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Discussion:IRS letter re: preparer responsibilities / compliance / records

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Discussion Forum Index --> Business Growth Community --> IRS letter re: preparer responsibilities / compliance / records


STANP (talk|edits) said:

24 January 2011
I rec'd an IRS letter informing me that an agent will be visiting my office to "verify compliance with existing IRS rules"

and e-filing compliance. I looked on the IRS website & found that approx 2,500 preparers of tax returns with Scheds A, C, & E were chosen. The letter states that the IRS agent will review "all relevant documents, including, but not limited to, worksheets,interview notes, correspondence". I have searched the IRS website & other places and cannot find where it is required by the IRS to retain copies of such records. I understand that tax preparers are required to be knowledgeable in tax law and regs and exercise due diligence as to the accuracy and reasonableness of the information presented and application of tax regs. As a rule, I don't make copies of the the clients info because they are responsible for their accuracy, and I would spend all my time making and storing the copies. As I generally attach the clients info to their tax return, I'm not sure where this leaves me as far as complying with the request in the letter. Has anyone rec'd the same letter or gone through this process? Thanks in advance for your help / insight which will be greatly appreciated.

Kerryfreemanea (talk|edits) said:

24 January 2011
My guess is that you are not an EA or CPA, for this is basic practice management issues that are covered alot. And though you might read that you are only required to maintain a list of taxpayers and thier forms filed (cir 230). Good practice management ask how do you prove that you did not do something wrong.

Yes the taxpayer is responible for the taxes, but that does not protect you for preparer pentalties. What tools do you have to prove DUE DILIGENCE. If an error was made, can you deffend that you had the correct information with the best of your knowledge.

What tools or worksheet do you use during the interview. I have about 3 to 6 different sheet, Plus organizer, plus other work sheet (CSF tax TOOLS)to help collect and provide me witht the comfort of Due Diligence. Example: New client, Demographic page (like what doctors office use)review and copy SS#, Engagement letter, interview work sheet, Mssing information work sheet, Direct Depsit work sheet, clients work sheet (P/L, Ledger,ECT) tax documents tally sheet and stamp docuemnts as recieved, enter and retruned, closing interveiw sheet(to explain pick-up, e-file and payment options( and finally, sign 8879, Possible EIC Due diligence work sheets.

So my process is in place, my Due Dilgince is done and I look forward to a audit.

Good luck, They are not out to shut you down, As it says It is to Verify Compliance. Even the best office can improve and have fun with it.

JAD (talk|edits) said:

24 January 2011
I don't understand these audits. If a client is audited, and I get a POA to represent him for 2009, and the auditor asks me a question about 2010, and I provide that information without obtaining the POA from my client first, then haven't I crossed a line that I'm not supposed to cross?

And if so, then how is it ok for me to provide an auditor - even an auditor of me, not the client - that client's information without first obtaining permission from the client? Aren't we being forced into an impossible situation: open up the client's confidential documents without the client's permission or a subpoena OR refuse to comply with the IRS's audit of me?

Taxalmancer (talk|edits) said:

24 January 2011
Here is some information from the IRS about this initiative:

http://www.irs.gov/businesses/small/article/0,,id=231916,00.html

Given there is an 8-week crunch time, you'd think the IRS would hold off until after tax season.

Taxalmancer (talk|edits) said:

24 January 2011
JAD - the AICPA shares your concern:

http://www.accountingtoday.com/news/AICPA-Worries-IRS-Visits-56808-1.html

Death&Taxes (talk|edits) said:

24 January 2011
Here is Donnie Castleman's experience....and see the first thread he mentions also

Discussion: Efile Audit......

STANP (talk|edits) said:

24 January 2011
Thx Talamancer & JAD

Kerryfreemanea (talk|edits) said:

24 January 2011
Jad, the “verify for compliance” is for the forms that I the tax preparer uses, 8879, 8453, 8867, and the process that was used by the tax preparer during the interview. These are not client audits, and as part of practice management you should not have these in the client files (jeopardizing a client rights). These forms are not the clients, and no disclosure is happing.

Did the client sign the 8879? Prove it. Do you use Due Diligence during the interview? Prove it. Did you have enough information that the client should have gotten a EIC? Prove it.

They are not looking into a client file, unless you put the client at risk by putting these forms in the client file, Then you opened up the client to Risk.

JAD (talk|edits) said:

25 January 2011
Kerryfreemanea, your comments are sort of reassuring, but at odds with the info in the link posted by Taxalmancer, which includes this:

If I am selected for a visit, is the IRS expecting me to do any advance preparation? The IRS will request that you have available all tax forms that you prepared in 2010, including all relevant documents. Relevant documents include, but are not limited to, worksheets, interview notes, correspondence, and a copy of the returns you prepared for your clients. No additional advance preparation is required, but the IRS will provide a link to educational material where you can review your obligations as a tax return preparer.


I think that this is really over the line. And the link to the AICPA shows that, IMHO, the AICPA was way too weak in its response. The response should be "NO". We cannot put ourselves in a position where we are required to go against our ethics, which include client confidentiality. If the client isn't being audited, he shouldn't have to be put at risk with a free peak at his documents by the IRS. It's not that hard to envision a situation where that free peek leads to an audit of the client. And then we either lie by omission to the client by not telling him what triggered the audit, or maybe we tell and put ourselves in the position to be sued by the client?

Maybe I am overreacting, but it seems more and more that the IRS is making rules and regulations to give itself more and more power. For example, requiring certain corps to disclose the issues behind their tax reserves....it's a run around past previous case law regarding tax accrual workpapers, and even more than that, it forces disclosure that previously might have happened in the context of an audit upon everyone.

Another thing that bugs me is that the IRS takes it upon itself to come and check up on each of us for these various procedures - many of which relate to efiling - after first requiring us all to efile. "We require you to efile, and that gives us the authority to come disrupt your office during tax season." It is all very big brother-ish, and underlying it all is perhaps a belief that there are many "bad accountant" to be caught. How about all of us who are trying to navigate this Code to the best of our abilities for the sake of our clients.

