McLaughlin & Quinn, LLC - Providence | Boston

On its website, the IRS has issued answers to frequently asked questions (FAQs) concerning IRS’s return preparer compliance campaign for the 2012 filing season. The FAQs discuss the 21,000 “reminder” letters that the IRS has sent nationwide to return preparers and the 2,100 in-person follow-up visits that will be conducted starting in November of 2011 and running through April 15, 2012. The FAQs also provide tax return preparers with general pointers on their due diligence requirements.

Who has received the letters? The FAQs indicate that the IRS letters were sent to a pool of paid preparers who completed a large volume of tax returns with Form 1040 Schedules A (Itemized Deductions), C (Profit and Loss From Business (Sole Proprietorship)) or E (Supplemental Income and Loss) during the 2011 filing season. IRS says that the selection of return preparers who received the letters was based on the returns prepared for clients during the most recent filing season having a high percentage of attributes that typically indicate errors on these schedules (i.e., inaccuracies and misinterpretations of tax law).

The IRS letters include an enclosure that describes the current responsibilities of tax return preparers. The letters remind return preparers that taxpayers may not fully understand the tax laws and may incorrectly believe they are entitled to claim deductions for non-qualifying expenditures. The preparer may rely in good faith on information furnished by the client without verification, but can’t ignore the implications of information furnished to or actually known by him. He or she must make reasonable inquiries if the information, as furnished, appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. The preparer must make appropriate inquiries to determine the existence of facts and circumstances required as a condition for claiming a deduction or credit. The enclosure also outlines common issues that they should be aware of on Schedules A, C, and E.

Schedule A letter. The letter indicates that the most common issues for Schedule A deal with:

… Unreimbursed employee business expenses claimed on Form 2106 (Employee Business Expenses). It reminds prepares that taxpayers may only claim allowable unreimbursed expenses.

… Mileage claimed on Form 2106. IRS’s letter reminds preparers that taxpayers should have documentation to support business miles claimed;

… Travel, meals and entertainment expense. The letter reminds the preparer that taxpayers must have documentation of business purpose, as well as receipts to support expenses claimed; and

… Charitable contributions. The letter reminds the preparer that taxpayers must have receipts for all cash contributions and adequate documentation for all non-cash contributions

Schedule C letter. The letter indicates that the most common issues with Schedule C deal with:

… Gross receipts not being fully reported. IRS’s letter reminds preparers that books and records should be available for review to substantiate amounts reported;

… Expenses claimed must be ordinary and necessary for the type of business reported; and

… All expenses claimed are to be paid or incurred during the tax year and the allowable amount of the expense must be correctly computed.

Schedule E letter. The letter dealing with Schedule E indicates that the most common issues are:

… Rental income and expenses not being properly reported;

… Rental depreciation not being correctly calculated; and

… Limitations surrounding passive activities, basis, and at-risk rules not properly considered or calculated.

The FAQs contain the following general pointers on a return preparer’s due diligence requirements:

• In general, return preparers should understand the underlying substantive law affecting an item of income or deduction. Return preparers must exercise due diligence in preparing or assisting in the preparation, approval, and filing of returns, documents, affidavits, or other papers relating to IRS matters.
• Return preparers also must exercise due diligence in determining (1) the correctness of oral and written representations made by the return preparer to IRS; and (2) the correctness of representations made by the return preparer to the client with reference to any matter administered by IRS.
• Return preparers who prepare returns for taxpayers who may be eligible for the earned income tax credit have additional due diligence requirements.
• Return preparers aren’t required to audit, examine or review books and records, business operations, documents or other evidence to independently verify information provided by a taxpayer, advisor, other tax return preparer or other party. However, the preparer can’t ignore implications of information furnished to him or actually known by him and must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.
• A return preparers must make inquiries of a taxpayer to prepare an accurate tax return. For example, he must make general inquiries or have existing knowledge of the taxpayer’s sources of income (e.g., whether the taxpayer received alimony, a refund of state taxes in the previous year, or received interest or dividends), and for Schedule C taxpayers, have a more in-depth discussion including what accounting method the taxpayer uses. A tax return preparer also should ask for taxpayer records where appropriate (e.g., previous year’s tax return or copies of depreciation schedules for Schedule C or E taxpayers or stock basis for filers of Schedule D (Capital Gains And Losses)).

Visits from IRS. The FAQs also discuss the 2,100 compliance visits IRS revenue agents will make nationally with members of the return preparer community. These visit will take place at the return preparer’s place of business. IRS requests that the return preparer have available the tax forms that he prepared in 2011 and all relevant documents, including worksheets, interview notes, correspondence, and a copy of the returns prepared for clients. If the return preparer is an Electronic Return Originator, e-file transmission documents should also be made available.

The purpose of these visits is to confirm that return preparers are complying with current return preparer requirements, including the maintenance of records and signing and furnishing of preparer tax identification numbers (PTINs) on the tax returns that they prepare, and to provide information on new return preparer requirements effective for the 2012 filing season. If violations are found, the revenue agent may, with managerial approval, determine it is appropriate to propose penalties