Discussion:New preparer penalties

Which, as I listened, didn't bother me. I'm not working on cutting-edge tax shelters. I try to interpret the law in the best way possible, but ultimately, I am bound by the law and am trying to do the right thing. So what's the big deal, right?

This example of how all of this translates into additional work and exposure alarmed me: Tax preparer prepares a business return. Taxpayer/client claims a deduction for independent contractors. If the tax preparer does not make appropriate inquiries into the appropriateness of worker classification for each contractor, meeting the "more likely than not" standard, then the preparer has exposure should the contractors later be reclassified to employees. In order to avoid those potential penalties, the preparer must disclose on the client's tax return that the client has independent contractors and that the classification may not withstand challenge. Client would be furious and would leave; disclosure is of course a red flag.

On the upside the Srgt. Schultz rule still applies (known/should have known). I don't think that the new changes will require us to verify a tax payers information. If that was true, only CPA's could prepare returns.

In your example of the independent contractors, I wonder what "appropriate inquiries" mean. I can picture it ranging from "Are they really independent contractors?" to auditing the work records.

On a tangent for the IC example- the new rules for Sec 6694(a) apply for understating a taxpayers liability. Wouldn't classifying employees as IC's overstate the business' income tax liability. If the preparer only prepared the income tax return he'd be ok, but if he had prepared the employment taxes he'd be at risk.

Good point re the income tax impact of having ICs instead of employees. It may be that they were discussing preparers who did both payroll and income tax returns and I missed that fact.

You commented that only CPAs could prepare the returns if preparers are required to verify information. The speakers weren't talking about verifying the information. It was more about what we have to do if we have reason to suspect that something isn't right or when we have to make minimum inquiries. For example, we're all supposed to ask our clients if they have appropriate documentation for meals and entertainment and business use of auto. What do we have to do to claim the deduction for IC's without making disclosure? They didn't conclude.

Also, they made the point that CPAs are already subject to Circular 230 and that these new rules force everyone else to operate under these standards.

1. "Congress did not take into account the fact that a practitioner often will not be able to determine whether a position is more likely that not correct" (for example, ambiguity as to whether an assets is held for sale or investment, if an expense should be capitalized or deducted)

2. "Now, every understatement could result in a penalty because, by definition, an understatement only arises if the position taken on the return was, at a minimum, not more likely than not correct". So for every audit adjustment, we can be assessed.

3. It suggests that some practitioners may simply file Form 8275 disclosing every number on every line of the return, with a comment that there is no certainty that the number is more likely than not correct. I love this idea. The problem is that I think there is a conflict of interest: it is not in my client's best interest to make this disclosure as it increases audit risk, it is in my best interest.

Somewhere I read that the real problem with this new rule is that a preparer who is assessed is then referred to an "Office of Professional Responsibilities" or something like that where he can potentially be stripped of his ability to earn a living in this field.

To me, it seems that these rules presume that we are all unethical, bad preparers. I wonder about the legislators that made and voted for these rules. How would they like to have disclosure made on each of their returns? Do they have such little faith in the ethics of their own tax preparers?

Jdugancpa, it sure seems like that could come back to bite all of us. The IRS could say that the wages are understated on the 1040, right?

So again, is there a way to disclose without increasing client's audit risk?

And Dennis, I love your solution, except that I still think we have a conflict - making disclosure that increases audit risk of client to protect ourselves. I am sure that my clients will not go for it.

As I read this, the more likely than not standard should be based upon an authority (or authorities) in Reg. 1.6662-4(d)(3)(iii) but does not require disclosure. The reasonable basis standard would require adequate disclosure.

Do you do an 8275 if you didn't see the mileage log?

Do you do an 8275 if you saw a mileage log but aren't sure whether it correctly shows ONLY the business miles?

Do you do an 8275 if the client says that there IS NO mileage log but you want to take the deduction anyway?

Someone above mentioned that it feels like IRS is saying all tax preparers do a bad job. When I went to the IRS seminars in September, one of them dealt with the new penalties and the speaker made me feel that IRS felt most tax preparers were bad EXCEPT those that were physically in front of her right at that moment. She did actually make a comment to the affect that those present in the room were most likely above reproach. Kind of a back handed compliment intended mostly to squelch any potential riot I'm sure.

2. No 8275 - because I would determine to a high degree of certainty

3. No 8275 - assuming there is an appointment book from which mileage can be determined or client had an established route.

The good faith clause is still in 230. The IRS ostensibly accomplished the goal of intimidation.

