IRS Compliance audits and suggestions for compliance

[GradyFinance]

I had an acquaintance/competitor call me last week. He had an IRS agent in his office doing a compliance check and left him with a $13,000 fine. He didnt go into details with me other than stating it was mostly errors on EIC and Sch C compliance.

I have been a preparer for 21 years and efiling for about 15 of those. Taken and passed RTRP exam. I have taken extra steps and precautionary measures to try to cover my A** on these HoH/EIC returns. I know some of you may not even prepare a return with EIC or have low percentages of EIC qualifiers. I am in a rural, farming town in Georgia with a median income of less than $28,000. I dont have the exact figures but I imagine of the 700 +/- returns I prepare, 60% are EIC qualifiers.

I created a taxpayer info sheet that I have all taxpayers complete for me before I begin their paperwork. On this sheet, I have questions about dependent relationship, location of the parents if the child is not their child or stepchild, etc..

I'm now worried that I'm not doing enough to satisfy the IRS should they do a spotcheck in my office.
Any suggestions above what I may be doing now? Fines like that will start shutting small businesses down! Or is that their (the IRS's) motive?

[zeros]

Schedule C Compliant?

A little curious about the problems on schedule C? What would be the problem there? The whole EIC audit is a little scary. Like you say, it could drive a lot of preparers out of business. I have about 9% with EIC and noticed a lot of more paperwork and time consuming.

[GradyFinance]

Like I said, he did not go into detail about it but I gathered the sch C was pertaining to self employed without 1099M's for proof of income. I have several beauty shop owners who file sch C's and have no 99m's issued to them. I have a farrier ( horse shoer) who gets 99m's for a portion of his work that's done for horse businesses but the rest that's done for farmers and other individuals is cash income with no 99m. He brings me detailed records and I have no questions that everything he brings me is legit. I do not keep copies of his paperwork. He brings me a whole box of records. There's no way the IRS can expect us to keep copies of all the records of all the sch C returns we do.

[Burke]

I do not keep copies of his paperwork. He brings me a whole box of records. There's no way the IRS can expect us to keep copies of all the records of all the sch C returns we do.

Under the circumstances you describe, I would certainly keep copies of his income records. Most of my Sche C clients do not bring me all their receipts, but a written record of income and deductions can be done on one or two pages, which I copy for the file. And I do keep copies of every 1099.

[ToledoEd]

The sch C issue is for people who use a Sch C to maximise the EIC payout. If you do EIC returns and you have people who get more EIC because they are filing a Sch C you had better have all the numbers on the Sch C backed up. If you rely on the customers statements it may seem to the IRS that you are conspiring with the customer to maximise the EIC. Just make sure you have documentation backup for all the numbers on an EIC return.

[GradyFinance]

My sch C clients are actually self employed. Most of them, I have prepared returns for many years. They have all neccesary documentation for proof, other than the ones who have cash income. Like I said, several are hairstylists, one owns a Landscaping Co, one is a farrier, etc..

My only concern on these is the cash income and what can I keep as record to protect me? All I really have to go on is their
statements and whatever documents they provide. I understand the "fast tax" places are padding income to increase EIC.

Maybe I'm worrying about something I shouldnt worry about.

[ruthc]

Due Diligence Webinars

The issue of the EIC and Schedule C income has been very important for a several years. There are several webinars (free) that have been available for us to utilize to make sure we are covering ourselves for audits. The IRS has archieved EIC webinars. I am sure there were questions on your RTRP test. To ask what you should be keeping, etc is kind of late. Backup and do what is required before an audit. The IRS is going to expect more of us as time goes on so we won't have time to back up to cover our tracks. We need to make sure we do what is needed when the client walks through the door in order give a valid EIC or Schedule C income on returns (should have been doing this already).

[zeros]

Meals for Policemen/Firemen/Emergency Works? Myth?

Sorry, posted on wrong screen.

[taxea]

1. whether or not the TP gets a 1099misc, he/she, is required to report all income related to the business.
2. easiest way to do due diligence on EIC is to give a blank copy of all pages to the client, have them fill them out and sign/date each page. This way you have all the answers in their handwriting. This copy remains in your file should the IRS question the entries.

[David1980]

2. easiest way to do due diligence on EIC is to give a blank copy of all pages to the client, have them fill them out and sign/date each page. This way you have all the answers in their handwriting. This copy remains in your file should the IRS question the entries.

Regarding Schedule C, wouldn't this amount to the equivalent of having the taxpayer write "I promise I really did have $15,000 of income" (or whatever the Schedule C income is)? Would this accomplish, well, anything at all if you get audited on EIC? Really, the question would be "How did you come up with $15,000 of income" - seems that's the far more relevant information as far as the record keeping the IRS wants preparers to do. Even a cash business with no bank account is capable of keeping invoices or copies of receipts for the customers. Obviously they have to be doing something to figure out the number.

[taxea]

Dave as the preparer you are not required to audit the clients books for verification of income. I use worksheets for clients to fill out. They give me the 1099ms they received and input the non-1099 income on the worksheet along with expenses. It is in their handwriting and I keep the originals. They sign the tax returns attesting to their accuracy. This all is within the Cir 230 requirements.

[Bees Knees]

Regarding Schedule C, wouldn't this amount to the equivalent of having the taxpayer write "I promise I really did have $15,000 of income" (or whatever the Schedule C income is)? Would this accomplish, well, anything at all if you get audited on EIC? Really, the question would be "How did you come up with $15,000 of income" - seems that's the far more relevant information as far as the record keeping the IRS wants preparers to do. Even a cash business with no bank account is capable of keeping invoices or copies of receipts for the customers. Obviously they have to be doing something to figure out the number.

I agree with taxea on this one.

Line 27 box e of the 8867 says: "Taxpayer summary of income." That indicates that if you have the client verify their income by providing you with a summary they produced, that is enough to satisfy the knowledge requirement.

We are not required to audit client's Schedule C businesses. People are making WAY TOO MUCH out of this EIC due diligence issue. The people being fined are the ones who are pulling numbers off the ceiling. There is no substantiated report of a preparer being fined for relying on client provided income and expense summaries.

[smithtax]

I agree with taxea on this one.

Line 27 box e of the 8867 says: "Taxpayer summary of income." That indicates that if you have the client verify their income by providing you with a summary they produced, that is enough to satisfy the knowledge requirement.

We are not required to audit client's Schedule C businesses. People are making WAY TOO MUCH out of this EIC due diligence issue. The people being fined are the ones who are pulling numbers off the ceiling. There is no substantiated report of a preparer being fined for relying on client provided income and expense summaries.

Unless the taxpayer drives a 2013 Navigator to his appointment and hands you an income summary only claiming $5,000 in SE earnings. More probing questions must follow.

[Bees Knees]

Unless the taxpayer drives a 2013 Navigator to his appointment and hands you an income summary only claiming $5,000 in SE earnings. More probing questions must follow.

Where in the code or regs does it require you to walk out into the parking lot during an appointment and inpect the vehicles of your clients for their make, year, and estimated cost?

[Lion]

Come on, Bees, he was just giving an example of when you know the information from your client might not be complete! If you know or ought to know. If he brags about his new BMW but his Sch C is so low as to qualify for EIC.... You don't have to ask how much his BMW cost, unless he's depreciating it as a biz vehicle.