I am starting a new thread on this topic for a couple reasons. The length of the previous thread is making it difficult to follow. But the number of comments, and the number of hits, suggest that this topic is of great interest to the entire community.
The Publications Editor at NATP has authorized me to post a copy of the article on my office server, to make the article available to those who are not members of NATP.
Here’s the link:
And here’s a link to an image of Letter 4809:
Within our community, in the previous thread, there has been a rather spirited, healthy and professional debate as to whether the penalties referred to in the NATP article pertain exclusively to EIC.
For example, Edward, the author of the original post, wrote:
And Snaggletooth wrote:
Gary2 wrote:
Jiggers wrote:
MLINDER, who went through an EIC due diligence audit, and paid penalties, wrote:
And Snaggletooth responded:
Soooooo…
I’m going to weigh in with an opinion on this matter.
I have read the article very carefully. Most of the article contains narrative descriptions by tax pros of an experience in which an IRS representative visited their office. In some cases, penalties were assessed; in other cases, they were not.
It appears that some of these visits were EIC due diligence audits, while others were visits associated with Letter 4809. These are two very different events.
Nowhere in the article does it identify the statutory authority by which the penalties were assessed.
An IRS visit conducted in connection with Letter 4809 is not the same as an EIC due diligence audit.
Due in part to the narrative nature of the article, this distinction is not entirely clear. The article discusses Letter 4809, and makes several references to due diligence, and also talks about EIC. The relationship between these three concepts is not analyzed or explored in great detail.
The article is very good, and it contains valuable information. But you have to read it carefully, and in context.
Tax pros certainly have a responsibility to perform due diligence when preparing any tax return, regardless of whether EIC is involved. Due diligence, in this sense, is a generic term. There is room for many different opinions about what constitutes due diligence when it comes to charitable donations, vehicle mileage, stock basis, and many other issues.
This general concept of due diligence has nothing to do with the statutory requirement to perform due diligence in determining a taxpayer’s eligibility for EIC.
The only penalty that can be assessed by the IRS for a tax preparer’s failure to perform due diligence is that penalty which is authorized by IRC 6695(g). And that penalty pertains exclusively to EIC.
If you read the NATP article carefully, and do your homework on this issue, you will see that there is no statutory authority for any “due diligence penalty” except the penalty associated with EIC.
Here’s a list of all preparer penalties authorized by the Internal Revenue Code:
An EIC due diligence audit will often involve a review of returns with EIC and Schedule C. And the IRS appears to have taken the position that due diligence with respect to EIC requires the tax pro to make certain inquiries, and possibly keep certain records, associated with Schedule C, particularly when the taxpayer has no income except for Schedule C, and when the net income on Schedule C is at or near the top of the EIC curve.
For example, if a client comes in asserting that their only income is from cleaning houses, or working at an adult entertainment club, and has no records of income or expenses, and claims that their income was $16,400, this should be viewed as a badge of fraud, and the tax pro has a responsibility to make numerous inquiries in an effort to determine whether there really is a business, or any income at all.
So I am acknowledging that an EIC due diligence audit will often involve detailed reviews of returns that have EIC and Schedule C. And I agree with Gary2 that the IRS can assess penalties against the preparer, based on the preparer not asking enough questions, or not keeping a record of what questions they asked and what information the taxpayer presented, all without ever conducting an audit of the taxpayer’s return. And even if they did audit the return, and made no changes to it because the taxpayer substantiated everything, the preparer could still be penalized for not performing due diligence with respect to EIC. As Gary2 noted, due diligence exists independently of whether the tax return is accurate. Due diligence, in this context, involves the information that is used to prepare the return—not the information presented in the return itself.
Schedule C is often closely tied to EIC, so it is indeed part of an EIC due diligence audit of the tax pro.
But an IRS visit to the preparer, as described in Letter 4809, is not an EIC due diligence audit. There are some other penalties that could conceivably be assessed during a “Letter 4809 visit.” But they are not as onerous as the EIC due diligence penalties, and they are penalties that most of us do not have to worry about. These are the penalties for failure to sign the return, failure to keep a copy of Form 8879 signed by the taxpayer, and things like that.
The IRS cannot show up at your office and assess a penalty after reviewing a return that contains Schedule A, by asserting that you did not perform due diligence in connection with charitable donations, or with some job-related education expenses, or any other issues that are unrelated to EIC.
They cannot assess any type of “due diligence” penalty except the one that is codified in IRC 6695(g), which is associated with EIC (and by extension, Schedule C when EIC is present on the return). There is no statutory authority for any other type of penalty based on a lack of due diligence.
Anyone who has been assessed this kind of penalty should vigorously appeal it. Even if you already paid it. Even if you waived your right to appeal. Even if the time to appeal has lapsed. I have an attorney that works closely with my firm that would love to take the case. Any such penalty is void ab initio because the IRS lacks statutory authority to assess it. Subject matter jurisdiction cannot be waived.
There is no “generic” due diligence penalty. It doesn't exist.
