Would you accept a client who answers NO on Sch C Part IV #47a?

[Bees Knees]

Speaking of Circular 230

A side issue...for those of you following the Loving case...

The way the Court of Appeals worded their ruling, some professionals are questioning whether IRS has the authority to regulate EAs, CPAs, and Attorneys who only prepare the tax return. If the law only allows IRS to regulate people who "represent" taxpayers, and the act of preparing a tax return is not "representation," per the Court ruling, then preparing a return is not subject to Circular 230, as the IRS has no statutory authority to tell us what we can and cannot do while preparing a return.

Other than the statutory requirement to sign the tax return, give a copy to the client, put our PTIN on it, and not willfully help a client evade taxes, the IRS has no authority to tell us how to prepare a tax return. PERIOD.

[taxxcpa]

Once I had a client who claimed a small amount of entertainment expense along with some other things the IRS questioned.
Eventually, the IRS gave up on everything but the entertainment expense for which he had no receipts.

He then went into a restaurant, picked up some receipts on the floor and presented them to the IRS agent who accepted them.

The amount was small and the guy was a sales engineer which would lead me to believe that he really did spend some money entertaining.

[Bees Knees]

I am replying to the literal facts of AZ-Tax's question. The client said I have no substantiation, period. End of story.

Question 47a in Part IV of Schedule C is not worded that way. It merely asks if you have evidence to support the deduction. The "period" and "end of story" part are not included in the question.

[cathe]

Yes

Yes, I inform them of what they should keep track of and how. Especially a first time client. I agree with Bees. We used to be here to take a stance for our clients and think in a reasonable way. People drive. They have to run their business and don't do it sitting at home. I will accept what seems reasonable without written documentation.

If they continue to non document (not everyone is as in love with numbers as we are), they know what could possibly occur and what they might face. Education is a big part of our job here. Making sense is another.

Cathe

[geekgirldany]

I would not kick them out the door. I ask for their total business miles for the year, if they documented it, if so how, if not then I explain how they should and why the should. If they decide not to do it then it is not my place to say "hit the road". As long as it is reasonable I will prepare their tax return.

[AZ-Tax]

Additional Fees Charged to Reconstruct Mileage Log

If the taxpayer tells me he drove his vehicle 80% of the time for business but did not keep a log, he has no evidence that he drove those miles, period. Yet, I might believe he drove them and allow him to claim those miles under the assumption that if he gets audited, I can make a pretty good case as to why he is entitled to deduct an expense. For one thing, if he gets audited, I could help the client reconstruct his records and come up with several court citations that allowed such re-constructed records, assuming they are based upon reasonable estimates. To me, that is a reasonable basis to claim the deduction, despite the fact that at the time I prepared the tax return, the client had no evidence to prove the deduction

Bees your quote "If the taxpayer tells me he drove his vehicle 80% of the time for business but did not keep a log, he has no evidence that he drove those miles, period. Yet, I might believe he drove them and allow him to claim those miles under the assumption that if he gets audited, I can make a pretty good case as to why he is entitled to deduct an expense." Bees, in this case how would you answer Sch C Part II 47 a & b?.

If your clients for which you prepared their initial tax return for will allow you to charge them additionally to "reconstruct" their records, all the power to you but mine will not. When they pay me for their initial tax prep fee, they expect me to be there if they receive any IRS communication inquiries but NOT charge them extra. If its a client for which another preparer prepared their initial tax return, then obviously I would charge. I have a new client currently who didn't track the date, address, RT miles and purpose of each trip but upon my suggestion, is willing to create a spreadsheet mileage log, with my help while fresh in their mind.

[Bees Knees]

Bees, in this case how would you answer Sch C Part II 47 a & b?.

No to question 47a. Question 47b is then left blank.

If your clients for which you prepared their initial tax return for will allow you to charge them additionally to "reconstruct" their records, all the power to you but mine will not. When they pay me for their initial tax prep fee, they expect me to be there if they receive any IRS communication inquiries but NOT charge them extra. If its a client for which another preparer prepared their initial tax return, then obviously I would charge. I have a new client currently who didn't track the date, address, RT miles and purpose of each trip but upon my suggestion, is willing to create a spreadsheet mileage log, with my help while fresh in their mind.

The reconstructing records is done because of an audit. I doubt your tax preparation fees covers and audit. Have you ever done one? Do you realize how much of your time is involved?

When a client gets an audit notice, I meet with them for free and explain the process and what their audit is about. Then I tell them my hourly rate for audit representation. They can choose to hire my audit representation services, or go it alone.