Cricktaxea (talk|edits) said:

25 January 2011
Stan, it sounds like you may know some tax law and can prepare a return but you don't know about preparer responsibilities. Read Circular 230 and the E-File Handbook. If you're not a CPA or EA then understand this stuff is standard precedure and the tea leaves say it's only going to get tougher on preparers, not easier. This stuff is covered in excruciating detail in Part 3 of the EA exam, Practice and Procedures. An example of what I think they would look at is say a client has $1,788 of cash donations. Where did that number come from? If there's nothing in the file and all you can say is "gee, the client must have told me" that would not be good. We would either have copies of those donation receipts in the file or a note in the organizer saying the client has those receipts. Usually for something around $500 or more, we would have the receipts but the regs say any cash donation must be backed up with a receipt or cancelled check.

I am very interested in just how tough they're going to be so if you don't mind being the "test dummy" (no offense) please keep us posted on what happened.

Bob

Cricktaxea (talk|edits) said:

25 January 2011
Jessica, I completely understand and agree this looks like they're over reaching but consider this: There are a lot of "bad accountants". If they come into someone's tax office, look at 100 files and find 25 of them looking sloppy, little or no notes, no copies of much of anything, they would take steps against you, right? Well, if they go after a preparer and find evidence of disreputable conduct, they will then get an injunction and demand a list of your clients and probably go after them too so what difference does it make? Either you have your act together or you don't. As to them going after some clients just based on looking in your files, exactly how would that work? I doubt they have photographic memories. I would assume you would be right there with them and if you saw them taking notes including your clients names and SSN's you could and should say something and close your files. If there's two of them could they have worked out some sort of secret code between them so if they happen to see something in a file they really want to turn into an audit one shoots the code (raised eyebrow or secret handshake?) to the other and they know to memorize the name and SSN? Sounds pretty farfectched to me. There have been a few threads here about these preparer compliance visits and nobody mentioned any notetaking going on so I don't think that would happen but who knows?

Bob

JAD (talk|edits) said:

25 January 2011
Ok, this wouldn't be the first time that I overreact, and maybe you have a point about the client not being at risk. But here's another thing: What gets my goat is that when a client is audited, there is a trigger for that audit. For example, I recently handled an audit for a client who regularly contributes $100,000 - $200,000 to charity. Ok, I can see why the IRS wants to make sure that there are records and that those contributions are real.

What is the trigger for the audit of us? Because someone files a lot of returns using e-file? No fair. It's a "guilty until proven innocent" type of thing. 10 years ago a CPA down the street went to jail for preparing a bunch of fraudulent returns. Ok. There was a trigger to the investigation. You say that there are a lot of bad accountants. But in 25+ years of doing this work, he's the only one I've been aware of. And to schedule the visits during tax season feels like a power play - we'll mess with you during the worst time of year just because we can.

I am in the middle of an FTB audit. I called the auditor just yesterday to ask about the status - I hadn't heard from him for a while - and just mentioned that I wanted to let him know a couple of things about my life so that he could evaluate whether or not he's going to come knocking on my door on, say, March 20. The thing is, I believe that he will respect the challenges of the season and my life. They're not all jerks. The IRS doesn't have to behave this way, yet it is chosing to do so, and that says something.

Natalie (talk|edits) said:

January 25, 2011
Kerry, would you please elaborate on this comment? "Jad, the “verify for compliance” is for the forms that I the tax preparer uses, 8879, 8453, 8867, and the process that was used by the tax preparer during the interview. These are not client audits, and as part of practice management you should not have these in the client files (jeopardizing a client rights)." I don't understand how keeping copies of a signed 8879 with the client files would jeopardize a client's rights.

Tax Lady (talk|edits) said:

25 January 2011
Is there a phone number you can call to verify who they are?

Tax Writer (talk|edits) said:

25 January 2011
These efile compliance audits have me concerned, as well. It's terrifying to think that I might be inadvertently violating a client's privacy rights. I understand wanting to see the client's efile records, but if this program is to merely to check efile compliance by the preparer, then why does this agent need access to the rest of the client file?

I have medical information, information about their kids, their workplace, marital status, what church they attend, whether or not their child has a disability, etc... it's not information that I think preparers should have to share in something that is basically a compliance audit for us. Do we have the option to blot out personal information? Probably not. The IRS wants access to everything. If the scope of the audit was limited, I would feel more comfortable.

I know that the compliance audits are designed to help the taxpayer and the public, but I get very concerned about disclosure of client's personal information. I don't know what the solution is-- but it makes me extremely uncomfortable.

Heritage120 (talk|edits) said:

25 January 2011
I so agree with everyone's sentiments that we are exposing our clients to audit risk. I would think e-file compliance would be the signature form. That doesn't have any info. on it that would be risky I don't think. Tax returns also are fine as they should have that anyway. I'd also like to hope the returns would have the box checked that we are allowed to talk with IRS regarding this return. We might consider letting our clients know that we may face compliance audits and their return can be selected. Maybe it will curb them from using shady tax preparers.

Donniecastleman (talk|edits) said:

25 January 2011
Hey, I'm famous now! Awesome! Seriously, don't run scenarios in your head of preparing your last return, while it's a pain in the butt it's not a big deal, they'll be out of your hair in a matter of 3 hours, and lock that filing cabinet! :)

Taxalmancer (talk|edits) said:

25 January 2011
Cricktaxea - "An example of what I think they would look at is say a client has $1,788 of cash donations. Where did that number come from? If there's nothing in the file and all you can say is "gee, the client must have told me" that would not be good. We would either have copies of those donation receipts in the file or a note in the organizer saying the client has those receipts. Usually for something around $500 or more, we would have the receipts but the regs say any cash donation must be backed up with a receipt or cancelled check."

I'm not sure I agree with this.

§10.34(d) of Circular 230 provides, "Relying on information furnished by clients. A practitioner advising a client to take a position on a tax return, document, affidavit or other paper submitted to the Internal Revenue Service, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete."

Do I make an inquiry with each client about their donations and the various rules for charitable contributions including the $250/receipt one? You bet I do and with every client. Unless there's a reason to suspect the amount provided by the client is wrong, or prepared with incorrect assumptions, or the client tells me he or she doesn't have receipts, I don't find anything in Circular 230 that tells me I have to personally inspect those receipts or have copies of them in my files.

Am I wrong?

Death&Taxes (talk|edits) said:

25 January 2011
Take a look at this discussion posted in chat

Discussion: Preparer audit story-sorry,belongs to existing thread but server error will only let me top post

"Where did that number come from? If there's nothing in the file and all you can say is "gee, the client must have told me" that would not be good."

