IRS SENDS SCHEDULE C WARNING LETTERS TO PREPARERS

[Lee B]

IRS Warns Tax Return Preparers About Schedule C Errors

 

By Ken Berry, CPA Practice Advisor Tax Correspondent On Dec 22, 2014

 

 

According to a new report in the Kiplinger Tax Letter, the IRS has mailed out more than 2,500 letters this month to tax return preparers who have been guilty of foiling a faulty Schedule C, Profit or Loss from Business (Sole Proprietorship).

 

The gist of the message: Do better next time.

However, while the IRS appears to treating wayward practitioners with kid gloves for the time being, don’t expect examiners to be as lenient during the 2015 tax-filing season. Repeat offenders could be slapped with penalties for as much as $5,000 per return.

 

This isn’t the first time the IRS has addressed this issue. After sending out tens of thousands of such letters in the past, the IRS updated its posting of Letter 5105 on November 24, 2014. In the letter, Carolyn Campbell, Director of the Return Preparer Office, outlines the reason for the correspondence. It says that the IRS has reviewed tax returns the recipient prepared in the past year and discovered many have a high percentage of traits typically resulting in errors on Schedule C. The letter reminds tax preparers:

 

Specifically, Letter 5105 covers the following:

Due diligence: A paid tax return preparer must take numerous steps to prepare accurate tax returns on behalf of his or her clients. Due diligence and includes reviewing the applicable tax law to establish the relevance and reasonableness of income, credits, expenses and deductions on a return. Generally, you can rely in good faith without verification on information provided by a client, but you can’t ignore the implication of the information you have. Make reasonable inquiries if the information appears to be incorrect, inconsistent or incomplete.

 

Schedule C reminders: To prepare an accurate Schedule C, you must ask your clients relevant and probing questions to help determine if the expenses are legit. Taxpayers may not fully understand the tax laws and may incorrectly believe that they can deduct expenses that don’t qualify. Furthermore, you should ask your clients if they have receipts to support the expenses and instruct them to keep them in case the IRS challenges deductions.

 

Helpful resources
: The IRS provides valuable information about Schedule C on its website at www.irs.gov (Keyword: Recommended Reading for Small Businesses). In addition, its recommends that tax return preparers review the Schedule C instructions; Circular 230, Section 10.22, Diligence as to accuracy; and Circular 230, Section 10.34, Standards with respect to tax returns and documents, affidavits and other papers

 

Potential consequences: 
Expect the IRS to get tougher in the future. It warns practitioners that they, as well as their clients, could face negative consequences from inaccurate returns. The IRS will be looking for improvement in future returns prepared by recipients of Letter 5510. Significantly, inaccurate returns may result in any of the following consequences:

• If the IRS examine a client’s return and find inaccuracies, the client may be liable for additional tax, interest, additions to tax and penalties.
•  
• If you prepare a return for a client that has an understatement of tax liability due to an unreasonable position, the IRS may assess a minimum penalty of $1,000 per return (IRC Section 6694(a)).
•  
• If you prepare a return for a client that has an understatement of tax liability due to reckless or intentional disregard of rules or regulations by the tax preparer, the IRS may assess a minimum penalty of $5,000 per return (IRC section 6694( ).

Forewarned is forearmed: Pay extra-close attention to filings of Schedule C for 2014 returns. Don’t simply accept a client’s unsupported opinion or rely on spotty documentation. Remember its your name and reputation – not to mention your wallet – that is on the line

 

Currently the only Schedule C Tax Returns that I am preparing are for clients that I am already

doing the record keeping.

[kcjenkins]

Currently the only Schedule C Tax Returns that I am preparing are for clients that I am already

doing the record keeping.

 

Clearly that is not a viable option for most of us.  Small business that do their own books are the backbone of many offices.  And QB has only boosted the number doing that.  

[MsTabbyKats]

Just do what you do....and don't do returns that aren't logical.

We aren't the IRS police.

[Jack from Ohio]

We aren't the IRS police.

That's what you may think....

[MsTabbyKats]

That's what you may think....

