Contributions/Mileage Logs-Preparer's Duty

[S T]

A question

While I as well, will try to make sure that I am in compliance and that my taxpayer is in compliance, could it be that these new regulations and penalties are because, there are a number of tax preparers (whether they are EA's, CPA'S or licensed preparer or unlicensed preparer or others ) that simply enter any "number" on the return.

Maybe IRS has found a way to eliminate some of the "not so professional preparation" and found a way to also increase some revenue.

As with JG, I would be okay in checking the box "NO" for the written mileage log, I don't necessarily believe, it would trigger an audit. I have had audits on the mileage issue and so far the auditors have bent over backwards to establish a fair mileage deduction when there were no written mileage records. The auditors allowed the taxpayer to do a reconstruction using calendars and appointment schedules, etc. However, producing repair bills on the autos with odometer readings was a MUST!

As in the past I will request that my clients produce some type of mileage verification, either through mileage logs, odometer readings from repair bills, etc.

The charitable contributions, well that is another issue, but most of my clients were prepared for 2006 filing and produced statements from the various charities. A lot of entries for non cash donations diminished or became non existent. And that is fine with me.

Sandy

[taxxcpa]

Getting scared

I don't think most people are out to get us. I don't even think the IRS is out to get us. I think reasonable precautions are necessary because everyone's memories are shot because of our stressful times. But, I am trying not to panic here.

Reading all these messages is beginning to make me think the IRS may want to stick it to some of us just to scare the rest of us into being super-cautious. The unintended effect may be to scare many of the honest tax preparers into sending a lot of clients to the more unscrupulous preparers who will not only accept the grey areas but will add a few tricks that even the cheating client had not thought to include.

I need to take a close look at the new penalty rules. My past practice has been to accept the client's word for things unless they are unbelievable. I had a guy who was claiming almost as much for mileage to-and-from a rent house as the rent he collected--which I considered unbelievable and asked him to come up with an accurate figure. If his original figure had been believable, I would have accepted it without asking for proof. I may need to go further next year.

Of course, the other option would be to stop doing tax returns. I'm tempted to do that after next tax season or limit my practice to just people whose entire income and deductions are supported by W-2s, 1099s, 1098s, etc.

[BOB W]

Reading all these messages is beginning to make me think the IRS may want to stick it to some of us just to scare the rest of us into being super-cautious. The unintended effect may be to scare many of the honest tax preparers into sending a lot of clients to the more unscrupulous preparers who will not only accept the grey areas but will add a few tricks that even the cheating client had not thought to include.

I need to take a close look at the new penalty rules. My past practice has been to accept the client's word for things unless they are unbelievable. I had a guy who was claiming almost as much for mileage to-and-from a rent house as the rent he collected--which I considered unbelievable and asked him to come up with an accurate figure. If his original figure had been believable, I would have accepted it without asking for proof. I may need to go further next year.

Of course, the other option would be to stop doing tax returns. I'm tempted to do that after next tax season or limit my practice to just people whose entire income and deductions are supported by W-2s, 1099s, 1098s, etc.

You may want to read the attached:

http://www.edzollars.com/2007-09-26_Circular_230.pdf

[Gretel]

I have many times checked the "not written" box. It so far has not been questioned. If a client really drove those miles for business and takes a low estimate why should he not take the deduction.

Perhaps you are thinking that it is more likely than not that the IRS will not allow if the client goes to audit. But what about the oral testimony - it is still valid. I'm not going to change things much, so do you think I am living dangerously? I want to protect myself, but you know what there are so many things that we could be doing more to double check clients. We could be taken to task by not seeing charitable contributions. Am I going to start requiring they sign something about that? I'm not sure, I don't think so. I think my questions and their signature on the tax return is sufficient.

I still am going to follow the policy that I believe my clients unless they give me reason not to believe them - in that case I have them sign things that I write up for their particular situation. (Usually involving hobby vs. business).

Everyone is so scared it is making me scared. Maybe they should initial each and every line on the tax return with an entry, maybe we should act scared so they will be scared. Clients have said that doing taxes is like going to a dentist. If I went to my dentist and he had me sign before he did each cleaning, each filling, and told me about how he's going to get a fine if he doesn't do something, well, I still won't fix my teeth myself but I sure will consider whether he instills my confidence.

I don't think most people are out to get us. I don't even think the IRS is out to get us. I think reasonable precautions are necessary because everyone's memories are shot because of our stressful times. But, I am trying not to panic here.