There must be twenty clients of mine who mail or fax documents like W-2s and 1098/1099s and then schedule a follow up telephone appointment, where they might provide me with their charity, or business expenses, union dues etc. If I can, I enter these directly in the software. There are those who begin to drone a list of the charities and amounts. I will stop them and ask if they have a total, and are all receipted? Are any $250 and over? Did they send a receipt? What is the total? Now put the list away with your papers; I am not your amanuensis.

Others send their expenses on sheets of paper or by email; these are scanned and kept in a folder. The same method is employed if I meet with them. Is there something in the file? Yes, this 'information furnished by the client.'

Fsteincpa (talk|edits) said:

25 January 2011
I totally agree with David. We are not required to keep copies of client documentation. Do I, yes, because I've been burned by clients before, not the IRS. In the past, I would not keep the stuff, back when I did less returns.

My reason for having the client documentation is to protect myself when the client questions something.

In addition, do not keep more than you need. Too much information is just as bad as too little information. If it is kept in your files, it should be there for a reason. Because it supports a number on the tax return. If the file gets audited, then everything in there is game.

Auditing 101

CrowJD (talk|edits) said:

25 January 2011
If someone is fined for something not required (and defined) by the Regs or a statute I hope they appeal. I am beginning to wonder just what is at stake here: is it merely the fine, or a fine plus a mark against your record which could prevent you from E filing (i.e. possible future suspension)? I would think they would have to mete out the punishment all at once, but I wonder. Anyway, I am not sure of the answer, but I think preparers should seriously consider an appeal in the proper cases.

Dennis (talk|edits) said:

25 January 2011
I dunno. Keeping copies of documentation to protect against the possibility of client dispute is not exactly a Circular 230 requirement. Is there really a difference between noting "confirmed receipts for donations" in each client file and having one statement of practice that indicates the question is asked for every return?

Kevinh5 (talk|edits) said:

25 January 2011
STANP (first, please fill out your tax pro user profile, thank you).

See §6695(d) - the $50 penalty per failure to maintain copies of the returns prepared or list of returns prepared.

Taxalmancer (talk|edits) said:

25 January 2011
Precisely Dennis.

The simple truth is we do that anyways. A large office will have a firm-procedure/quality-control document in place specifying this particular item amongst others. A small office, or one-person show, does it routinely but may not have a written quality control document in place.

I try to scan every document, paper, or record that I believe affects a client's return, at least as best I can.

Taxalmancer (talk|edits) said:

25 January 2011
In the era of tax-preparation software combined with numerous back up options, it would be hard to imagine there is a person among us who couldn't produce the list required under IRC 6107(b).

Kerryfreemanea (talk|edits) said:

25 January 2011
Natalie, if forms 8879, 8453 ECT... are placed in the client files, by opening the Client files you are allowing the IRS to go further than checking simple signatures. You have volunteered the client’s information to the IRS for review.

In almost every meeting I been to, protecting clients right with IRS compliance. The IRS is to audit us and review certain forms. That is way my practice for years, has kept these forms in stated compliance files. Same is true with Privilege; Separate files not part of the clients folders.

JAD (talk|edits) said:

25 January 2011
D&T, I just read that long story in the link that you posted. That is terrifying and a perfect example of everything that is objectionable about these audits. We need a tax preparer bill of rights. We also need someone super-brave, maybe someone about to retire, to refuse to break client confidentiality, litigate the issue, and try to drum up public support. The IRS needs the public to come to us because the law is too complicated, but what happens if everyone resists because they don't want to be subject to this sort of backdoor inspection.

This type of thing encourages tax preparers to not support efiling. And I don't have any EIC client, and if someone new approached me and needed the EIC calculation, I would not take him on.

Dennis (talk|edits) said:

25 January 2011
Just as an aside...There is a rationale behind the Cohan rule and there are reasons for the IRS to want to turn you all into auditors. Personally I prefer to be an advocate. There are ways to ask questions that preclude getting an answer that would prevent you from submitting a deduction you have every reason to believe represents an expense your client actually had.

Kevinh5 (talk|edits) said:

25 January 2011
NATP has asked any of its members who are involved in these compliance audits to contact them.

Natalie (talk|edits) said:

January 25, 2011
Kerry, first, I think you make a big assumption that just because a document is kept in "client folders," that by opening that document, more information is available. Second, I think you left something out of this comment: In almost every meeting I been to, protecting clients right with IRS compliance.

Cricktaxea (talk|edits) said:

25 January 2011
I completely agree with the idea of keeping as many client records as possible. I work at a CPA firm with over 1000 clients and we scan everything. As to those cash contributions Taxalmanacer this is from Topic 506 on the IRS website:
"For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution."

Regardless of amount. Now of course if all you're talking about is a hundred bucks or something like that, not a big deal and if they want to bust me because I didn't verify $89 fine let them but as soon as it gets around $5-700 or more, we verify receipts and when it's over $1,000 we attach the receipts to the return. And sure, nobody's perfect including us, some of the files I'm sure don't have the proper notes in them but our procedure is to have as many good notes and back up as possible. The reason for this is most people who will hire a CPA for their taxes are not your average worker making $45K. Our clients are well over 100K and many way over that so the numbers are significant. Stuff like contributions will be written in the organizer by the taxpayer and the preparer will put his own notes next to the client's notes.

Bob

CrowJD (talk|edits) said:

25 January 2011
"For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution."

Isn't this directed to the taxpayer? These laws are not free floating. I think tax preparers should be very clear on exactly what legal duties apply to them. Otherwise, the situation could become unmanageable. At the very least, the client may need to pay extra for all the storage costs. Data is not free when it takes labor to scan it, even though it might seem to be a minor cost in the short run.

Fsteincpa (talk|edits) said:

25 January 2011
I do not, nor will I ever audit my clients. If forced to do so, I will find other work to perform.

Taking care of my due diligence requirements is fine. No problem, but I am not required to have them show me receipts and I encourage them not to. And I have clients who make well over $100K as well, in fact right before year end I had to cut a $700,000 bonus check out of one of my corporate clients accounts for them.

Absolutely no need, none, nada to verify receipts of contributions. Sure, they will write it down on organizer, or during the client interview.