"The IRS will run out of lawyers". For me, they never will, they only need one to run me out of business.

"Disclose on every line": And dump me into the frivilous return category, along with my client. No thanks. If I get canned by the IRS, I certainly do not need a lawsuit by the client also.

All of this is hypothetical of course, as is all of my replies. That is why I have never put the disclosures as required by circular 230 on any of my responses.

Lengthy anedote

Reminded me of the time I told an office auditor to 'work a little harder.' He had yawned in my face, belched once or twice, and then in a situation where the client had her car stolen with records inside, and where she worked as an account executive for a radio station, a job that is spent in the car being a gopher, and where she had given me a list of her clients with location, and where she had produced repair bills showing total mileage plus an employer letter, this genius disallowed the auto.

He asked me to repeat what I said, so I did and explained that a prior audit six years before had been a no change and that it stood to reason she used her car. He opened a drawer and pulled out a piece of paper.

"Do you know what this paper says? It's from the District Director telling us to audit all of your returns."

"Oh, that's great, I will make a fortune. Now let me talk to your manager."

He backtracked, asked if we could complete the part of the audit about the husband's sideline business so he could write his report first. I pulled out some papers, he ruffled them and said, 'this looks okay' and then suggested 70% of the auto for the wife instead of 78%, pointing out she should've shown reimbursement for trips to Newark.

He prepared a report; I told him I would sign it if the client had no objections and then he said 'Sir the return is well prepared, and I had you mixed up with another preparer. Didn't you used to work for David X?" I nodded affirmatively. "Well, he's the bad preparer."

Talk about a guy digging a hole......but the morale of the story is that two weeks later he was transferred to Field Audit!!!!!! a promotion!!!!! Like the speaker Action heard....the bad preparers are always someone else.

btw: can you electronically file the 8275? or a statement saying the same things?

I, on the other hand, have lost endless hours of sleep wondering whether they will be routinely proposing preparer penalties. It seems there is no way to know every tax position on a corporate tax return. Was the storage rent really for personal purposes, did they run gas expenses for the officers through company even though they said they didn't, is the owner's son overcompensated, etc..

I'll bet that if each of us tried hard enough we could find an item of deduction or income (a tax position) on every corporate tax return that could not be sustained under close scrutiny and cause a penalty to the preparer.

Will the IRS rule will an iron fist?

Congress (and thus IRS) is likely after the big firms and bold tax attorneys who counsel the big companies into tax-favored deals which are just wrong.

Any link to this Bill?

So the advice on AMT grouping and the self-rental rule, must that meet the MLTN standard? And the cost segregation study you perform on the real estate in the fourth year the partnership is in operation, does it need to meet the MLTN standard?

Unlike the covered opinion rules of Circular 230, there is no opt-out disclaimer. All you can do is require disclosure of the less than MLTN position.

Finally, the real problem was never about MLTN vs. substantial authority, it was always the other side: reasonable basis. How many older authorities, whether cases or rulings, have been implicitly overruled by later decisions? Does this mean the standards are different for attorneys and non-attorneys?

How does classifying a worker as an IC overstate the tax liability? On audit if the IC is reclassified as an employee the business would not have paid any FICA tax (much less any other wohholding tax) and would therefore have underpaid its tax. The IRS agent would be waiting for a check from the business owner at the conclusion of the audit. Thus, the definition of an underpaid tax has been met and the tax preparer may be opening himself/herself to a preparer penalty.

I see the IC/employee area being a huge problem for tax preparers. Am I missing something?

I hope I'm wrong.

Txsrv - I noticed your background with the IRS and I hope your assessment that the IRS will be out for the big boys and shelter promotors is correct. What troubles me is that, to the best of my knowledge, the IRS has not issued any guidance on how they will administer these penalties in the future. The penalty amounts were so small in the past (started out at $100 & $250) that most practitioners paid little attention to them. Now they have mushroomed into formidable weaponry.

Txsrv - Do you have any experience of when, or how, tax preparers have been referred to the "Office of Professional Responsibilities" in the past and what that could mean to a preparer? That heavy hammer seems ridiculous if every time a taxpayer loses an IC case (or some other subjective issue) the preparer will be penalized and then referred to OPR. Who the heck will be a preparer in the future if they operate like that?

Naturally if a pattern of bad returns are found, I would expect this to be used to put the preparer out of business but it would be hard to see using this new power as a negotiating tool.

"I don't agree with what you propose; I am asking this case be sent to Appeals."

"Oh, then let's up the ante and tack on a preparer penalty. Of course, I'll drop it if you sign for the changes I propose."

