Google: It's here: Form 1099-K business income matching

[taxea]

This is yet another reason why I sold my prep practice. Looks like Uncle Sam is asking us to audit the TP's books to insure they reported the proper amount of income.
I thought we were not required to audit the TP records but rather to accept as truthful the information given to us at face value.

[joanmcq]

Well the 1099-Ks are working the same way as 1099-MISC. If your client reported $20k of total income but you have a 1099-MISC for $30K, wouldn't you inquire further? That's called due diligence, and has been required all along. At least if you were covered by circular 230.

[ChEAr$]

Is that back again? having to separate credit card sales from cash sales? Admittedly I haven't looked at a schedule c yet.

[joanmcq]

No, you don't have to separate cash from credit card sales. But the IRS is sending CP notices to people who don't report at least as much in gross receipts as reported on their 1099s.

[Nashville]

Due Diligence = Audit

Well the 1099-Ks are working the same way as 1099-MISC. If your client reported $20k of total income but you have a 1099-MISC for $30K, wouldn't you inquire further? That's called due diligence, and has been required all along. At least if you were covered by circular 230.

I think if we're smart, we prepare our clients returns by making things match to information statements.

However, I agree with the statement that we are being expected to AUDIT instead of accepting information from the client, and the govt is trying to make you think that this audit function is no more than "due diligence." I can tell you this much, they would LOVE for us to do their job for them, and I have read statements from people in the Commissioner's office such as "We consider these 750,000 tax preparers to be our first line of defense against fraud...."

Make no mistake about it, and know the devil when you see him. When "due diligence" requires you to examine a taxpayer's mileage log, that is an AUDIT function. When "due diligence" requires you to ask to see a child's report card, that is an AUDIT function. When "due diligence" requires you to insist on a church statement before you can deduct contributions on Sch A, that is an AUDIT function.

Please don't confuse this with a responsibility to ascertain whether a taxpayer is on the up-and-up. Due Diligence would, for example, stop us from accepting totally ridiculous deductions or accepting revenues that are totally unrealistic. I would also include failure to observe information statements as a failure of due diligence. But going beyond what the client tells you and making him produce documents crosses the line into the audit function.

[joanmcq]

I don't agree. I make it a point to inform clients of the regs; if they donate $250 or more, I tell them about the need for a letter, due to the regs. I don't request the letter, but I have had clients get corrected letters if the one the org sent doesn't have the required info on it. I ask if clients have a mileage log. If they say 'yes', I don't ask to see it, but I do inform new biz clients of the need for one, and have a stack in my desk drawer to hand them. I also show them the app I have on my phone that I use to keep my own log.

This is not auditing, this is due diligence.

[Black Bart]

Whether I'm "due"ing diligence or "do"ing auditing, I came face-to-face with 8867's new page-four reality yesterday afternoon. Pleasant this EIC -- is not gonna be.

Black Bart: We need some proof your kids live with you.
Client: Say what?
BB: I said (same thing).
C: But you've been doin' my taxes for 15 years.
BB: I know, but you live out of town and I don't personally know the kids, so IRS wants us to get documents from you proving that they live with you.
C: Like what?
BB: Okay, lets go down the list. What about getting a memo from the school on their stationery listing the kids and the address of each?
C: I dunno; that school secretary's awful grouchy, but I got their report cards last week and they were sent to "The parents of Jack and Jill Doe".
BB: Do the cards themselves list an address?
C: No, but the envelope they came in did.
BB: You keep it?
C: Who knows? I'll look. What else?
BB: Landlord statement.
C: We own the house.
BB: Health care provider statement.
C: Nobody was sick last year.
BB: Medical records.
C: They won't even give you a bill anymore, much less anything with an address, but I'll call.
BB: Child care provider records.
C: They're too old for babysitters.
BB: Placement agency statement.
C: ???? Nobody in our family's adopted.
BB: Social service records or statement.
C: Nobody's on social security, but I've got their cards somewhere at home. No address on those though.
BB: Place of worship?
C: Sorry, we don't go.
BB: Indian tribal official statement.
C: You're joking.
BB: Employer statement.
C: There's 3,000 people at the factory - they barely know me, never mind kids.
BB: Okay, dig up the report cards, the envelope, social security cards, and whatever else you can; then come back January 30th -- we'll claim them and finish this up . If all else fails, I'll put a note in your file saying you swear on your honor as a southern gentleman that you've got two kids.
C: Three. One of the girls stays in the dorm at college. What about her?
BB: Forget that one; we'll wing it.

[David1980]

Sounds terrible! But, following the IRS instructions, would that conversation be necessary at all?

If a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that any information the taxpayer has given you appears to be incorrect, incomplete, or inconsistent with the taxpayer's eligibility to claim the EIC, you must ask the taxpayer reasonable questions to get information that is correct, consistent, and complete. You must document the questions you asked and the answers you received. This is how you meet your knowledge requirement.

Check “Does not apply” on line 24 if you did not need to ask any additional questions because you were not given any information that appeared to be incorrect, inconsistent, or incomplete.

You've done the tax returns for 15 years, the kids are their children not nephews/nieces/brothers/whatever, what exactly would cause a reasonable and well-informed tax preparer to conclude the information appears to be incorrect, incomplete, or inconsistent? If nothing, then you need to have records of nothing. Right?

