Who is making sure you aren’t paying more taxes than you need to?
Prior to 2007, most Americans relied on their tax preparer, accountant or tax attorney to represent them as their agent to ensure they were receiving every possible deduction and credit to lower their tax obligation since we are under no obligation to pay more in taxes that required by law.
Since January 2008, the role of tax preparers vis a vis the IRS has dramatically altered due to provisions in the Small Business Work Opportunity Act. And now the more recent change on January 4, 2010 aimed at all tax preparers, the IRS released the following press release “Higher Standards to Boost Protections and Service for Taxpayers, Increase Confidence in System, Yield Greater Compliance with Tax Laws” - IR-2010-1, Jan. 4, 2010.
The IRS recommends a number of steps that it plans to implement for future filing seasons, including:
- Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.
- Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.
- Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.
- Extending the ethical rules found in Treasury Department Circular 230 — which currently only applies to attorneys, CPAs and enrolled agents who practice before the IRS – to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.
The detailed report presented the following interesting facts: Less than six percent of Americans had an income tax obligation as late as 1939. More than 75 percent of the American population had an income tax obligation by the end of World War II. As we know, the US tax system is becoming more and more complex.
For any tax payer in America, this is cause for considerable concern. As mentioned in my book due to the changes in the2007 Small Business and Work Opportunity Tax Act now holds any tax preparer jointly financially responsible with the client if certain deductions are denied by the Internal Revenue Service. In fact, the legislation expands the definition of preparer to apply not only to income tax returns, but also to those who prepare estate and gift, excise, exempt organizations, and employment tax returns. By default, CPAs cannot without incurring substantial risk represent the best interests of clients outside of plain vanilla accounting services. They must now place the interests of the IRS ahead of their clients.
This act changes the relationship between you and your CPA or any other tax preparer. The tax preparer is now jointly financially responsible for fines for under-payment or error in the reporting of your taxes. The penalties were raised to the greater of $1,000 or half the income derived by the preparer and for “willful or reckless conduct,” to the greater of $5,000 or half the income derived by the preparer. These are substantial fines for any tax preparer and there is discussion of increasing the penalties.
From the recent IRS Return Preparer Review – All paid tax return preparers are subject to Internal Revenue Code penalties. Section 6694(a) of the Internal Revenue Code imposes a civil penalty on a tax return preparer who prepares a return that understates the taxpayer’s liability where the understatement was due to a position that the tax return preparer knew or reasonably should have known was unreasonable. The penalty imposed on the tax return preparer is increased under section 6694(b) if the understatement is due to the tax return preparer’s willful attempt to understate liability or reckless or intentional disregard for the rules (The IRS is the sole judge and jury as to whether a preparer or tax payer meets their definition and continues to broaden its interpretations and authority). A tax return preparer may also be penalized for aiding or abetting in the understatement of a liability on a return under section 6701. Tax return preparers who demonstrate a pattern of misconduct may be enjoined from preparing further returns. (The only recourse a tax preparer or tax payer has is to file a suit against the service which many Americans have done over the years and engage in a prolonged legal battle. Those lacking the necessary resolve and financial resources must comply. The service marching to its own interpretations of the laws and the threat of prosecution has effectively eliminated any resemblance of independent tax planning).
In addition, section 6695 imposes penalties on a tax return preparer who fails to perform certain acts. For example, a tax return preparer must sign the return and include his or her own identification number on the return. The tax return preparer must also provide the taxpayer with a copy of the return. The penalty for failing to meet these requirements is $50 per failure and cannot exceed $25,000 for each type of failure annually. These penalties generally will not be assessed if the tax return preparer shows that the violation was due to reasonable cause and not willful neglect.
Tax return preparers are also subject to criminal sanctions arising from improper conduct. For example, a tax return preparer that helps taxpayers prepare false or fraudulent returns may be liable and could receive a prison term and a fine of up to $100,000 under sections 7206 and 7207. Other penalties, both civil and criminal, prohibit tax return preparers from improperly disclosing or using the information taxpayers provide to a tax return preparer in connection with the preparation of a taxpayer’s tax return. Civil and criminal penalties can be imposed for the same violation.
Attorneys, certified public accountants, enrolled agents and other individuals authorized to practice before the IRS who prepare returns are subject to additional federal oversight. Collectively known as Practitioners, these individuals must adhere to the more stringent standards of practice promulgated in Part 10 of Title 31 of the Code of Federal Regulations and reprinted in Treasury Department Circular 230. Practitioners who violate these standards of practice or who are shown to be incompetent or disreputable may be reprimanded, censured, suspended or disbarred from practice.
The IRS Office of Professional Responsibility is charged with investigating allegations of practitioner misconduct and proposing appropriate disciplinary sanctions. Additionally, the IRS, under its broad authority to regulate the filing of electronic returns, requires any tax return preparer who files returns electronically to comply with certain regulations. Under these regulations, the IRS may require the electronic return originator to pass background and credit history checks.
We have entered a new era in IRS enforcement of the tax code for all Americans. With over 70,000 pages in the tax code of often contradictory definitions and rules, Americans and their tax preparers need to be aware of the penalties and understand the limitations confronting their tax preparers.
Under the current tax law, the top 1 percent of taxpayers pay 40 percent of the tax, and the top 5 percent pay 60 percent of the tax, while the bottom 50 percent of taxpayers pay just 3 percent. This trend is expected to continue under the current administration.
If you want to know you can secure your future, there are solutions but fewer answers are now found within the accounting and legal professions since all domestic attorneys and CPAs now have similar restrictions. It’s left to those of us who have an international business. Contact Bill Faiferlick, Financial Strategist, for more information.