I inform all clients that their documentation is their business. If client brings me a Profit and Loss from quickbooks and I feel they are knowledgeable and they don't want me to review the entries, it goes as it is.

Natalie (talk|edits) said:

January 25, 2011
I agree with Fred and Crow. Too much documentation can be bad. Have you checked with your insurance carrier as to why tax preparers are sued? I some cases, it's because the client thought the preparer had audited their information.

One preparer I worked for kept pictures of in-kind donations for one client. The reason was the deductions were for thousands of dollars in clothing, and the tax partner thought it was highly likely the client would be audited just because the amount was so large. The pictures showed gorgeous sequined gowns and elaborate evening dresses. This client was on the top of the best-dressed list. Otherwise, we typically didn't keep receipts (and I don't now).

Taxalmancer (talk|edits) said:

25 January 2011
That's a relief. I was starting to develop a complex thinking I was the only who didn't audit each client's records.

CrowJD (talk|edits) said:

25 January 2011
You couldn't audit everyones records unless you put them all on extension.

Dennis (talk|edits) said:

26 January 2011
This disturbing item from The Journal of Accountancy contains the phrase

"Schedule A flags included high levels of charitable contributions or employee business expenses, and either reported as round numbers."

Admittedly I am (very) old school, but I was taught professional standards mandated rounding when estimates are used. Should we consider Cohan overturned by administrative action?

Kevinh5 (talk|edits) said:

26 January 2011
I have found that many of these articles in so-called professional journals are written by free-lancers who have no indusry experience. I also am always suspicious of articles written by academics who must 'publish or perish', as they usually have limited real-world experience also. We have direct experience here on TA with that.

Fsteincpa (talk|edits) said:

26 January 2011
I have believed exactly what Dennis said. Estimates are acceptable, but they are not allowed to appear as if they are not estimates.

If a client estimates their charitable contributions, not a problem. I let them know that they need to have back up if the IRS comes, but the estimate is acceptable. And, I will not put down $1,243 as an estimate, it would be $1,250.

Death&Taxes (talk|edits) said:

26 January 2011
Round numbers, huh? Last year when I printed my Quicken reports for our accounts, I found our charitable deductions were a 4 figure round number, totally round with a digit on front. Just when I thought, uh, oh, I went through our receipts and found three Shoprite grocery tapes and on each was circled $1 and the name of the charity.....so we had x003. Still looks phony in my opinion, but .................

CrowJD (talk|edits) said:

26 January 2011
I think Dennis was asking a rhetorical question, but isn't Cohan a Supreme Court decision? They can't overturn that by direct administrative action can they?

On another subject entirely, I want to caution the scallawags out there not to make up numbers wholesale. Don't make them up at all! Just yesterday, I incautiously accused an accountant I didn't even know of making up numbers out of thin air. I don't know what I was thinking (I often don't, see below).

You should be aware of Benford's Law: http://en.wikipedia.org/wiki/Benford's_law

Here is some further reading on the subject: http://www.benfordonline.net/benfordBibUser/benfordBibUserHome.php

I want to remind everyone that the government can pull a van in front of your house (it's usually black) and wipe out your brain with a strong magnet. I've had to start over several times in life becuase of this (it started when I was in kindergarten the first time)

.**When I say scallawags, I'm not speaking of the TA community itself by rather of some of the members of our broader readership "out there".

Kevinh5 (talk|edits) said:

26 January 2011
CrowJD, do what I do: make a cone hat out of aluminum foil (you can't buy real tin-foil anymore, it was too effective in blocking the government from reading people's minds, so they gave the Reynolds company special tax breaks to switch over to aluminum) and wear it at work, especially when you're meeting with clients. It will help you focus more. You will know it is working because your clients will be fixated on the hat - focused on your every word and movement. When you reach out to hand them a pen they will react by jumping backwards. Now that's focus!

Kevinh5 (talk|edits) said:

26 January 2011
http://www.instructables.com/id/How-to-Make-a-Paper-Hat/

This online instruction works well, just substitute aluminum foil for paper.

Kevinh5 (talk|edits) said:

26 January 2011
http://en.wikipedia.org/wiki/Tin_foil_hat

Note that this man's hat is not as effective as a cone-shaped hat in blocking others from reading his mind.

JAD (talk|edits) said:

26 January 2011
Ok, back to the issue of the use of estimates. I also understood that it was ok to use estimates in certain situations, if they were reasonable. I also understood that we were to use round numbers. However, hasn't the climate changed? If I enter an estimate for an expense, how can I believe that the taxpayer has proper documentation? Couldn't the IRS say that I should have reasonably known that the documentation did not exist since we used an estimate. Then I would be hit with penalties.

CrowJD (talk|edits) said:

26 January 2011
For years I thought I was protecting myself and you are exactly right, they don't use tin anymore and I was wasting my time with these hats. I first knew the government was spying on me when I went with my grandmother to help her apply for veteran's benefits (on my grandfather's account). The government clerk knew I had 10 toes distributed as 5 on each foot (somehow it came up in the coversation). Now how did he know that? You see what I mean?

He knew it. He didn't assume it, do you follow me? I would never make the assumption that someone had 10 toes distributed 5 to a foot. The clerk had to know.

Sorry for the diversion but I wanted to say something before they wiped my brain out again.

Kevinh5 (talk|edits) said:

26 January 2011
JAD, wear such an aluminum foil hat to the IRS audit and then the auditor won't be able to read your mind that the client even used estimates.

Kevinh5 (talk|edits) said:

26 January 2011
The last time I did this the auditor couldn't wait to conclude the audit. We ended up with a 'no change' letter, along with a request that I handle future audits by mail. It seems that many of the taxpayers waiting at the IRS office caught on to my method and started wearing aluminum foil hats to their meetings with the IRS.

Dennis (talk|edits) said:

26 January 2011
Apparently we are not going to have a serious discussion. For Crow's benefit, Cohan was a Second Circuit decision (for the lower Court to reconsider) with the opinion written by Judge Learned Hand. The IRS (with the issuance of regulations under §274) has already taken an administrative action.

Kevinh5 (talk|edits) said:

26 January 2011
Dennis, sorry if my posts didn't appear serious. I had my foil hat off and my thoughts were being controlled. I've got it back on now. Sanity is a frivolous and fleeting concept during tax season.