Does anyone really think that is going to happen?

DZ - That's an excellent question and one I've wondered about myself. In all likelihood most CPAs are not going to be willing to share that they've had a preparer penalty assessed agaist them. So I have no way of knowing. What floors me is that in 2006 if you prepared a corporate tax return, charged $50,000 and had one position that was not likely to be upheld the penalty would by $250. In 2008, the same penalty will be $25,000. Whether the IRS enforces that to the letter of the law or not the penalty should never have gotten that large. Sorry, but that's just plain wrong. Congress decided entirely on their own that you and I should now be quasi-IRS agents and are holding a mammoth monetary axe over our heads. I never signed up for that program.

I am terribly disappointed with the AICPA. IMO, they should have insisted that guidance be given with respect to this issue. They also should have provided more guidance about the frequency of preparer penalties in the past and what they believe the IRS's position will be now that the stakes are raised to the "nth" degree.

We, its members, are left out on our own to twist in the breeze. The large firms have formulated policies done in conjunction with national headquarters and a team of highly-paid lawyers. What does a sole practitioner do when he or she has no idea what the landscape was (frequency of preparer penalty) and what it is likely to be.

Here we are......going into 2008 with new killer preparer penalties and FIN 48. This profession stinks.

I agree CrowJD. I've soul searched these past 6 months, spoken with several tax attorneys and finally decided to slash my client list using a Sawzall. I'll look to pick up more work if this issue ever corrects itself but until then I'm out except for certain clients.

CPAs are really getting the python squeeze. On one hand, the risk from doing audit work has never been higher so many firms just got out of doing it. On the other hand, Congress wants to strike fear in our hearts with the threat of penalties of epic proportion that have real teeth. Finally, add that the AICPA has done nothing, in my opinion, to help relieve the pressure mounting inside most practices today. Whoa is us.

You make an excellent point that prospective new clients have to go somewhere and most serious preparers try to do things correctly. Are mistakes sometimes made? Of course. Preparers have a tiny window of time to get things done especially given all the changes over the years to eliminate fiscal year filing. That was forced on us.

We'll now have to get it 100% right and be able to document how we nailed down every tax position on every tax return with both Gorilla Glue and stainless steel fasteners. It's utter nonsense but is the reality we face.

The more than likely standard is a joke. Only a handful of tax preparers are lawyers. How are CPAs, EAs or other preparers, trained to read court cases and decide whether you can show that in 2 out of 3, or 3 out of 5, or 4 out of 7 court cases the taxpayer won and, voila, you can meet the more likely than not.

Who. I ask, has the training and who has the time to do that for EVERY tax position on EVERY tax return (that means every line item on every return)?

Naturally if a pattern of bad returns are found, I would expect this to be used to put the preparer out of business but it would be hard to see using this new power as a negotiating tool.

"I don't agree with what you propose; I am asking this case be sent to Appeals."

"Oh, then let's up the ante and tack on a preparer penalty. Of course, I'll drop it if you sign for the changes I propose." Does anyone really think that is going to happen?"'

I don't, but not because they won't develop the preparer penalty issue.

First, the tax press is full of stories that relate how agents must develop the penalty position, always. I've never seen it, but I won't put it past the Service. There are too many frequent-flyer gunslingers out there and too many national return prep practices for agents to worry about having to see the preparer again. And the IRS just did force agents to raise issues they did not want to deal with: the LMSB Industry Issue Focus program. Though some think this program is only for Fortune 1000 companies who work with the Big 4, it is not. If you keep the real estate in the S-corp, it is not hard to break the $10 million in assets barrier. Even cases that were in Appeals and ready to close were kicked back to Exam to re-open IIF issues. So I don't think they'll try to use it as leverage, but I think they may try to develop it.

Second, the IRS is working on coordinating SBSE and OPR so that no one falls through the gap between practitioners and the unenrolled. According to the Director of OPR, they had the inaugural issue meeting in late September. Every non-CPA, non-law firm that has a national practice, no matter how big, has historically been regulated by SBSE, largely on a regional basis.

Third, the penalty only applies to positions you knew or should have known about. No more willful blindness, but they're not asking you to be an auditor. Not yet.

Fourth, there are a handful of cases on the issue of the preparer penalty and almost nothing on Circular 230. I have heard of situations where the penalty has been proposed, but nothing more than that.

We can all discuss what we think is reasonable, practical, and professional. But we're not the ones in charge of enforcing these provisions.

Does your accountant work for you or the IRS?

