpayers. However, one of the reports in the NATP article stated they expected preparers to keep on file contribution statements from churches, nonprofits, proof of relationships for EIC, etc. If a preparer has to do this, is he not auditing the client??? I also believe they think fines and penalties on preparers are easy to collect instead of having to collect from the taxpayer.

What about the TurboTax user who simply increases their contributions and phony deductions enough to calculate the desired refund? If they won't audit this obvious avenue for fraud, then why are they auditing US??

[JoshinNC]

Increase all EIC return fees by $500?

I think a first prudent step is to refuse to prepare returns claiming the EIC, except in very limited circumstances. I've told more than one client that I'm just not geared up for EIC work and encouraged them to go to HRB, JH, or anywhere other than my office.

On the other hand, anyone who does prepare these types of returns should build a hefty premium into their pricing to allow for penalties, regardless of how much due diligence they do. The handwriting is on the wall.

In a broader sense, I suspect this may just be the tip of the iceberg. I believe IRS would like nothing better than to make tax preparers an extension of their audit division across the board. If they can accomplish this through the back door via the threat of penalties, they will continue to expand this lucrative route. They've already succeeded in making tax preparers take on the role of data entry clerks, may as well keep enhancing the role.

Accomplishes two things, runs off the ones you don't want and creates a "penalty fund" for the unforeseen. Also, could these preparers file an E&O claim?

[taxea]

That wont work on an EIC audit.. 8332 is for claiming a child that DOES NOT live with you.. for EIC they have to live with you more than 6 months.

Chris

I don't believe I said anywhere in my post that the dependent did not live with the TP

[Koss]

Form 8332

Form 8332 allows a noncustodial parent to claim an exemption for a child.

So if you argue in an audit that "my client can claim this child because the other parent signed Form 8332," then you have just asserted that your client is the noncustodial parent.

Noncustodial = child did not live with that parent for more than six months.

A noncustodial parent can never claim EIC.

Form 8332 cannot be used to defend an EIC claim. If it is the custodial parent who claimed EIC, and the custodial parent signed Form 8332 to release the exemption to the noncustodial parent, this is consistent with the EIC claim, but it does not prove that the child lived with the parent who signed Form 8332.

For the parent identified as the noncustodial parent on Form 8332, presenting the form in an EIC audit actually provides the IRS with evidence that the taxpayer cannot claim EIC.

BMK

[Edward]

It appears as tho the comments on this subject are assuming the IRS letter 4809 relates strictly to EITC (Except for "Nashville's Posts).-- BUT, if you read the 4809, EITC isn't even mentioned; with the target areas being Schedules A, C and E. instead., The letter further states "Tax Return Preparers are expected to be knowledgeable in tax law and prepare accurate returns while exercising Due Diligence". Download a copy of the "Letter 4809 (Rev 10-2011 - catalog Number 58566D) - it has some interesting data.

[Koss]

Visit or Audit?

As I noted in my first post in this thread, I think there is a difference between a visit, as this term is used in Letter 4809, and an EIC compliance audit.

Here's a link to a PDF of an actual Letter 4809:

http://blogs-images.forbes.com/kellyphillipserb/files/2011/11/Notice-4809.pdf

If you read the text of the letter carefully, it only refers to preparer penalties that may arise when the return contains an understatement of tax liability.

The only way the IRS can determine that there is an understatement of tax liability on a particular return is by conducting a examination of that return. They can only do that by notifying the taxpayer. In this context, examination is just another word for audit. But it refers to an audit of a specific return. The IRS can only begin that process by mailing a notice to the taxpayer. They cannot audit an individual tax return by simply visiting the preparer's office.

EIC compliance audits are very different. They do not involve examination of individual tax returns. In an EIC compliance audit, the IRS cannot make changes to any tax return. They do look at some tax returns, and they review the preparer's records to determine whether the preparer has complied with the due diligence requirements of EIC. But they are not auditing those returns in the traditional sense of an audit. They can't do that without notifying the taxpayer.

So we are talking about three different processes:

(1) EIC compliance audit
(2) Examination of individual income tax returns
(3) Preparer visit as described in Letter 4809

An EIC compliance audit can result in preparer penalties under the due diligence rules of EIC.

An examination of an individual tax return can result in preparer penalties under IRC 6694(a).

But I don't see how a preparer visit, conducted under the procedures described in Letter 4809, could result in any preparer penalties. On this type of preparer visit, I don't see how the IRS would have any authority to look at any individual tax returns. And even if they did, I don't see how they could determine that there was an understatement of tax liability.

Maybe I'm really missing something here. I already acknowledged that I have not read the NATP article.

My question is this:

If the NATP article is not talking about penalties that arose out of an EIC compliance audit, and it is not talking about penalties that arose out of a full-blown audit of an individual tax return (which would have had to begin with a mailed notice to the taxpayer, not a visit to the preparer), then what penalties are they talking about??

Where is the statutory authority for these penalties? It sure isn't in Letter 4809.

BMK

[Snaggletooth]

You are Missing It

Maybe I'm really missing something here. I already acknowledged that I have not read the NATP article.

My question is this:

Where is the statutory authority for these penalties? It sure isn't in Letter 4809.

BMK

Mr. Koss, you are indeed missing something. The NATP article gives specific examples where the visit to the preparer's office resulted in an examination of due diligence and preparer procedures/documentation, and penalties actually WERE assessed. In some cases, many thousands of dollars. And the article is not limited to EIC issues, in fact, EIC did not appear to be the primary focus of the visit.

The strategy of the IRS appears to be quite clear, and they are NOT the kindly, heartfeeling people like your neighbors next door. They are moving away from auditing taxpayers, and instead raising revenue by preparer penalties. They are easier to collect from, easier to track down, and appear to have the last word in their determination.