IRS Takes Scattered Shots at Tax Preparation Industry
As part of an effort to exert greater control over the tax preparation industry, Notice 4809 was recently sent by the IRS to 21,000 tax practitioners. According to the agency’s own statement, the notices are a “hands-on effort to improve the accuracy and quality of filed returns and to heighten awareness of preparer responsibilities.” Many tax professionals viewed the letters as veiled threats in a blanket campaign toward tax businesses.
Although this has a feel of an effort to help the public avoid unskilled tax preparers, the IRS is empowered to collect taxes rather than render consumer protection. In fact, recipients of the ominous IRS Notice 4809 were not singled out for repeatedly erroneous work for their clients. Rather, a licensed tax practitioner receiving the letter was targeted because of completing a large volume of tax returns that the IRS cites have “a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of tax law.”
The “attributes” of greatest concern to the IRS are not refundable tax credits, which have generated a large number of incorrectly filed tax returns. Instead, the IRS is most concerned about tax preparation basics, such as the schedules covered on the registered tax return preparer exam. This is clear from the enclosures with Notice 4809.
The final line on every IRS Notice 4809 indicates that the enclosure is “Target Area of Concern A, C or E.” Actual enclosures addressed one of those three possible schedules. Tax professionals who prepared a large percentage of tax returns with one of these schedules received the relevant enclosure.
Each enclosure then proceeds to explain potential problems with the tax preparer work of a particular schedule. For example, the target area enclosure related to Schedule E reminds the tax practitioner to ask sufficient questions of clients to determine that rental expenses are correctly claimed.
Specifically, the Schedule E enclosure points out that inaccurate preparation of the form includes improper reporting of rental income and expenses; incorrect calculation of depreciation; and inaccuracy surrounding limitations for passive activity, at-risk rules, and basis. These are among the essential elements covered in a registered tax return preparer exam study guide. Existing tax professionals must already possess complete understanding of these facts.
A tax return preparer is not required to verify information furnished by a client. However, one of the mandates for tax return preparer certification is making reasonable inquiry about taxpayer disclosures.
The result of RTRP guidelines is that all tax professionals must help the IRS in its mission to assure that returns are accurate. Tax preparers are required to determine that facts and circumstances support claims for deductions and credits.
This creates a situation of delicate balance for tax return preparers. That is, the taxpayers are clients – from whom payment is obtained for tax services. But, simultaneously, tax practitioners are somewhat instruments of the IRS, who have to ask about “facts and circumstances.” Reponses are accepted in good faith, but a tax preparer cannot perform work for someone who submits details that appear incorrect or inconsistent.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.