The IRS has been sending out letters to income tax preparers for the past few years reminding them of their obligation to prepare accurate tax returns on behalf of their clients. During the month of November, the IRS started sending out letters to more than 21,000 tax preparers across the country. The reason for these letters is because the returns prepared during the past tax season have shown a high percentage of inaccuracies and misinterpretations of the tax law. The agency will be focusing on preparers who prepared a large number of individual returns with Schedules A (Itemized Deductions), C (Profit or Loss from a Business), and E (Supplemental Income or Loss) during the past filing season.
The letter contains an enclosed documents related to Schedules A, C and E. The documents address some tax issues that the IRS review considers to have been misunderstood or misinterpreted.
Tax return preparers are expected to be knowledgeable in tax law. They are expected to take the necessary steps to file an accurate return on behalf of their clients. These steps include reviewing the applicable tax law, and establishing the relevancy and reasonableness of income, credits, expenses and deductions to be reported on the return.
In general, preparers may rely on good faith client-provided information. However, they can not ignore reasonable inquires if the information furnished by their client appears to be incorrect, inconsistent with an important fact or another factual assumption, or is incomplete. Tax preparers must make appropriate inquiries to determine the existence of facts and circumstances required as a condition of claiming a deduction or a credit.
Both the tax preparer and their clients may be adversely affected by incorrect returns. These consequences may include any and all of the following:
• If their client’s returns are examined and found to be incorrect, they (the client) may be liable for additional tax, interest and penalties.
• Preparers who preparer a client’s return for which any part of an underestimate of tax liability is due to an unreasonable position can be assessed a penalty of at least $1,000 per tax return.
• Preparers who preparer a client’s return for which any part of an underestimate of tax liability is due to recklessness or intentional disregard of rules or regulations by the preparer, can be assessed a penalty of $5,000 per tax return.
The letter further goes on to state that preparers in addition to their responsibility to exercise due diligence in preparing accurate tax returns for their clients should also be aware of the IRS’s tax return preparer requirements. This includes entering the Tax Preparer Identification Number on all returns prepared for compensation and adherence to the electronic filing requirements.
IRS revenue agents will be conducting 2,100 compliance visits nationally with members of the tax preparer community. The purpose of these visits is to make sure that preparers are complying with the current return preparer requirements and to provide information on new preparer requirements effective for the 2012 tax season. These visits are expected to start in November 2011 and be completed by April 15, 2012.
Taxpayers should be careful when choosing a tax preparer. While most paid preparers provide honest and excellent service to their clients, there are some that make common mistakes or engage in fraud and other illegal activities.
Reputable preparers will ask to see receipts and other documentation when preparing a tax return. They will ask numerous questions to determine whether expenses may be claimed as deductions or qualify for favorable tax treatment. By choosing a reputable preparer you can avoid additional taxes, interest and penalties that could result from an examination of your tax return.
In summary, the IRS continues to monitor tax return preparers. They are looking to make sure they are in compliance with tax return preparer guidelines and they continue to review tax returns in which there has been shown a high degree of inaccuracies and misinterpretations of the tax law.