|
The IRS is updating
their standards for tax preparers. The results will be a
substantial increase in fines, penalties and most importantly
responsibility. C. Michael Halfast, CPA of Risk Avoidance
Managers, Inc. in St. Petersburg, FL, says.
|
"Insured's need to be diligent in
their research done to support whatever position they take with
respect to their clients." |
|
Here's
an example of where the Preparer Penalties are more of a concern
for the average 1040 tax return preparer. Often, the CPA will
assume that the taxpayer can substantiate the list of charitable
contributions or un-reimbursed employee expenses that the
taxpayer gave the CPA along with his/her other tax stuff (W-2,
1099s, 1098s, real estate taxes, dependent day care expenses,
etc.). I believe the new law states, if the preparer fails to
obtain and include in his/her file a confirmation from the
insured which states, upon request of the IRS, you can provide
substantive evidence for the deduction, the preparer could be
subject to preparer penalties equal to the greater of $1,000 or
half of the fee they billed the client. In essence, the IRS is
turning the tax preparers into auditors. This is a simple
example and there are several other more complex issues that
make it very treacherous ground for the CPAs.
It gets worse when we are talking about errors in the
preparation of an 1120-S or 1065. If a position in the return is
questioned and the CPA is deemed not have a "reasonable basis"
for the position AND that position impacts the K-1s issued to
the shareholders/partners, the penalties are compounded. If
there were five K-1s issued, preparer penalties would be
assessed on the 1120-S or 1065 filing AND on each of the 1040s
filed by the shareholder...even if the CPA doing the corporate
return did not prepare the 1040s.
Insured's need to be diligent in their research done to support
whatever position they take with respect to their clients.
So is there anything a tax preparer/CPA can do to protect
themselves? Ralph Picardi, Esq., CPA of the Law Firm Lapping &
Picardi in Boston, MA, suggests that since most tax
professionals know that there are numerous gray areas in the tax
law, when a client asks you to take a position, you should
require the client to provide you with the information needed to
take that position. Be certain to back up your request in
writing, you will need a paper trail. Then, make sure you have
done more than adequate research on your position. While you may
cite one court case that assimilates your position, there may be
subsequent Revenue Rulings or Treaties that closed the position.
Not completing your research is a sure way to get the penalty
assessed without the client's involvement.
Ralph also mentions that recent changes to the IRC and Circular
230 concerning the standard applicable to positions taken in
returns prepared by paid preparers has been raised from
“reasonable basis” to “more likely than not”. Ralph suggests
that the best way to treat this change in the engagement letter
is to explain to the client the approach the firm will take, and
the consequences of wrongful or uncooperative behavior on the
client’s part.
Ralph goes on to recommend that the engagement letter provision
should state that without disclosure in the return itself of the
specific position taken on a given issue, the firm must have a
reasonable belief that it is more likely than not that the
position will be held to be the correct position upon
examination by taxing authorities. The provision should go on to
say that if the firm does not have that reasonable belief, it
must be satisfied that there is at least a reasonable basis for
the position, and in such a case the position must be formally
disclosed on Form 8275 or 8275-R, which form would be filed as
part of the return. The provision should further say that if the
firm does not believe there is a reasonable basis for the
position, either the position cannot be taken or the firm cannot
sign the return. The provision should point out also that in
order for the firm to make these determinations, it must rely on
the accuracy and completeness of the relevant information to be
supplied by the client, and that in the event the firm and/or
the client is assessed penalties due to the firm’s reliance on
inaccurate or incomplete information supplied by the client, the
client will indemnify, defend and hold the firm harmless as to
those penalties.
As always, when adding language to your engagement letters, you
should work with an attorney for legal reasons. Ralph Picardi
offers an engagement letter review service; for details visit
his website. CPAGold™ policy holders can contact their brokers
for access to the risk management hotline.
|