An IRS visit pursuant to Letter 4809 and an EIC due diligence audit are two totally different events. The NATP article talks about both.
In much of the discussion in the previous thread, this critical distinction has been overlooked.
BMK
The Publications Editor at NATP has authorized me to post a copy of the article on my office server, to make the article available to those who are not members of NATP.
Here’s the link:
And here’s a link to an image of Letter 4809:
Within our community, in the previous thread, there has been a rather spirited, healthy and professional debate as to whether the penalties referred to in the NATP article pertain exclusively to EIC.
For example, Edward, the author of the original post, wrote:
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".
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.
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.
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?
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?
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.
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.
I’m going to weigh in with an opinion on this matter.
I have read the article very carefully. Most of the article contains narrative descriptions by tax pros of an experience in which an IRS representative visited their office. In some cases, penalties were assessed; in other cases, they were not.
It appears that some of these visits were EIC due diligence audits, while others were visits associated with Letter 4809. These are two very different events.
Nowhere in the article does it identify the statutory authority by which the penalties were assessed.
An IRS visit conducted in connection with Letter 4809 is not the same as an EIC due diligence audit.
Due in part to the narrative nature of the article, this distinction is not entirely clear. The article discusses Letter 4809, and makes several references to due diligence, and also talks about EIC. The relationship between these three concepts is not analyzed or explored in great detail.
The article is very good, and it contains valuable information. But you have to read it carefully, and in context.
Tax pros certainly have a responsibility to perform due diligence when preparing any tax return, regardless of whether EIC is involved. Due diligence, in this sense, is a generic term. There is room for many different opinions about what constitutes due diligence when it comes to charitable donations, vehicle mileage, stock basis, and many other issues.
This general concept of due diligence has nothing to do with the statutory requirement to perform due diligence in determining a taxpayer’s eligibility for EIC.
The only penalty that can be assessed by the IRS for a tax preparer’s failure to perform due diligence is that penalty which is authorized by IRC 6695(g). And that penalty pertains exclusively to EIC.
If you read the NATP article carefully, and do your homework on this issue, you will see that there is no statutory authority for any “due diligence penalty” except the penalty associated with EIC.
Here’s a list of all preparer penalties authorized by the Internal Revenue Code:
An EIC due diligence audit will often involve a review of returns with EIC and Schedule C. And the IRS appears to have taken the position that due diligence with respect to EIC requires the tax pro to make certain inquiries, and possibly keep certain records, associated with Schedule C, particularly when the taxpayer has no income except for Schedule C, and when the net income on Schedule C is at or near the top of the EIC curve.
For example, if a client comes in asserting that their only income is from cleaning houses, or working at an adult entertainment club, and has no records of income or expenses, and claims that their income was $16,400, this should be viewed as a badge of fraud, and the tax pro has a responsibility to make numerous inquiries in an effort to determine whether there really is a business, or any income at all.
So I am acknowledging that an EIC due diligence audit will often involve detailed reviews of returns that have EIC and Schedule C. And I agree with Gary2 that the IRS can assess penalties against the preparer, based on the preparer not asking enough questions, or not keeping a record of what questions they asked and what information the taxpayer presented, all without ever conducting an audit of the taxpayer’s return. And even if they did audit the return, and made no changes to it because the taxpayer substantiated everything, the preparer could still be penalized for not performing due diligence with respect to EIC. As Gary2 noted, due diligence exists independently of whether the tax return is accurate. Due diligence, in this context, involves the information that is used to prepare the return—not the information presented in the return itself.
Schedule C is often closely tied to EIC, so it is indeed part of an EIC due diligence audit of the tax pro.
But an IRS visit to the preparer, as described in Letter 4809, is not an EIC due diligence audit. There are some other penalties that could conceivably be assessed during a “Letter 4809 visit.” But they are not as onerous as the EIC due diligence penalties, and they are penalties that most of us do not have to worry about. These are the penalties for failure to sign the return, failure to keep a copy of Form 8879 signed by the taxpayer, and things like that.
The IRS cannot show up at your office and assess a penalty after reviewing a return that contains Schedule A, by asserting that you did not perform due diligence in connection with charitable donations, or with some job-related education expenses, or any other issues that are unrelated to EIC.
They cannot assess any type of “due diligence” penalty except the one that is codified in IRC 6695(g), which is associated with EIC (and by extension, Schedule C when EIC is present on the return). There is no statutory authority for any other type of penalty based on a lack of due diligence.
Anyone who has been assessed this kind of penalty should vigorously appeal it. Even if you already paid it. Even if you waived your right to appeal. Even if the time to appeal has lapsed. I have an attorney that works closely with my firm that would love to take the case. Any such penalty is void ab initio because the IRS lacks statutory authority to assess it. Subject matter jurisdiction cannot be waived.
There is no “generic” due diligence penalty. It doesn't exist.
An IRS visit pursuant to Letter 4809 and an EIC due diligence audit are two totally different events. The NATP article talks about both.
In much of the discussion in the previous thread, this critical distinction has been overlooked.
BMK
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