Death&Taxes (talk|edits) said:

26 January 2011
Kevin: at the urging of my client, I brought my dog Farfel to the audit. Better than a hat; RA fell in love with her.

I have a classical musician from Israel; he never gives anything but a round number. I learned, however, that when he was audited his round numbers were always $10-15 too low. It's his way of viewing the world; he is an artist with a cello, others are grocers, as he puts it.

Kevinh5 (talk|edits) said:

26 January 2011
I would have loved to have made a foil hat for Farfel to wear to the audit!

CrowJD (talk|edits) said:

26 January 2011
Thanks for the information about Cohan, I knew nothing about this. The modern bookkeeping today is an estimate for a lot of these companies, but it says on the box it's a bookkeeping program and the figures come out looking so pretty and people are willing to believe it. Where do you know where to precisely draw the line without being hypocritical? Perhaps I'm being too hard on this software (or really the operators of the software) as my experience is limited. I mention this as a way of putting this issue in a broader perspective.

Kevinh5 (talk|edits) said:

26 January 2011
This just in: An MIT study showed that while foil hats are effective in blocking certain common radio wave signals, they actually amplify the signals reserved by the FCC for use by the government:

"Using a $250,000 network analyser, we find that although on average all helmets [they tested 3 models of foil hats] attenuate invasive radio frequencies in either directions (either emanating from an outside source, or emanating from the cranium of the subject), certain frequencies are in fact greatly amplified. These amplified frequencies coincide with radio bands reserved for government use according to the Federal Communication Commission (FCC). Statistical evidence suggests the use of helmets may in fact enhance the government's invasive abilities. We speculate that the government may in fact have started the helmet craze for this reason."

http://berkeley.intel-research.net/arahimi/helmet/

Fsteincpa (talk|edits) said:

26 January 2011
JAD, I don't believe that the requirements say we need to know the client has documentation, only that what we report is a proper representation. If a client loses a receipt, I'm still going to take that deduction.

Death&Taxes (talk|edits) said:

26 January 2011
I find it odd that in 230, 10.21 regarding client omissions precedes 10.22, diligence. Seems the latter should come before the former. In Fred's lost receipt scenario above, the due diligence of learning that the client does not have a receipt for a donation would lead to the explanation of the consequences of not being able to produce this receipt.

btw, Crow.....you do realize that Cohan was THAT George M fellow. You get this picture of James Cagney spinning his tale in front of the judges.

JAD (talk|edits) said:

26 January 2011
Fsteincpa, I agree generally. I am concerned about some of the crazy stuff that I have read regarding preparers being assessed penalties for what would seem to be the client's responsibility, as though it was our responsibility to audit the taxpayer for the IRS. Take this a step further. If a client presents rounded numbers (I gave about $2000 to charity), then the IRS audits, and lets say that the client can only document $500. By accepting the client's estimate, wouldn't we be putting ourselves in the position of being at risk of a penalty assessment because we "should have known" that the client didn't have receipts by virtue of the estimate that he provided ....instead of the actual expense.

Dennis (talk|edits) said:

26 January 2011
The due diligence requirement concerns accuracy not what specifically can be proven at any given time. Are you not at the same "risk" if client loses his bag of receipts between the time he showed them to you and the time he is audited...?♫

CrowJD (talk|edits) said:

26 January 2011
Good point.

I will respond to this in a common sense manner. What would be exptected to catch the ordinary similarly situated preparer's eye as being unusual? In other words, what should an ordinary preparer be expected to question further? I would think $2,000.51 or $2,015.00 as a charitable deduction would be more suspicious than $2,000.00. Likewise, for other expenses, a perfectly round number might raise an eyebrow. It's obviously subjective to a large degree because the preparer could always be dead wrong in his (un)educated guess.

Of course, some numbers (take mileage for instance) may stand out as so blatantly outside of the "normal" range for an certain occupation that any preparer would be expected to question it.

Since I don't think "due diligence" is defined in Circ. 230 (correct me if I'm wrong), you could expect to have a court flesh it out (if a preparer had the money to take it that far). Or it may be that it's too vague of a standard period (so as to have Constitutional implications) since it's not defined in the Reg., but only a court could answer that I think. (This may call to mind the courts wrestling with what the term "pornography" meant in the past), even though I think due diligence would be easier to define than that, which begs the question: why isn't it defined in Circ. 230?

MarkSC (talk|edits) said:

26 January 2011
Absent a subpoena, I would never, ever, ever open up a client file or work papers to the IRS unless it was to defend a client in an audit. You are opening yourself up to privacy violations, waiver of preparer privilege (very serious issue), and the like if you do. I have no problem with an interview about my work processes or showing IRS the e-file consent forms. I was selected last year for one of these IRS visits. It was very pleasant. The agent read from a script and was not allowed to deviate. The goal was to educate me, not to audit my practice. I said, "Yes, I understand, and we remind clients of those rules." That was it. Very pleasant. If she had asked to see a client file or documentation of a position taken on a return, I would have told her, "No way. Get a subpoena or audit the client you have a question about. Otherwise, you have no legal authority to see those files." I'm not sure why the person with the story in the other thread agreed to cooperate with IRS's fishing expedition. I certainly never would.

Death&Taxes (talk|edits) said:

26 January 2011
How does a request to see a client file square with 10.20 and its 'promptly submit records' in Circular 230? "Mr. Jones, can I see the Stagliano file?" "That file is not mine to show; I cannot do that without violating their privacy." But when Lenny Briscoe asks to see something and the person refuses, he barks out that he can always come back with a warrant or the like and turn the place upside down.

I keep my 8879s in their own file folder, in order of date I received them. I keep a folder with copies of all 8453's submitted, including copy of what was attached.

Jessica: one method of ferreting out accuracy of 'about 1,500' guesses is a line like, "are you sure it's 1,500 and not 1,479, or 1,521?" I often find more by asking little questions like this, and often the answer is 'let me get back to you.'

Kevinh5 (talk|edits) said:

26 January 2011
CrowJD, I should have used the yellow search box before giving you info that you already had: Discussion:Drop Land Line?

Kevinh5 (talk|edits) said:

26 January 2011
and here: Discussion:Anyone heard of Cloud Servers?

MarkSC (talk|edits) said:

26 January 2011
Nothing in Circular 230 requires me to give IRS access to client files. That's why there is a preparer privilege now. Although not quite as broad as attorney-client privilege (which I can also rely on), it clearly prohibits IRS from the fishing expeditions described.