I can only imagine the reaction from a Congressman (or any taxpayer for that matter) getting his return done signing an engagement letter that details the following:

The Internal Revenue Code and regulations imposed NEW preparation and disclosure standards with non-compliance penalties on both the preparer of a tax return and on the taxpayer. These standards differ. Unless we have a reasonable belief that any tax position in your return will more-likely-than-not be sustained on its merits, a preparer penalty will be imposed on us unless that position has a reasonable basis and is adequately disclosed in the return. And, while we might be able to avoid a preparer penalty by adequately disclosing the return position, you might not have to disclose the position in order to avoid applicable penalties. If we determine that we would be subject to a preparer penalty by delivering your return to you, you agree to either adequately disclose that position on your return or change the position to one that would not subject us to penalty. If you do not choose to change your position or adequately disclose so as to eliminate, in our sole opinion, our exposure to the preparer penalty, we, in our sole discretion and at any time, may withdraw from the engagement without completing or delivering tax returns to you. Such withdrawal will complete our engagement and you will be obligated to compensate us for all time expended and to reimburse us for all out-of-pocket expenses through the date of our withdrawal.

The HR 4318 bill will likely pass as it is an election year. You will do just about anything not to tick off a group of constituents.

Tom

Fewer disclosures will be required to avoid preparer penalties. If the preparer has a reasonable basis for taking a position on a return, but isn't sure the position has a better than 50-50 chance of prevailing, IRS provides an out: The preparer won't be penalized for nondisclosure if he or she advises the client that the reporting standards for tax pros are stricter than for individuals, documents that advice and demonstrates that the taxpayer had substantial authority for the position.

Notice 2008-13, page 17, Example 11

As I think about this, I find myself back in the finale of The Maltese Falcon [Hammett's book or the great film] where Sam Spade tells Bridget not to be sure he is crooked, but that is what she counted on.

It is important, as Natalie points out upthread, to contact your legislators. I rattle my saber once in a while when I don't like what I am hearing. But, then again, I have friends who have contacts.

My dad worked for the feds writing personnel legislation for the last 25 years of his government career. He always said most legislation was poorly written because it was written by recent law school grads working on Capitol Hill trying to make a name for themselves. He would get stuff constantly from committee staffers and re-write it, as he put it, into English.

When I read the text of the law, I just thought to myself, "Dad's theory once again is being put into practice." I understand TxSrv's point that it appears that Congress' intent was to go after the big boys (big CPA firms and big-time tax attorneys promoting abusive tax shelters) and wound up casting a much wider net than intended.

And considering it was a revenue raiser designed only to raise $82M, are we being realistic that most of this is going to come out of our pockets? I doubt it and I am realistic enough as well not to take that chance. But $82M is chump change in the federal budget. By changing the law, they can always find the money somewhere else.

Now if the AICPA will stop feeding the pig and push this through, we can go back to doing our jobs and feeding our families.

Tom

Now, my question is.....I know this is cash....I know it would not stand up in an audit.....What do I do? Do I need to disclose that this is cash ( he has many of the guys sign a piece of paper that says received $x in cash with a signature)

Help!!!!

Does he have a schedule of who he paid for which move job?

Nancy, I guess I would wonder how the $60,000 in cash is handled. Is your client in a high-cash business? Is he reporting all of his revenue? I would also suggest to the client that he have W9s on file and file 1099s as required.

You're right. I worked on Capitol Hill (albeit as a controller for a non-profit) and we had a couple of people who held some serious sway with the political elite. One very famous bill went down in flames as a result of one, just one, of our colleagues say so.

But it wouldn't hurt for all of us to complain. Most of us are small operators, or so it seems from most of those who have bothered to fill out their profiles and based on what people have said. This could seriously affect our relationships with our clients and not in a good way.

Which is why I hold onto the belief that in this election year, we will see this change. And if the AICPA were reading this and were smart, they would play the small, independent businessman who is a tax preparer (i.e., us) who is caught up in this sweeping legislation that could effectively jeopardize our "way of life" at the hands of the "big, bad IRS." (I know, it's a little melodramatic, but they do it with the family farm all the darn time. No offense to the family farmer out there.)

Tom

I know the AICPA is doing something, but I think we all need to jump on it as well. It's going to take all of us contacting our representatives. Here is the link to do so:

https://forms.house.gov/wyr/welcome.shtml

Give it a shot, folks.

Tom

Tom

Dusty

Thank you for the the link to contact our representatives and the info re HR 4318. I will contact mine today.