Audit Concerns

[RitaB]

The Spirit of the Law in Title 26 of the IRC is to admonish us not to UNDERSTATE tax liabilities.  Yes, I said that like I know.   Here's the list of penalties from irs.gov.  We really DO need to know them, contrary to some advice we have seen.  On here.

https://www.irs.gov/tax-professionals/summary-of-preparer-penalties-under-title-26

Note:  Yes, some of the amounts are a little low on this because some penalties have been adjusted upward.

[RitaB]

Here are the first two listed:

IRC § 6694 – Understatement of taxpayer’s liability by tax return preparer.

IRC § 6694(a) – Understatement due to unreasonable positions.  The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

IRC § 6694(b) – Understatement due to willful or reckless conduct.  The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

 

 

[jklcpa]

1 hour ago, Jack from Ohio said:

So therefore, by citing specific instances we can totally erase the purpose and effects of Circular 230?  Just ignore it because "the chances are very slim..."  I guess my definition of "Professional" is different than some of the dictionaries in use in this profession.

Schedule A today, Schedule C tomorrow, Schedule E after that....

 

Hmm, maybe after that will be those 709s  that you weren't at all worried anyone would ever find out about... even after having read the technically correct answer.

Last year it was "reality, too much effort, and who's ever going to find out" and now it's "known/should have known, ethics, and circ 230".     Pick one. 

 

[Jack from Ohio]

4 hours ago, jklcpa said:

 

Hmm, maybe after that will be those 709s  that you weren't at all worried anyone would ever find out about... even after having read the technically correct answer.

Last year it was "reality, too much effort, and who's ever going to find out" and now it's "known/should have known, ethics, and circ 230".     Pick one. 

 

Your retreading of old statements does NOT CHANGE Circular 230.  My position still stands.

[Jack from Ohio]

5 hours ago, RitaB said:

The Spirit of the Law in Title 26 of the IRC is to admonish us not to UNDERSTATE tax liabilities.  Yes, I said that like I know.   Here's the list of penalties from irs.gov.  We really DO need to know them, contrary to some advice we have seen.  On here.

https://www.irs.gov/tax-professionals/summary-of-preparer-penalties-under-title-26

Note:  Yes, some of the amounts are a little low on this because some penalties have been adjusted upward.

Disagree.  

Who determines "The Spirit of the Law?"  I prefer how the law is written.  Unless a court or the legislature makes changes, the regulations are as they are written. 

I am not willing to gamble that big.

The "professional" who prepared the return we are currently assisting with audit WILL be talking to an IRS agent soon.  Overstated deductions by $23K on a $6k income Schedule C.  Auditor was very adamant.

[Jack from Ohio]

In addition, the IRS has publicly stated that it will be increasing penalties and enforcement on preparers in order to "increase voluntary compliance...

  TIGTA analyzed the Master File to determine if the IRS is effectively enforcing paid preparer penalties. It found that the IRS isn't treating this issue as a top priority, so it often goes by the wayside. Without increasing its emphasis on policing tax return preparers, TIGTA says it's unlikely the IRS can change its behavior and increase voluntary compliance...

IRS officials agreed with all of TIGTA's recommendations. The IRS says it's putting corrective actions in motion. Tax return preparers should be aware that there's a new sheriff in town.

http://www.accountingweb.com/tax/irs/irs-to-crack-down-on-tax-return-preparers

 

[jklcpa]

26 minutes ago, Jack from Ohio said:

Disagree.  

Who determines "The Spirit of the Law?"  I prefer how the law is written.  Unless a court or the legislature makes changes, the regulations are as they are written. 

... ... ... ... ... ...

In addition, the IRS has publicly stated that it will be increasing penalties and enforcement on preparers in order to "increase voluntary compliance...

  TIGTA analyzed the Master File to determine if the IRS is effectively enforcing paid preparer penalties. It found that the IRS isn't treating this issue as a top priority, so it often goes by the wayside. Without increasing its emphasis on policing tax return preparers, TIGTA says it's unlikely the IRS can change its behavior and increase voluntary compliance...

IRS officials agreed with all of TIGTA's recommendations. The IRS says it's putting corrective actions in motion. Tax return preparers should be aware that there's a new sheriff in town.

http://www.accountingweb.com/tax/irs/irs-to-crack-down-on-tax-return-preparers

 

That is all simply fantastic, Jack, and I'm glad you posted that because I remember you also making a comment about not caring about articles written by some unproven source, that is if I may be so bold as to *retread* something you said. That statement of yours was in reference to an article by an attorney that was an expert in the area being discussed and published in the AICPA's JoA, but never mind that now because the information below is what is pertinent to the current discussion.