Kevinh5 (talk|edits) said:

26 January 2011
or here: Discussion:The "new" Years Raise/Review"

who'da thunk I should have done a yellow box search on 'tin foil hat'?

JAD (talk|edits) said:

26 January 2011
Mark,

How do you square your planned response with 301.7216-2(b), which exempts disclosures to the IRS from the disclosure restrictions and penalties of 7216? As I understand it, this reg means that we can disclose client detailed data to the IRS without the client's knowledge or permission.

D&T (and anyone else),

I am new to efiling this year. Do I have to keep hardcopies of the 8879s and 8453s, or can I scan them all to a separate file on my hard drive, and just print out the whole file if the IRS comes knocking?

MarkSC (talk|edits) said:

26 January 2011
Correct, the preparer privilege extends only to "tax advice" and not to tax preparation. Still, I would not agree to give IRS that info without a fight.

MarkSC (talk|edits) said:

26 January 2011
Really, though, I don't think IRS is conducting these types of preparer audits. They are doing what I described: interviewing practitioners, asking to see their e-file forms, explaining the substantiation rules, etc. I can't explain what prompted the audit described in the link above. Maybe IRS had an undercover visit and discovered something amiss. I don't think it is the norm.

Death&Taxes (talk|edits) said:

26 January 2011
Jessica: your point to Mark is precisely what I was trying to bring out.

I know some have posted that they scan to hard drive; I just can't think who. I receive most of my 8879s by mail, fax or email, when the client file is already boxed to be returned to storage. They sit in a manila file by date received (actually last year I reached 3 or 4 files since there are state copies too).

I have thought of scanning these forms to hard drive, but would probably wait until filing season was over. I already scan the client data to a pdf folder on a hard drive, but I would not scan the 8879 to that same folder for the reason that why should opening a folder reveal more than needs to be seen.

btw, one thing that drives me nuts is that clients will email me the signed forms, or fax them, and then send them by snail mail too!

CrowJD (talk|edits) said:

26 January 2011
Mark, speaking of the government in general, if it's a nice friendly visit, I can almost guarantee they are planting a bug in one of your potted plants. Don't ever accept a cookie from one of them unless you want to host a homing device in your bowels. The NSA can aim a beam of neutrinos at your brain and know what you think about a young lady walking across the street in those bikini pants they wear today. Kevin, you make my point, they keep wiping out my brain and I can't remember what I wrote yesterday.

MarkSC (talk|edits) said:

26 January 2011
This is from IRS. They are trying to ensure compliance with the items mentioned. That would not require or allow any viewing of client work papers.

"When the IRS visits preparers as part of the FY2011 IRS Return Preparer Initiative, the focus is on the return preparer's activity; not on the taxpayers' reporting compliance. The IRS is inspecting the taxpayers’ returns to ensure the return preparer's compliance with the requirements subject to penalty under IRC Section 6695 for failure to furnish copy to taxpayer, failure to sign return, failure to furnish identifying number and failure to retain copy or list of all returns prepared. Taxpayers generally will not be contacted as a result of a FY2011 return preparer visit. Taxpayer contacts resulting from these visits will be to confirm potential violations of the return preparer that may result in penalties against the tax return preparer. The rights of the return preparer's clients will not be jeopardized.

Guya (talk|edits) said:

26 January 2011
Do bear in mind that as part of the voluntary disclosure process the IRS have identified in their CI database huf=ge numbers of advisers selling unkosher product. It is those people they really care about, anything else is esentially trivial process stuff where a slapped wrist might result.

Thankfully data protection laws here in the UK would prohibit the IRS from seeing my client data without a court warrant. Perhaps more preparers should think of moving over this direction?

Death&Taxes (talk|edits) said:

26 January 2011
'advisers'?????? that is being polite.

MarkSC (talk|edits) said:

26 January 2011
Guya, sounds like a good excuse to visit. I do have one UK client. Maybe I should move my file server to your office?

CrowJD (talk|edits) said:

26 January 2011
I don't want my head chopped off over there when I can buy justice over here. The only freedom left in the world is to be declared insane, then a fellow has room to express himself without worrying about the consequences.

Kevinh5 (talk|edits) said:

26 January 2011
(hint: start wearing the foil hat)

Taxea (talk|edits) said:

26 January 2011
check the videos section of the IRS...there is a reference there for business records

Joanmcq (talk|edits) said:

27 January 2011
I love the UK and have a client over there too. I really CAN work anywhere...and they have health care available even to the self-employed with pre-existing conditions. Cute accents too.

Taxalmancer (talk|edits) said:

27 January 2011
"When the IRS visits preparers as part of the FY2011 IRS Return Preparer Initiative, the focus is on the return preparer's activity; not on the taxpayers' reporting compliance. The IRS is inspecting the taxpayers’ returns to ensure the return preparer's compliance with the requirements subject to penalty under IRC Section 6695 for failure to furnish copy to taxpayer, failure to sign return, failure to furnish identifying number and failure to retain copy or list of all returns prepared. Taxpayers generally will not be contacted as a result of a FY2011 return preparer visit. Taxpayer contacts resulting from these visits will be to confirm potential violations of the return preparer that may result in penalties against the tax return preparer. The rights of the return preparer's clients will not be jeopardized."


My policy is that every client gets a printed copy of the return and it is signed by me. It doesn't matter whether I uploaded a draft to their portal, which they approved. They still get a printed copy.

How do you prove to the IRS that you did, or did not, furnish a copy to the client and whether that return was signed? Ditto with identifying number?

JAD (talk|edits) said:

27 January 2011
Agreed. And honestly, don't they have the returns? Can't they see if they were signed by looking at their copy - at least for paper-filed returns.

TaxInfo (talk|edits) said:

27 January 2011
In 2007 my office was visited by two IRS agents. The purpose of the audit was ensuring the proper record keeping procedures of the e-filed returns.

Following items were checked: 1. If I had a list of my e-filed returns. 2. If I was not stockpiling my returns. 3. On 8879 forms agents checked the dates ( client had to sign before his return was transmitted. 4. W2 & 1099 had to be attached to 8879 if needed (need to be kept for 3 years. 5. EIC worksheet (asked to show if I was filling out preparers worksheet for returns with EIC) 6. Security of the office (if the alarm system is was place, who had the keys and etc.). My office was found in good compliance.