[MAMalody]

<<<I've even had auditors tell me they will allow 20% of gross receipts as a deduction with no proof, just to close the case. Explain to me, again, why I should tell a client to get lost with no records when IRS auditors tell me stuff like this?>>>

It has been a number of years, however, I used to be an IRS auditor. If I was told the above during an audit, my response would have been, that's what takes cases to appeals. Next issue.

If reference to the question at hand I would do the, same as an auditor, as we would do as a tax preparer. Absent the client (I recommend you never take a client to audity), I would make a judgment on the facts and circumstances presented by the preparer (assuming they are no on my QP list) and go from there. I might play let's make a deal, I may not. It would depend on the issue and the dollars we are talking about. For mileage I would probably accept any reasonable amount/argument (assuming this was not an "issue" this year with the IRS). I had some audits where I allowed $50K in a deduction with no documentation. I admit, I had to explain why to my manager but it was allowed based upon my reasoning. Discretion is a tough issue to deal with, both as a tax preparer and an auditor.

[ttbtaxes]

Two thoughts.

First, even considering the Loving case, if the return you prepared for your client gets audited and your client asks you to handle the examination you've now crossed over into representation status.

Second, I'd be concerned about a potential preparer penalty. My proposed scenario with the client willing to throw you under the bus is not that unusual. The client gets audited, has no substantiation and is simply not willing to reconstruct saying he told you he didn't have any substantiation.

If the audit gets ugly, you may have to defend a $1,000/$5,000 preparer penalty proposed by the IRS, with the client a witness being against you.

[Bees Knees]

Second, I'd be concerned about a potential preparer penalty. My proposed scenario with the client willing to throw you under the bus is not that unusual. The client gets audited, has no substantiation and is simply not willing to reconstruct saying he told you he didn't have any substantiation.

If the audit gets ugly, you may have to defend a $1,000/$5,000 preparer penalty proposed by the IRS, with the client a witness being against you.

My two thoughts:

1) A taxpayer willing to throw you under the bus is also throwing himself under the bus, along with additional tax, understatment penalties, and interest. Thus, I would have a strong case to give my client as to why it is in his/her best interest to cooperate and help with re-constructing those records.

2) Preparer and taxpayer penalties are by statute avoided when the sin is disclosed on the tax return [IRC §6694(a)(2)(B) and §6662(d)(2)(B)]. Answering no on Schedule C to the question concerning evidence to support the deduction is disclosure of the fact you have no substantiation. Thus, the penalty for taking the deduction does not apply, assuming you have some reasonable basis for claiming the deduction. If I know the taxpayer has to drive a vehicle in order to perform his job, even with no substantiation, it is reasonable to assume he incurred the expense.

[taxxcpa]

The Assistant Director of the Texas Comptroller's Oil & Gas tax division once told me that audit challenges ought to be settled with an administrative hearing rather than in some hotel room over a bottle of whiskey.

I never knew of any of my audits being settled over a bottle of whiskey, but the Director of the O&G Division always managed to work some compromise even if it meant changing previous policy.

[ttbtaxes]

...........

[AZ-Tax]

Tax Pro Today article on Auditig

Interesting Article from Tax Pro Today. Last paragraph reads as follows:

"Categories scrutinized by the IRS: "The IRS has identified certain types of expenses, deductions and credits that are frequently exaggerated or claimed without justification," said Mueller. “Deductions targeted by the IRS may change from year to year. Some of the items that may be questioned include automobile, travel and entertainment expenses; office at home deductions; itemized deductions such as mortgage interest and charitable contributions; the Earned Income Tax Credit; filing status and dependency exemptions; casualty and net operating losses; and rental activities."

http://www.accountingtoday.com/news/Talk-Clients-Audits-69610-1.html?utm_campaign=tax%20pro%20today-feb%2014%202014&utm_medium=email&utm_source=newsletter&taxpro=1

[MRPLOW]

Interesting Article from Tax Pro Today. Last paragraph reads as follows:

"Categories scrutinized by the IRS: "The IRS has identified certain types of expenses, deductions and credits that are frequently exaggerated or claimed without justification," said Mueller. “Deductions targeted by the IRS may change from year to year. Some of the items that may be questioned include automobile, travel and entertainment expenses; office at home deductions; itemized deductions such as mortgage interest and charitable contributions; the Earned Income Tax Credit; filing status and dependency exemptions; casualty and net operating losses; and rental activities."


http://www.accountingtoday.com/news/...etter&taxpro=1

LOL. That's just about all the most common and major tax deductions, so this list is basically useless...
I can't think of 1 single return that I do that doesn't have at least 1 of the following from the above list.

[geekgirldany]

I agree on that. I have several clients every year who do not want to take the office in home deduction because it is a "red" flag for audits. I tell them I have been doing taxes for now 18 years and never had a person audited on OIH deduction. Just another scare tactic by the IRS.