With increased scrutiny on preparers comes more questions for taxpayers

[swiftax]

Just would like to know what kind of formal checklist, if any, you use to make sure you are not exposed to this penalty.

Thanks

Jeff

http://www.accountingweb.com/cgi-bin/item....at=%o%20%B%20%Y

Excerpt of the link above:

The IRS rules require tax preparers to actually flag the deductions they aren't at least 50 percent sure will pass IRS scrutiny, the Denver Business Journal reported. While preparers previously needed to believe the deductions had a "realistic possibility" of being accepted, now they must hold a "reasonable belief" of acceptance. If unflagged deductions are determined to be unreasonable, the penalties kick in.

"Here's a classic example," said Joe Nelson, head of the tax practice for BKD in Denver. "A lot of times you'll ask a client, did you have any non-cash charitable contributions? He'll say, 'Yes, I had $300.' Well, do you have a receipt? He says, 'No, it's an estimate. I know I gave the stuff.' Before, you'd accept that. But now it raises the question of whether that is a more-likely-than-not position ... You could expose yourself to a penalty that is 50 percent of the fee because of an innocuous charitable contribution like that."

[jainen]

>>do you have a receipt?<<

That is not an accurate report. Newspapers these days are not reliable sources for professional guidance because they like to make things more sensational and controversial than they really are.

The more-likely-than-not standard applies to the POSITION, not the documentation of that position. We are still allowed to rely solely on a client's unverified assertions as long as they are not inconsistent or otherwise unreasonable.

[mgmea]

>>do you have a receipt?<<

That is not an accurate report. Newspapers these days are not reliable sources for professional guidance because they like to make things more sensational and controversial than they really are.

The more-likely-than-not standard applies to the POSITION, not the documentation of that position. We are still allowed to rely solely on a client's unverified assertions as long as they are not inconsistent or otherwise unreasonable.

>>The more-likely-than-not standard applies to the POSITION, not the documentation of that position.<<

Let's say the charitable contribution is a $100 bill put in a Salvation Army kettle for which the donor has no documentation as required by the code for this charitable deduction to be allowed. If the tax preparer knows the client has none of the required documentation and claims the deduction any how on the return, isn't the preparer preparing a return based on a position that has zero chance of being accepted? That's the way I have been proceeding this year so far. It would much easier if my position is incorrect.

[GeneInAlabama]

>>The more-likely-than-not standard applies to the POSITION, not the documentation of that position.<<

Let's say the charitable contribution is a $100 bill put in a Salvation Army kettle for which the donor has no documentation as required by the code for this charitable deduction to be allowed. If the tax preparer knows the client has none of the required documentation and claims the deduction any how on the return, isn't the preparer preparing a return based on a position that has zero chance of being accepted? That's the way I have been proceeding this year so far. It would much easier if my position is incorrect.

When I was an auditor way back in the 70's, our OFFICE policy was that we would allow $52.00 without documentation (a dollar bill in the collection plate every Sunday). Each office is different and a dollar was a whole lot more then than it is now. The point is that $100 would PROBABLY be accepted depending on the office, the auditor, or the circumstances.

Gene

[jainen]

>>If the tax preparer knows the client has none of the required documentation and claims the deduction any how on the return, isn't the preparer preparing a return based on a position that has zero chance of being accepted?<<

It would seem so, because with charitable contributions specific documentation is required by law. But it is a new, untested law. There is really no reason to think getting that $100 by cashing a third-party check or using one of those new-fangled sidewalk pin money machines won't count as a "bank record." A strict interpretation would hold that out-of-pocket expenses and mileage, which are considered to be cash donations, are not allowable without a bank record or organization receipt. In my opinion, it is more likely than not that we can continue to use self-made logs and store receipts for a while longer.

Besides, the "classic example" in the original post was about non-cash donations. Since the rules are intended to be similar, it is worth noting that a bank record is meaningless and even the organization receipt is not always required and usually would be at least partly self-written.

[mgmea]

>>If the tax preparer knows the client has none of the required documentation and claims the deduction any how on the return, isn't the preparer preparing a return based on a position that has zero chance of being accepted?<<

It would seem so, because with charitable contributions specific documentation is required by law. But it is a new, untested law. There is really no reason to think getting that $100 by cashing a third-party check or using one of those new-fangled sidewalk pin money machines won't count as a "bank record." A strict interpretation would hold that out-of-pocket expenses and mileage, which are considered to be cash donations, are not allowable without a bank record or organization receipt. In my opinion, it is more likely than not that we can continue to use self-made logs and store receipts for a while longer.

Besides, the "classic example" in the original post was about non-cash donations. Since the rules are intended to be similar, it is worth noting that a bank record is meaningless and even the organization receipt is not always required and usually would be at least partly self-written.

A literal interpretation of the new law can definitely lead to absurd results. Your example of out of pocket expenses is a perfect example. If you pay for them on a credit card your credit card statement will contain the required name of donee organization, date, and amount of the contribution. If you pay them by a check, your bank statement will not contain the required name of the donee organization, only the date and amount of the contribution. Do you need a cancelled check then if you pay them by check? Or, can you combine the bank statement with a carbonless copy of the check? If you pay them in cash you just might be SOL. And then there is the question of when the required proof must be in your possession. For the rule on contributions of $250 or more, you have to have the required documentation when the return is filed. It appears the new law is not quite as clear on when the documentation is required. Until the IRS assues updated regs on this it will continue to be a no mans land, at least in my mind. Time to go read the technical explanation of the bill one more time.

In the "classic example" of non-cash contributions, if a single contribution of $250 or more is made, I believe I am correct in saying that if the preparer knowingly prepares the return with the knowledge that the taxpayer does not have a receipt for this non-cash contribution of $250 or more, that preparer will definitely be subject to a $1000 or possibly even a $5000 haircut when the deduction is disallowed if this disallowance results in an understatement of tax.