Taxalmancer (talk|edits) said:

27 January 2011
All this poppycock because we e-file. If my hand wasn't forced to do it this year, I would have paper-prepared client returns until I was old and cold. It may be the cat's meow for some people but, for me, this e-file stuff is for the birds.

Natalie (talk|edits) said:

January 27, 2011
". . . but I would not scan the 8879 to that same folder for the reason that why should opening a folder reveal more than needs to be seen." I'm guessing then that your monitor is set up so that whoever is in your office can see what you open.

Tscales (talk|edits) said:

27 January 2011
I used to work in a program that processed over 21k worth of returns. We maintained Form 8879, Intake Form, along with copies of any income-w2, 1099, etc...Apparently, these forms were in compliance. Also, we were constantly reminded that tax preparers are not bookeepers. Unless you are a CPA or your firm offers other financial services, simply preparing individual tax returns should not require storing or scanning documents. In my office, I copy and scan SS cards, ID cards, 8879 and an Intake Form. Part of my fee includes responding to audits on returns that I have prepared. However, when it boils down to proving receipts, it is solely my clients responsibility. Some of my clients come in my office with shoe boxes of receipts, I give them a calculator to add them up and write down the total.

Szptax (talk|edits) said:

27 January 2011
The 8879s print with a date. What if the client holds the form and doesn't sign immediately? Would it be considered that you "held the return" based on this date? What if the client signed on that date & they held it?

If anyone uses Ultra Tax - maybe you could tell me how to print without a date!

Taxalmancer (talk|edits) said:

27 January 2011
I've never looked at a client's social security card, or a client's child's birth certificate, or a marriage license.

Anyone here think we should be doing this?

TaxInfo (talk|edits) said:

27 January 2011
8879 has to be signed before you e-file tax return, not after, so prior dates are fine, return would not be considered "held" but if you would had all the forms in your possession and would not e-file your returns then it would considered stockpiling.

Death&Taxes (talk|edits) said:

27 January 2011
I have only looked at Social Security cards when returns are rejected because of name placement.

Natalie: I work from my home on a laptop; my computer table is against the wall and while a client sitting to my left can see a screen, you have to sit head on to see it. The folders I refer to do not have the software in them but rather contain pdfs of documents, so that opening a folder might show 20 documents but no detail (the scanning is done on another computer in another room, and if I open the file on that computer, the 20 pages open in thumbnails, but I have only a portable harddrive with backup of those). I interview perhaps 5 clients a week here. In Philadelphia where I go twelve times a year, the clients sit across a desk and see nothing....this year I will take a netbook with photos of our trip so if they want to see them, I will hand them the netbook....no business stuff on it.

Fsteincpa (talk|edits) said:

27 January 2011
I do not e-file returns unless I have both the e-file authorization and payment. Sometimes the signing comes and then payment is received a week later. I do not consider this stockpiling as all necessary information required for submission is not received.

In my office, it is necessary for payment to be received prior to submission unless other arrangements are made.



http://www.irs.gov/efile/article/0,,id=205434,00.html

An ERO must ensure that stockpiling of returns does not occur at its offices. Stockpiling is

   * collecting returns from taxpayers or from another Authorized IRS e-file Provider prior to official acceptance in IRS e-file; or
   * after official acceptance to participate in IRS e-file, stockpiling refers to waiting more than three calendar days to submit the return to the IRS once the ERO has all necessary information for origination

The IRS does not consider returns held prior to the date that it accepts transmission of electronic returns stockpiled. This includes when the IRS is not able to accept specific returns, forms, or schedules until a date later than the start-up of IRS e-file due to constraints such as late legislation, programming issues, etc. EROs must advise taxpayers that it cannot transmit returns to the IRS until the date the IRS accepts transmission of electronic returns.

NewYorkEA (talk|edits) said:

January 27, 2011
Szptax:

1040 - US ELF: Automatic Generation of PINs Resolution


With the taxpayer's consent, you can elect to have UltraTax CS automatically generate taxpayer(s) PINs for use with IRS e-file.

To setup UltraTax CS to automatically generate PINs, follow these steps:

  1.
     Choose Setup / System Configuration / Electronic Filing.
  2.
     Click ERO.
  3.
     Mark the Automatically generate taxpayer(s) PIN checkbox, highlighted below. The PINs will be generated after entering a signature date on Screen PIN, located under the E Filing folder.

In the same area there is a box you can check/uncheck that says "Automatically generate signature date."

If you look in the UltraTax support Knowledgebase it is case # K13688660.

Szptax (talk|edits) said:

27 January 2011
Thanks NewYorkEA, that's the check box I needed!

Natalie (talk|edits) said:

January 27, 2011
D&T, I guess if you have very detailed information in the title of the documents and the agent is sitting head on, there's a potential for exposure, but it doesn't sound like that big of a deal. It may be more efficient to put all 8879s in one place, similar to what is recommended for I-9s, but it's not wrong to put them in with client folders as was inferred by Kerry in a post near the top.

Mikeburg (talk|edits) said:

28 January 2011
Hey, I have one of these audits tomorrow. On the phone, the agent set the appointment for 8:30 a.m. 1-28-11 & Monday 1-31-11 (2 days). The letter he then sent says I must have "available all tax forms" I prepared in 2010. They plan to review my software set-up computer security procedures & overall compliance with e-filing requirements.

It further says that after an initial interview, the examiner will review a selected number of tax returns prepared to confirm I complied with existing return preparer rules. At the end I may be emposed penalties for any non-compliance.

The audit verbally tole me on the phone he will probably choose 25 tax returns for me to provide.

I am a licensed CPA in Texas. What should I do?

I welcome any & all discussion as I am almost out of time. I am a small sole practitioner who prepares 400 to 500 tax returns each year. I am so busy doing those, I will loose business if the IRS gives me a hard time this time of the year. FYI I do not prepare a tax return unless I am allowed to do it correctly.

Thanks for all your comments & information. mikeburg

NewYorkEA (talk|edits) said:

January 28, 2011
Go through all your files and make sure you have what you need. If you are missing anything important for any of the clients and cannot find it/produce it, make a note of that so that you can defend yourself. You do not want to look shocked when he asks you for something you do not have.

