The IRS recently sent 1,200 letters to selected tax practitioners who were identified by having prepared client tax returns with traits that typically indicate errors. Any paid tax preparer who received one of these letters had numerous clients with a Schedule C that appeared suspicious. This is the fourth year that the IRS conducted a campaign to heighten awareness of tax preparers about their responsibilities.
In an effort to improve tax preparer education, the IRS has scheduled personal visits to the letter recipients. This educational endeavor is aimed at improving accuracy and quality of professionally prepared tax returns. Highlighted elements include better understanding of Schedule C rules as well as reminding tax practitioners about due diligence requirements.
Under Circular 230, tax preparer duties include ethical obligations. These entail obtaining reasonable assurance that reported information on a tax return is accurate. In addition, tax preparers are required to present their clients with representations that accurately convey facts concerning any matter administered by the IRS. Special due diligence requirements surround taxpayer eligibility for the earned income tax credit.
In general, tax preparers may rely in good faith upon statements of clientele. No verification process is mandated. However, the IRS requires that every tax return preparer not ignore the implications of furnished information. For instance, investigation of conflicting or incomplete taxpayer proclamations is a necessary ingredient for maintaining tax preparer registration.
Proper conduct by tax practitioners demands inquiries into the facts and circumstances for each claimed tax deduction and credit. This does not mean an audit of taxpayer records is necessary. But, information as furnished must not have an inaccurate or incomplete appearance.
This process occasionally obliges a tax preparer to examine taxpayer records, particularly when completing a Schedule C or D or E. Some documents whereby taxpayers maintain specific records to substantiate certain facts are depreciation schedules, loss carryover reports, and cost basis records.
An inquiry about detailed facts and circumstances gives a tax preparer sound understanding of the taxpayer’s situation before claiming deductions or credits. Compulsory questioning renders sufficient details that resemble sample scenarios in a tax preparer study course. Accurate tax returns are more likely when tax preparers are armed with credible taxpayer information. Implausible taxpayer assertions commonly arise as instances of limited self-employment income relative to purported expenses. Also targeted for IRS scrutiny are cases of small Schedule C income amounts with no expenses that trigger higher calculations for the earned income tax credit.
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.