JG,

It is a relief to read your post. I am fully with you. Just like you I try not to panic and still use common sense. I also believe that the IRS is trying to catch the unscrupulous not us. The bad thing is that if you give people (IRS) power, some tent to misuse it, meaning we could be in a position to defend ourselves far beyond common sense. Not to speak of the clients who would do everything to find someone to blame.

Still, I refuse to surrender to my fears, which are undoubtedly there. I will use caution, I will insist on seeing some kind of proof as far as mileage goes, and I will believe the word of my clients if it is reasonable. If not, I hope I will not argue and send a client away. I also will make better notes.

The worst thing that can happen is going to jail. This happens to a lot of innocent people, so I don't know how someone could prevent this from happening. I want to enjoy my work, my life and not be driven by fears and there not be able to enjoy my work anymore. If fate then sends me to prison, so be it. (By the way, I am also afraid to be deported than, since I am not a citizen yet, just a permanent resident)

Happy New Year!

[taxea]

Contributions/Mileage Logs-Preparer's Duty Reply to Thread

The way I read the law, you are not required to audit or verify the information provided by your client but, if you have reason to believe the deduction is not accurate then you are subject to the penalty.
My yearly client checklist says "Due to changes in the tax law that apply to 2007 you must have receipts for your donations and a record of mileage ." If you don't have the required records you may not claim the expense. taxea

[fliszt]

Dennis, I understand

your point of view. In fact, I will re-evaluate what I do. But I do agree with most comments on what is going on with the mileage records. In the past I have never checked the "not written" box. There have been times that I would like to tell the client that I don't believe them, but it is not for me to judge. I take their records written on torn pieces of spiral bound notebook paper and use it to prepare their return. I know there will be those that tell me I'm not being "diligent" for doing things that may seem improper, but I am not going to have clients sign documents other than the 8879 to allow me to efile their return. I tend to agree with JG that running scared produces others to run scared. I have a very stiff attorney prepared disclaimer that I point out to every client. And I explain it to them so they understand it fully. I can see from their faces that they don't like it, but they come back year after year. I also have one client that said last year to use the same as last year. Told him I can't do that and he needs to go home and figure out the miles. He then said, well forget the mileage thing! So I did. For certain clients I use their "trip" mileage. Initial trip measured in miles and documented and then recorded as 40 trips/yr., etc.
I have a business to run and a living to earn. I will take every precaution and be as diligent as possible but am not going to overboard on this. Most clients I find to be almost as diligent as I am which I find to be refreshing.

[sea-tax]

I think what we all including myself sometimes fail to realize is that the IRS is not going after preparers like us. Those of us who are by inlarge honest folks trying to eak out a living. We all do continuing education and try and uphold the law of the land the best we can. Unfortunately there maybe some honest preparers who get caught up in these types of issues.
Mainly I think we all need to be aware of the scrutiny and continue to practice good judgement. Hopefully in time this will blow over.

[taxxcpa]

CYA checklist

We probably need to prepare several forms to be signed by clients.

One would be a form similar to the one we fill out for mileage, but including a place to enter beginning and ending mileage and the business miles.
Also the client could be asked to give a yes or no answer about written evidence.
He shooud also sign it.

Also a signed statement indicating that we have explained the hobby loss rules and the requirement for receipts for donations.

Apparently the clients signature on the return itself is not enough for the IRS. Obviously most clients just sign it without really going over it and telling you that they don't have written evidence or any other kind of evidence for mileage.

I've never seen anyone who would admit their farm was a hobby, but I've never asked for a signed statement in the past. Often farm losses are due to building up a herd with the anticipation of future profits when they leave the big city and retire to the farm. It may be a hobby in some cases, but it is hard for me to understand why anyone would do all that work as a hobby.

[Donald Rihn, EA]

CYA time

In recent years I have had the client sign an engagement letter that basically says they know that they are responsible for record keeping, especially with vehicles, and that they are reporting all of their income.

This year I revised the form to include the following: "You represent that the information you are supplying to me is accurate and complete and that your expenses for meals, entertainment, travel, business gifts, charitable contributions, dues, and vehicle use are supported by records as required by law."

My year-end checklist and letter includes information on those items, as well as a brief explanation of the new regulations and penalties that apply to us. I explain that because of these new regulations I am requiring more detailed information than I have in the past.