So,back to your post that references the penalties assessed under sec 6694, there is no need to make any interpretation about the "spirit of the law" here.   If you've ever read that section, you should note that it ALL pertains to UNDERSTATEMENT of taxpayer's liability, and nowhere in it does it reference understatement of deductions. If you are unsure and would like to read it again or perhaps for the first time, here is a link to that section of the code:  https://www.law.cornell.edu/uscode/text/26/6694

[RitaB]

On ‎10‎/‎1‎/‎2016 at 9:59 PM, Jack from Ohio said:

If, for some reason he gets audited, YOU may be on the hook.  Think about it.  The first item requested in an audit are bank statements.

If you are willing to gamble, submit the return with an incorrect amount on Sch. A.  Since you KNOW he gave more, you are in violation of Circular 230 if you report a number you know to be incorrect.

The question is: "How lucky do you feel, with a client that has been audited for this in the past?"  

Your call.

 

My goal here has been to express my opinion that you are wrong that Christian could get nailed for overstating liability.  Of course he could, and should, be hammered for understating liability. 

 

36 minutes ago, Jack from Ohio said:

Who determines "The Spirit of the Law?"  I prefer how the law is written.  

 

So do I.  I believe if they were going to hammer us for misstatements, they would have used the word misstatement, not the word understatement (of taxpayer's liability).  I think IRS was very clear if you think about it.

I'd bet my lunch that no lawmaker ever thought anybody would be fighting over the ethics of overpaying tax.  Only tax pros.

 

IRC § 6694 – Understatement of taxpayer’s liability by tax return preparer.

IRC § 6694(a) – Understatement due to unreasonable positions.  The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

IRC § 6694(b) – Understatement due to willful or reckless conduct.  The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

[RitaB]

48 minutes ago, Jack from Ohio said:

The "professional" who prepared the return we are currently assisting with audit WILL be talking to an IRS agent soon.  Overstated deductions by $23K on a $6k income Schedule C.  Auditor was very adamant.

Good.  If taxpayer was innocent, I hope preparer gets a penalty.  I know you have told taxpayer that he has a duty to look at his returns.  Good job.

[Christian]

Lawd have mercy! I wonder if I ever dare post again. I am reasonably sure Jack is technically correct but I have no fear I will be looking at any penalty nor for that matter that my old friend will trigger an audit of his return. A former taxman in our area used to stuff his farm returns with everything but the kitchen sink. A farm rental return of his I received had about $600 in rent income and some $6,000 in deductions in that year as an example. He practiced in this manner for about forty  years until his death and as far as I know triggered few audits. Was this right? Of course not. But if my old friend wants to pay more tax than he need pay that is his decision and I'll abide by his wishes even though I did tell him he was overpaying.

 

 

[michaelmars]

On 10/5/2016 at 10:10 PM, SaraEA said:

 

This discussion reminds me of a problem raised in my Master's program.  Many Jewish people give large sums to their synagogues and in return receive preferential seating and other social perks (just like in the BC days).  Students wondered if the full amount of their donations counted for the deduction because they got something in return.  There were a bunch of IRS agents in the course, and they all agreed that never in a million years would they get away with digging into the intent of the donation.  The only thing they were taught to watch for was tuition to religious school disguised as a donation.  Your client has nothing to worry about.

in Judaism, the number 18 [chai] is lucky so many people make contributions in multiples of 18,180,1800 and many will use 18 in the amount, ie 218, 518, etc.

I once had an audit and the agent [not Jewish] didn't want to accept the cancelled checks saying that they must have been for tickets or something run through the temple. [pre 250 letter requirement days].  I asked him how long he has been auditing here on the North Shore of Nassau County and he said 1 week.  I laughed and explained it to him.  Months later he called me to thank him for the education and how all he sees are donation such as I listed above.

I guess not many Jews from where he came from, somewhere down south.  

[jklcpa]

18 minutes ago, michaelmars said:

I once had an audit and the agent [not Jewish] didn't want to accept the cancelled checks

Yes!  Your post brought back memories of an audit long ago where the client made his memo-area notations in Hebrew on all of his donation checks.  That auditor asked for interpretation of a few he randomly selected and then accepted the entire batch.