How Much Help is your Tax Preparer?

Can your tax preparer help you if you run into trouble with the IRS? It depends on what kind of trouble, but generally your everyday, average tax preparer cannot do everything necessary to resolve your tax issues.

If your tax preparer is either an enrolled agent, certified public accountant, or tax attorney, then you will likely have all the authority you need in your corner to address whatever the problem might be. Although attorneys are often better suited for assisting with collection, litigation, and tax court matters. The IRS sees these three categories of tax professionals as having “unlimited representation rights.”

But if your tax preparer does not possess one of these three credentials, then the amount of help he can provide is very limited. Tax preparers who are not EAs, CPAs, or attorneys (also known as “unenrolled preparers”) may only represent taxpayers on issues having to do with returns that they personally prepared. And even then, if the issues escalate to the level of the IRS Collections Department, IRS Appeals, or beyond, they must turn it over to an EA, CPA, or attorney (or the taxpayer may try to handle it on his own). If the dispute cannot be resolved administratively and makes its way up to US Tax Court, then it should certainly be handled by an experienced tax attorney, but it can also be handled by an EA or CPA who has been admitted to practice before the Tax Court. And, of course, the taxpayer still has the option to go at it alone as a “pro se” litigant in Tax Court.

It is one thing to say that someone has the authority to help you, but it is quite another thing to say that they have the skills, experience, and desire to help you. I have met a number of Enrolled Agents that are qualified to represent their clients in audits and IRS disputes, but who simply do not choose to do that as part of their business.  And those who make the decision to pass on those types of cases, never gain the necessary experience and skills to represent a taxpayer competently in such matters. Unenrolled preparers are even less likely to include IRS representation as part of their repertoire.

Although nobody anticipates getting into trouble with the IRS, and it can’t really be predicted, these are a few things to keep in mind when selecting a tax preparer. And according to the IRS, November is a good time to make that decision.

One month left until tax day; who should prepare your tax return?

There’s about one month left to file your 2013 taxes. You may notice that there are lots of places soliciting to prepare your taxes these days. Every time you pass a strip-mall you likely see some type of gimmick, from air dancers, flags, and a person dancing on the corner with a sign. These gimmicks were formally found at a used car lot to attract your attention, but competition can be tough these days. Just like buying a car, you want to make sure you don’t get a lemon when it comes to choosing a tax preparer.

These strip mall tax centers are virtually everywhere. Just because they are everywhere, does not necessarily make them better. The quality and expertise of these types of tax preparers rests entirely on who specifically within the pop-up shop prepares your tax return. There really is a spectrum in the quality and experience you may encounter at one of these shops because these companies are often so big and/or individually owned and franchised.

On the one hand, you may be trusting your taxes with a seasoned tax preparer who’s a licensed accountant, really knows what they are doing, and will work closely with you to ensure your returns are accurate. On the other hand, you may be risking doom with someone using the franchise’s own do it yourself software, who’s simply answering the Turbo Tax type questions for you. So the key when trusting your returns with these types of tax preparation shops is to consider the complexity of your tax returns and to ask about the experience and qualifications of the specific person who is actually going to prepare your tax return.

Before You Sign Your Tax Return

Today the IRS released another installment in its “IRS Tax Tips” series, which is available in the Newsroom of the IRS website.  The IRS lists 10 things to keep in mind when selecting a tax preparer.  But perhaps the most important point is something that many may gloss over — the fact that the taxpayer, not the tax preparer, is legally responsible for what is on the return.  Failure to understand this can result in serious tax problems.

The signature on the return is more important than you might think.  The tax return is not considered complete, and will not be accepted, if it is not signed.  The IRS returns tax forms that are not signed or it sends a separate form that, if signed, has the same effect as a signed original form.  If you file electronically, then you also sign electronically by using a five-digit Personal Identification Number (PIN), which has the same force and effect as a signature made with paper and pen.

When you sign your tax return, you are attesting that the information contained in the return is complete and accurate whether you prepare it yourself or not.

If you have someone prepare your return, you are still responsible for the correctness of the return.

~ Form 1040 instructions

How many of us have carefully read the declaration in the signature box at the very bottom of the Form 1040?  This is what you’re promising when you sign:

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

I can’t imagine many people review every single schedule and every page in any kind of detail, although they should.  It is self-evident that you should never sign a blank tax return (as the IRS points out in its Tax Tip) since you would be unable to truthfully declare that you have examined the return.

If you have a preparer who signs (or EA, CPA, tax attorney), the preparer’s attestation is normally based on what he/she has been given by the taxpayer (or by the IRS), whether it be verbal or documentary information.  The preparer is entitled to rely on that information in preparing the return.  However, as you can see, the preparer’s declaration is actually broader than that — the preparer is obligated to prepare an accurate return based on all information and any knowledge he/she might have.

Another Tax Preparer Fraud Case

A Cincinnati man has proven there is more than one way to cheat on your taxes. And now, in addition to his huge tax debt, he has criminal charges levied against him.

Yesterday John Humphrey, III, 46, was sentenced to 12 months of home confinement and ordered to pay more than $65,000 in restitution to the IRS. Humphrey, a tax preparer by trade, pleaded guilty to filing false tax returns for both himself and his clients.