I have always included a mileage statement that clients must complete and sign.

And new for this year is a two-page questionnaire covering all sorts of things that I normally asked during the interview. Clients are asked to complete and sign and return during their interview.

[taxxcpa]

Honest John's Tax Service and Money Laundring Service

All these signed documents won't stop a dishonest tax preparer from giving his clients a document stating all the rules and regulations . Here is how Honest John might do it.

Honest John:Just sign all these and I will fill in all the deductions you need for another big refund.

Roscoe Bin Cheatin: Yeah, heh, heh, sure I got mileage logs for those 150,000 miles and lots of receipts for those $ 5000 contributions.

Honest John: Don't forget to sign that document certifying the farm loss you claim for the flower pot in your window is not a hobby loss.

Rosco Bin Cheatin: Those flowers are going to be worth big bucks someday when I start selling the seeds. Where do I sign?

Honest John: Great, now I'll make up some figures for all those items and get you a big refund. Thanks for signing all those papers to keep me in the clear in case the IRS starts snooping around.

[Donald Rihn, EA]

Honest John's Tax Service and Money Laundring Service

[QUOTE=taxxcpa;47266]All these signed documents won't stop a dishonest tax preparer from giving his clients a document stating all the rules and regulations.QUOTE]


I agree. And based on whatever information that the client gives us, we are supposed to use our knowledge and judgement in determining if the information is legitimate.

Schedule F Gross Income of $3,000, 50,000 business miles, $900 cell phone expense, computer expense (and records given to me are handwritten), should arouse our suspicion and either get the correct information or send the client out the door. A signed statement from the client does not get the preparer out of any penalties.

But the client providing signed statements, answers to questionnaires, mileage statements, engagement letters, etc. does get us out of penalties if something materializes that the IRS rejects and we had no knowledge of. For example, the client saying that he didn't have any houseshold labor and indicates such on the questionnaire. During the audit, and the auditor goes through the personal bank statements, it is found that there is houseshold labor. The taxpayer owes significant payroll taxes, plus over $1,000 per quarater and owes FUTA and state taxes. Original return showed tax liability before withholding of $3,000. Payroll taxes now amount to $5,000. Big problem. Taxpayer penalized, preparer is not.

[taxxcpa]

Preparer penalties

You wrote:
Schedule F Gross Income of $3,000, 50,000 business miles, $900 cell phone expense, computer expense (and records given to me are handwritten), should arouse our suspicion and either get the correct information or send the client out the door. A signed statement from the client does not get the preparer out of any penalties.
Comment:
You are probably right. About 99% of the time it would be fraud. However, there is always a small possibility that the unbelievable is true. A person might buy a farm at a distant location to which they wanted to retire. Initially they might drive up and do a lot of preparatory work getting it established, then retire a year or two later and eventually develop it into a profit-making operation.

I would not like to deal with such a situation. Even if it was legitimate, I might face that $1000 penalty since it looks so suspicious.

In my opinion, the IRS should limit these penalties to situations where the preparer either did not disclose the rules or actually made up the figures. Even if the client knew the figures were improper and accepted it, I would still agree that the preparer was aiding and abeting fraud. However, if the client provided the figures and the preparer is held responsible for auditing and verifying that they are correct, then tax preparation will become too risky, and we would need high-premium insurance like doctors have which would only be viable if we made the kind of money doctors make.

I would like to keep doing tax work but if the IRS gets too hard-nosed, I will retire and let others worry about those penalties.

[Donald Rihn, EA]

CYA & Questionnaire

One question that I put in my Questionnaire for businesses is "If you hae a loss, or have consistently shown a loss, do you have a profit motive or plan to make a profit in the future?"

I also add the following statetment or something similar to it to my return cover letter:
"*** It should be noted that your Schedule F has consistently shown a loss. This has always been the result of having little or no sales while incurring high expenses. While this loss may be substantiated, it may cause this return to be audited by the IRS. You must be prepared to show that, even though you currently have losses, you have the intent on making a profit."

It is also printed in bold type.

I had this on a Schedule C that always had a large loss (cash type of business income) and was audited. The auditor commented "...well, you can't say you didn't warn him..." In that audit client did not use deposits for income, instead used inventory disappearance times the selling price (vending machine business). Substantial underreporting of income, but I was in the clear with engagement letter and the client used my organizer and I used his numbers.