[AZ-Tax]

From TTB Letter of Engagement RE Audit

However, I agree with the statement that we are being expected to AUDIT instead of accepting information from the client, and the govt is trying to make you think that this audit function is no more than "due diligence." I can tell you this much, they would LOVE for us to do their job for them, and I have read statements from people in the Commissioner's office such as "We consider these 750,000 tax preparers to be our first line of defense against fraud...."

(First 2 bullet points of the TTB's LOE)
Tax Return Preparation
• We will prepare your 2012 federal and state tax returns based on information you provide. Services for
preparation of your return do not include auditing or verification of information provided by you.
• This engagement does not include any audit or examination of your books or records. In the event
your return is audited, you will be responsible for verifying the items reported.

How many of your have something on the bases of "no aduiting or verification of information provided by you" in your LOE?

[Black Bart]

Right you are, D-80. Thanks for the lifepreserver and

Sounds terrible! But, following the IRS instructions, would that conversation be necessary at all?

If a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that any information the taxpayer has given you appears to be incorrect, incomplete, or inconsistent with the taxpayer's eligibility to claim the EIC, you must ask the taxpayer reasonable questions to get information that is correct, consistent, and complete. You must document the questions you asked and the answers you received. This is how you meet your knowledge requirement.

Check “Does not apply” on line 24 if you did not need to ask any additional questions because you were not given any information that appeared to be incorrect, inconsistent, or incomplete.

You've done the tax returns for 15 years, the kids are their children not nephews/nieces/brothers/whatever, what exactly would cause a reasonable and well-informed tax preparer to conclude the information appears to be incorrect, incomplete, or inconsistent? If nothing, then you need to have records of nothing. Right?

your back-to-basics reminder: First; read the instructions. Your analysis makes sense (I think Bees said something similar in a recent "how to cope" post).

So...the logic is that if nothing appears crooked, then we're checking 8867's page three lines 24&25 as "Does not apply" and we're back to where we were last year (except for that new line 22 asking if they're somebody else's sons and daughters then why aren't they claiming them? -- got to watch out for that one).

This remedy seems good for "trusted old" clients, but at a $500 risk I'm turning down "new guys" who look halfway greasy and/or claim nieces, nephews, cousins, albinos, or any other strange thangs unless furnished ironclad documents written in blood.

[kpangelinan]

Sounds terrible! But, following the IRS instructions, would that conversation be necessary at all?



You've done the tax returns for 15 years, the kids are their children not nephews/nieces/brothers/whatever, what exactly would cause a reasonable and well-informed tax preparer to conclude the information appears to be incorrect, incomplete, or inconsistent? If nothing, then you need to have records of nothing. Right?

I went through that exact list once and ended up getting a notarized letter from the school on their school letter head noting where they believed the child resided based on their application and annual paperwork.

I've also gotten notarized documents from their neighbors.

It's rare to go through that list and not come up with something, but I think the final response in that situation is fine.....pretty funny reading that, but that's how some of them go for us as well.

[Black Bart]

Gotta give you points for being thorough,

I went through that exact list once and ended up getting a notarized letter from the school on their school letter head noting where they believed the child resided based on their application and annual paperwork.

I've also gotten notarized documents from their neighbors.

It's rare to go through that list and not come up with something, but I think the final response in that situation is fine.....pretty funny reading that, but that's how some of them go for us as well.

but doesn't it seem like overkill to require the school statement to be notarized? After all, it's on the school's letterhead and an ordinary taxpayer usually couldn't get one of those to fake up.

Did the client suggest a notarized document from the neighbor (seems sort of intrusive -- like the census-takers in 2010)? If it's your idea, you've got guts, but, of course, everybody's gotta do what they think they need to do (I'm all for anything that soothes the nerves).

Anyway though, it looks like you aren't taking David1980's advice to say "never mind" about getting documentation. So, if I may ask, how are you answering the questions on lines 24 and 25 of page 3 on the 8867? Do you think those questions "Did you ask this taxpayer any additional questions..." are referring to the bold print beneath number 24 which talks about "incorrect, incomplete, or inconsistent" information, or are they referring to the documents listed on page four?

[AZ-Tax]

Increase the chance of auditing?

Do you think those OIH Sch C's who elect NOT to go with the $1500 and go with actual exps for obvious reasons, may increase the chance of being audited?

[taxea]

Well the 1099-Ks are working the same way as 1099-MISC. If your client reported $20k of total income but you have a 1099-MISC for $30K, wouldn't you inquire further? That's called due diligence, and has been required all along. At least if you were covered by circular 230.

Of course I would however what I read sounds like the IRS expects us to do more (like a full income audit) rather than ask for "forgotten" income.

[taxea]

I don't agree. I make it a point to inform clients of the regs; if they donate $250 or more, I tell them about the need for a letter, due to the regs. I don't request the letter, but I have had clients get corrected letters if the one the org sent doesn't have the required info on it. I ask if clients have a mileage log. If they say 'yes', I don't ask to see it, but I do inform new biz clients of the need for one, and have a stack in my desk drawer to hand them. I also show them the app I have on my phone that I use to keep my own log.

This is not auditing, this is due diligence.

That is pretty much what is being said here. Question is, if you don't ask to see the document how do you know there truly is one? I think we can take what the client says at face value unless we have reason to think it is false information) is no longer the rule of thumb and due diligence has become see it before you believe it.