His own returns appear to be a mixed bag of illegal tax tricks:

  • 2004 – failed to report wage income
  • 2005 and 2006 – claimed niece as a dependent to claim a false exemption deduction
  • 2007 – omitted more than $100,000 in gross receipts from his business, The Tax Place
  • 2008 – claimed a false “Contract Labor” business expense

Besides the 12 months of home confinement, Mr. Humphrey will also have 3 years of probation and will likely have to find a new profession. His sentencing included a prohibition from preparing his own tax return and from working at a tax preparation firm.

IRS Offers Advice on Interacting with Tax Preparers

You can often avoid tax problems early on if you select a competent tax preparer. This post is based on “IRS Tax Tip 2012-06″ published by the IRS earlier today.

The title given by the IRS was “Ten Tips to Help You Choose a Tax Preparer,” but I think you will agree that this is not an accurate title. I think the author started off listing tax preparer selection tips, then ran out of suggestions by #8 or so, but really wanted to have a nice round 10 items on the list. Not that numbers 8-10 are bad suggestions, they just don’t exactly qualify as things you can do to help you choose a tax preparer. Numbers 8 and 9 will probably come into play only after a bad tax preparer has been hired. And number 10 has nothing to do with selecting a tax preparer other than the fact that you most likely would not select an abusive tax preparer two years in a row.

Here’s the list in abbreviated form:

  1. Check the tax preparer’s qualifications: PTIN, certifications, professional organizations, etc.
  2. Check the tax preparer’s history: get on the internet and poke around a little
  3. Find out as much information as you can about their fees
  4. Make sure they will file electronically
  5. Make sure the tax preparer is accessible
  6. Make sure the tax preparer asks you enough questions and asks for enough information/documentation to be able to legitimately prepare your return
  7. Never sign a blank return
  8. Review the return before you sign it (you are ultimately responsible for what is on the return, even if you get a professional to prepare it)
  9. Make sure the tax preparer signs the return and includes his/her PTIN
  10. Report abusive tax preparers to the IRS

Your Tax Preparer Might be an Inmate

It’s 10:00pm; do you know where your children are right now?  What about your tax preparer?

According to a recent TIGTA audit, the IRS approved 331 tax preparer identification numbers to individuals serving prison terms.

  • How did they do it?  In most cases the prisoners lied on their applications by not disclosing their convictions.
  • Why do they do it?  To try to defraud the IRS.  They use false or fraudulent tax returns in hopes of obtaining refunds.  Prisoners have a history of trying to defraud the government, particularly the IRS.  They have enough time on their hands and not much to lose if their scheme is unproductive.
  • What is the IRS doing about it?  The IRS has vowed to suspend tax preparer identification numbers already issued to prisoners and deny any future applications from inmates.

Chances are that these inmate preparers are not actually preparing returns for the average American consumer.  Maybe they’re doing returns for their fellow inmates.  Maybe their laying the groundwork for after their prison terms are over.  Or, even more likely, they are just seeing where this new credential will take them.  Whatever the case may be, it is usually a good idea to actually meet your tax preparer in a face-to-face meeting . . . even if just to confirm they’re working out of an office and not a prison cell.

IRS Return Preparer Program

After yesterday’s comments from the Commish (that’s IRS Commissioner Douglas Shulman) at the AICPA fall meeting, there is reason for some tax preparers to be concerned. They have to be careful that their desire to offer taxpayers maximum tax relief and maximum refunds does not override their desire to perform their duties ethically.

Boiled down to its essence, the program will ensure a basic level of competency for return preparers while enabling us to focus on finding unscrupulous preparers.

~ Douglas Shulman, IRS Commissioner

The enforcement segment of the IRS Return Preparer Program will include:

  1. Letters to preparers who have been identified as “high risk,” making sure they are doing their due diligence.
  2. In-person visits with preparers who have been identified as “egregious.”
  3. Letters and in-person visits to return preparers who are not using the Earned Income Tax Credit correctly.
  4. Special crackdown on “ghost preparers” (those who don’t sign or identify themselves with their PTIN)
  5. Undercover shopping visits to preparers who are suspected of engaging in fraud.
  6. Civil and/or criminal prosecution where appropriate.
  7. Coordinated effort with the Office of Professional Responsibility and the Department of Justice.
While there are many undefined terms being thrown around, there appears to be a spectrum of poor conduct and discipline emerging. At one end is the return preparer who has exhibited a pattern of honest-appearing errors who will receive a letter from the IRS (this is something new). At the other end is the preparer who is suspected of something more “egregious” who very well could be tracked down and thrown in jail (this is not new).

IRS Will be Watching EITC Claims More Closely in 2012

The Earned Income Tax Credit (EITC) is a refundable credit for low to moderate income households. It is a very desirable form of tax relief because it actually puts money back in their pockets . . . if they qualify.  The problem is that over the years the IRS has also paid out in circumstances where the taxpayer doesn’t really qualify. In fact, in 2009 over 26 million people received nearly $59 billion through the EITC.

In an effort to promote more accuracy (and less fraud) in connection with EITC, the IRS is likely going to make it a requirement that all paid tax preparers include Form 8867 with all returns that include the credit. Right now it is a proposed regulation still awaiting public comment and final approval. In years past, tax preparers were required to complete this form (to prove their due diligence) and retain it in case of audit. But under the proposed regulation, paid tax preparers would be required — beginning January 1, 2012 — to actually file the form along with the return.