I work for those who pay me. Professionally, the IRS gives me nothing, not even telephone support.

I don't do "stupid"...but I don't make clients take lie detector tests.

[FreedomTaxed]

I've looked into this more closely. One of our tax preparers got a letter like this. A problem has arisen where this letter isn't being taken seriously, but from all the news items, I'd say that the $1000 fine per incident is now a serious risk.

 

Times like this, the manager's hat is heavy.

[Jack from Ohio]

These letters are only sent to preparers that have numerous issues with returns they have prepared.  As manager or owner, if the hammer falls, it will get you as well. 

 

In addition, these letters are the 3rd or 4th communication about these items.

 

This should have been taken seriously 2 years ago when it started.  Just remember, for preparer penalties in a firm, the scat runs UPHILL from the IRS.

[Terry D EA]

In my opinion. this is where the engagement letter is a must. I never, and I suppose this is the norm for all of us, do an independent verification of the client's books and records or receipts prior to preparing the tax return. A client can take a Lowe's Home Improvement receipt for repairs to their home and call it a business related repair and we will never know the difference. Even if the client is using QB which many are, each transaction is not verified. Now, keep in mind that I will send the guy packing who brings me hand written expenses on a sheet of notebook paper. That is where the due diligence comes in. Time to ask more questions. I think the main thing to keep in mind is the definition of carelessly and recklessly in circular 230 and if you are doing everything that is required to CYA, then there shouldn't be any concerns. 

[GeneInAlabama]

I have had clients bring in a handwritten sheet of notebook paper with all expenses neatly presented that I felt completely comfortable in using.  I have had others bring in receipts that I had no way of knowing if they were business expenses as was mentioned.  Ultimately, we have to accept the word of the taxpayer unless we have reason to believe that the figures they give us are not accurate.  I used to have a client that brought in a hand written schedule F every year that I felt completely satisfied that the figures were genuine.  I wish that I still had him, but he died about three years ago.

[NECPA in NEBRASKA]

I am not sure that I see the difference in writing down their figures on a sheet of paper or filling in numbers on their organizer. I am not auditing their business, but I do ask questions if I think that there is an issue. Many of them bring me their whole year on notebook paper, including their individual items and where they added the items up. I don't think that means that I have to check their addition. Many people are not comfortable with computers. Some of these clients have been bringing me their information the same way for over 20 years. I've had a few Schedule C audits and only one owed the IRS a fairly small amount. 

[Catherine]

I have one guy who brings me everything on notebook paper.  At one point he offered me his paper tape calculator tapes for all his categories... I declined.  His is a known business, he keeps everything (and thank heavens does not bring me every scrap), and can always answer any question I put to him (but usually starts with "I'll check my records when I get back into my office and get back to you).  As with all clients, I emphasize that he will need to produce ALL his receipts and details should he get audited, so please keep them safe and filed by year.  I think I can trust his figures.

[Terry D EA]

Well the entire key to this conversation is if we are reasonably sure the information presented is accurate or do we have reason to believe it is not. Hence the need for the additional questions and documentation. I guess I should have stated my feelings about the one notebook paper guy I had. He was always skiddish answering questions and if I read into everything he did make me feel his figures were inaccurate. Bingo, last time I seen this guy he was trying to answer why he forgot to give me a 1099R that cost him big time. Never felt comfortable but always had the engagement signed that stated as Catherine said that all receipts for expenses and income must be substantiated and that an independent verification wasn't being done. The was good enough but now with all the due diligence issues I think we need to further protect our selves. Now, if I smell a rat as in my other post, I tell them I can't help them or throw such a ridiculously high fee at them they leave. Not worth it.

[Catherine]

I ditch EVERY client who I feel is not forthcoming with me.  

 

Being skittish in answering questions, "forgetting" papers (well, forgetting is fine; lots of folks don't understand what New Form X is anyway -- but hemming and hawing after the notice is way different), excuses, the quick shift of eyes as they are trying to come up with something plausible....  get RID of those folks.  Not worth whatever they pay.