TexCPA (talk|edits) said:

28 January 2011
Mike:

Sec. 901.457. ACCOUNTANT-CLIENT PRIVILEGE. (a) A license holder or a partner, member, officer, shareholder, or employee of a license holder may not voluntarily disclose information communicated to the license holder or a partner, member, shareholder, or employee of the license holder by a client in connection with services provided to the client by the license holder or a partner, member, shareholder, or employee of the license holder, except with the permission of the client or the client’s representative. (b) This section does not prohibit a license holder from disclosing information that is required to be disclosed: (1) by the professional standards for reporting on the examination of a financial statement; (2) under a summons under the provisions of the Internal Revenue Code of 1986 and its subsequent amendments, the Securities Act of 1933(15 U.S.C. Section 77a et seq.) and its subsequent amendments, or the Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.) and itssubsequent amendments or under a court order if the summons or order: (A) is addressed to the license holder; (B) mentions the client by name; and (C) requests specific information concerning the client; (3) in an investigation or proceeding conducted by the board; (4) in an ethical investigation conducted by a professional organization of certified public accountants; or (5) in the course of a peer review under Section 901.159. [1]

RULE §501.75 Confidential Client Communications Except by permission of the client or the authorized representatives of the client, a person or any partner, officer, shareholder, or employee of a person shall not voluntarily disclose information communicated to him by the client relating to, and in connection with, professional accounting services or professional accounting work rendered to the client by the person. Such information shall be deemed confidential. However, nothing herein shall be construed as prohibiting the disclosure of information required to be disclosed by the standards of the public accounting profession in reporting on the examination of financial statements or as prohibiting disclosures pursuant to a court order signed by a judge, a congressional or grand jury subpoena, investigations or proceedings under the Act, ethical investigations conducted by private professional organizations, or in the course of peer reviews.

It would be difficult for me to comply with the IRS examiner, since this action by the federal government may conflict with my state's law.

"The rights of the return preparer's clients will not be jeopardized." hmmmmmm

TexCPA 02:31, 28 January 2011 (UTC)

Szptax (talk|edits) said:

28 January 2011
how much warning do they give you for these audits?

Mikeburg (talk|edits) said:

28 January 2011
TexCPA,

I got to the Rule paragraph 501.75. Having trouble getting to Rule 901.457. Can you post a link to it?

Thanks a million. mikeburg

TexCPA (talk|edits) said:

28 January 2011
Go here [2]

then Board, then rules 501.75 is a TAC, Title 22, Part 22, Chapter 501, Subchapter C, RESPONSIBILITIES TO CLIENTS

Best of Luck Mike, I am also researching TSBPA's news letters.

TexCPA 03:10, 28 January 2011 (UTC)

Gazoo (talk|edits) said:

28 January 2011
QUOTE: how much warning do they give you for these audits?

Three knocks. Sometimes two if the weather's bad.

Rgtaxservice (talk|edits) said:

28 January 2011
Who's there?

Mikeburg (talk|edits) said:

28 January 2011
I will have to confess, the IRS agent called me 3 weeks in advance to tell me of the office review & sent me a letter confirming it 17 days in advance.

Thanks TexCPA, I need am more worried about my CPA license than the audit.

Should I give the agent these rules & explain my license is in jeopardy? I have contacted the state board & they are suppose to send me a letter ruling via e-mail as soon as possible.

Keep me posted what you find asap. mikeburg

TaxInfo (talk|edits) said:

28 January 2011
I had IRS visit last year. I was a lucky winner of the IRS lottery again…

We had candid good conversation afterwards. Same agent visited me, who did my e-file audit in 2007 (apparently his mom lives in my neighborhood). Make sure you have your EIC questioners filled out. Usually they target EIC, Schedule A (charitable deductions) and Schedule C fillers. I told the agent I serve low income self -employed immigrants. I do a lot of Schedule C eligible for EIC returns. He said that it was “ok” make sure you document everything to back up your position.

Last year I e-filed around more than 500 individual tax returns.

After the visit they might do recommendations to the office of professional responibility if you do not show that your office has good compliance procedures in place. Just show good effort and listen closely…..be slow to speak…and be willing to learn (ask questions)….

Gazoo (talk|edits) said:

28 January 2011
Szptax: I was just kiddsing. If you read over the IRS site that Taxalmanac posts way above (Post 4), you will see that the IRS is supposed to work with the preparer in setting up a time for the appointment. That's how I understood it anyway.

Mikeburg (talk|edits) said:

28 January 2011
Agent just finished in my office. While he asked other questions about my operation, he focused on schedule E asking questions. He wanted to merely see my ptin info on the returns & look at nothing else. Any he is finished & all is well. Thanks for all your input!

TexCPA (talk|edits) said:

28 January 2011
Mike,

Sounds like it went well, please update this post with the 'letter ruling' from the TSBPA. I wish our state's website [3] was a little more informative. I get the quarterly newsletters and could not find any 'opinions' regarding these 'preparer compliance audits'.

So did the 'agent' look at any returns?

Congrats !

TexCPA 18:36, 28 January 2011 (UTC)

Anne (talk|edits) said:

15 November 2011
I got a letter today from the IRS, Letter 4809. They are saying the same as people received earlier this year. They may select me as a tax preparer to visit to confirm compliance with return preparer requirements. The letter states that returns I filed for clients have a high % of attributes associated with returns typically containing inaccuracies & misinterpretations of tax law. The targeted area of concern is Schedule E. I did a total of 254 individual returns in 2010 and 37 had schedule E for rentals & 28 had Sch E for K-1s. Is there any advice anyone has? I feel like I try to do my best to make sure I'm preparing an honest accurate return but the letter makes you feel like you've made all kinds of errors.

Ricky (talk|edits) said:

15 November 2011
Anne, I received an IRS Letter 4809 yesterday at my home. It looks like a 2 page form letter, and then includes a third page which is titled "Targeted Area of Concern." My letter lists Schedule A, which lists 2106 unreimbursed employee expenses, mileage claimed on 2106, travel, meals and entertainment, and charitable contributions.

I have always had clients who legitimately donated large amounts to charities, but I file very few 2106's. (It did not mention Schedule E's and C's).

I'm waiting to see if I hear anything else.

Ricky

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