Disclosure backlash

[solomon]

Tax Preparer Fines:

http://www.usatoday.com/money/perfi/taxes/2006-06-21-irs-usat_x.htm

[KJ Judd]

I have in my engagement letter...

You represent that the information you are supplying to me is accurate and complete to the best of your knowledge and that your expenses for meals, entertainment, travel, business gifts, charitable contributions, dues and memberships, and vehicle use are supported by records as required by law. I will not verify the information you give me. However, I may ask you for clarification of some of the information.

I generally get most of my clients to sign the engagement letter. I know I'll be even more strict about it this year.

[solomon]

The good faith clause is still in 230 so I would accept it with a clear explanation of the penalties involved if records were not available on audit. I would have them sign something attesting they have records for all deductions.

[Zee]

Unless a client brings in all of his records and you audit them or compile the tax figures from the source documents, you don't really know whether that $ 500 donation was by cash or check.
People generally bring W-2s and 1099s and morgage statements, but do not always bring all the back-up for their itemized deductions or business expenses, so I would say that the problem area would be more likely if someone claims something clearly not allowed by law, like penalties on tax underpayments--which I once saw being claimed on a return prepared by a guy who was both a CPA and lawyer. If he took the position that the penalties were a cost of doing business, that would be an unreasonable position.

Yes, client's don't generally bring backup and I wouldn't want to sort thru all those receipts if they did. I'll probably use a stronger tax engagement letter and checklist and require a signature on each.

[skhyatt]

Ok, so I am doing a client's return. We get to charitable contributions. I ask if you have any. You say yes and verbally tell me the amount. I ask, do you have documentation to support that. You say yes, but I don't have it with me. Do I as the preparer, take their word or say, I need to see the documentation before I can put that on the return???

[taxxcpa]

Unsupported deductions?

Unless a client brings in all of his records and you audit them or compile the tax figures from the source documents, you don't really know whether that $ 500 donation was by cash or check.
People generally bring W-2s and 1099s and morgage statements, but do not always bring all the back-up for their itemized deductions or business expenses, so I would say that the problem area would be more likely if someone claims something clearly not allowed by law, like penalties on tax underpayments--which I once saw being claimed on a return prepared by a guy who was both a CPA and lawyer. If he took the position that the penalties were a cost of doing business, that would be an unreasonable position.

[Kram BergGold]

To KJ Judd re losses

The 2 out of 5 rule is not black or white. If the client has a profit 2 out of 5 years he is presumed to be working at a business for profit. If he has not had a profit in 2 out of 5 then the presumption is he is not for profit. In the first case theh IRS has to prove not for profit. In the latter you have to prove for profit. So this would not fall under the adequate disclosure rules in my opinion.

[joanmcq]

and an increase in my day job's business...representing TurboTax users in audit.

[Zee]

The IRS has accomplished the goal - intimidation of tax preparers - which probably will make the majority of us follow the rules - might take a bit more research at times. This does not bother me. What bothers me is the free ride the self-prepared will probably still have.

I agree. The requirement for tax preparer to disclose will most likely result in an increase in the sale of personal TurboTax, etc., and an increase in the business for the less ethical tax shops.

[solomon]

The IRS has accomplished the goal - intimidation of tax preparers - which probably will make the majority of us follow the rules - might take a bit more research at times. This does not bother me. What bothers me is the free ride the self-prepared will probably still have.

[KJ Judd]

The new "greater than 50% probablity" standard doesn't seem so tough at first glance. However in an update seminar the presenter wondered if the IRS audits you & wins, will the IRS turn around & say you didn't have a greater than 50% probability of success since the odds were in your favor & the IRS won.

And how do you judge if it's 49% or 51% chance of success? So in actuality your threshhold is higher. I agree my clients don't want me to do something that's not "more likely that not" sustainable. However, there are gray areas out there & we don't always agree with the IRS's reasoning. So now we're almost forced to be even more conservative because of the potential threat of penalty out there.

I don't know what your fee structure is however a penalty of the greater of $1000 or 50% of tax prep fee, this is a nasty penalty. In my fee structure the $1000 minimum penalty is several times my tax prep fee.

[Nashville]

Answer to Zee's Question...

...in my case is ZERO. Form 8275 is sometimes affectionately known as the "Please Audit Me" form.

If I am so prodigiously concerned about a client's position on a particular line item that I have to issue a Form 8275, then I shouldn't be taking his position to begin with.

If, during a conversation with a client who is pressing to take a questionable deduction, I tell him:

Nashv: "O.K. I'll take your office-in-home deduction even though it is nothing more than a computer in the bedroom of your youngest son."
Client: "That seems reasonable to me."
Nashv: "But if I deduct this, I'll have to file a Form 8275."
Client: "What's an 8275?"
Nashv: "It's a special form that tells the IRS we are taking a questionable position on your home office."
Client: "That's ridiculous. Why would we want to tell them that so they can have a reason to audit me?"
Nashv: "I agree, but that's what I'll be forced to do if we deduct your OIH."
Client: "Just forget it. I don't want you to file a Form whatever-it-is..."
Nashv: "I didn't think so. No deduction for OIH."
Client: "My second cousin's son-in-law is a tax man. He says I can deduct it. I think I'll go to him."

RESULT: The need for the 8275 evaporates, and yes, Zee, I will lose customers if I file one. I will also lose customers if I fail to take deductions they want me to take.

[DonPriebe]

Trivial quibble ...

The new rules are quite onerous. Essentially, they prohibit a preparer from signing a return in many of those simple situations where preparer's have let the client assume the risk of audit in the past. Lack of receipts for cash contributions is a good example, mileage logs is another.

I'll argue that the lack of mileage logs is adequately disclosed by checking the "Is the evidence written" box NO.

Agree that if the client says he has no records of charitable contributions, then no deduction is allowed.

[JoshinNC]

No offense taken.

Josh, your not dumb. it's hard to keep up with the constant changes. I'm sorry if my answer seemed abrasive.

The new rules are quite onerous. Essentially, they prohibit a preparer from signing a return in many of those simple situations where preparer's have let the client assume the risk of audit in the past. Lack of receipts for cash contributions is a good example, mileage logs is another.

I'm wondering what those here will do? If your client says, "I donated $500 to the collection plate", but don't have a receipt since it was cash."
Most will probably explain the new rule and explain it can no longer be deducted. If the client insists they made the contribution, want the deduction and are willing to risk an audit of that item do we now refuse to prepare the return? The new high penalties and disclosure rules sure seem so.

I had actually thought about that specific situation just the other day while leaving my local big box store. If you drop a C-note in the bell ringer's tub and don't get a receipt you don't get a deduction. I would simply tell the client it's not deductible and move on. If they were adamant about taking the deduction they would need to find a new preparer. I'm not taking that liability.

[Zee]

but I knew nothing about this. I guess I've got some studying to do over the holiday break.

Josh, your not dumb. it's hard to keep up with the constant changes. I'm sorry if my answer seemed abrasive.

The new rules are quite onerous. Essentially, they prohibit a preparer from signing a return in many of those simple situations where preparer's have let the client assume the risk of audit in the past. Lack of receipts for cash contributions is a good example, mileage logs is another.

I'm wondering what those here will do? If your client says, "I donated $500 to the collection plate", but don't have a receipt since it was cash."
Most will probably explain the new rule and explain it can no longer be deducted. If the client insists they made the contribution, want the deduction and are willing to risk an audit of that item do we now refuse to prepare the return? The new high penalties and disclosure rules sure seem so.