IRS Letters and Visits to Return Preparers - FAQs Filing Season 2013
1. What is the purpose of the Letter 4810 and visits to selected tax return preparers? Is this related to the IRS’s efforts to improve the accuracy and quality of the returns prepared by paid tax return preparers?
Yes. This is the fourth year that the IRS is contacting selected tax return preparers nationally in an effort to improve the accuracy and quality of filed tax returns and to heighten awareness of preparer responsibilities. These contacts are another step in the IRS’s increased efforts to ensure paid tax return preparers are assisting taxpayers appropriately.
2. Was the professional designation of the tax return preparer (in other words, CPA, attorney, enrolled agent, or other professional designation) part of the selection process for the Letter 4810 and visit?
No. A tax return preparer’s professional designation was not a factor in determining who will receive a visit. Letters were sent and visits scheduled nationwide with tax return preparers of all different professional designations. The tax return preparers who were sent letters and selected for visits come from a pool of tax return preparers who generally submit large volumes of tax returns with attributes that typically suggest errors on Schedules C. The selection of preparers who received letters is based on filters we use to identify those preparers that may benefit from an educational visit.
3. What is the purpose of the visits?
The purpose of these visits is to:
- Heighten awareness of Schedule C rules
- Improve the accuracy and quality of future Schedule C tax returns
- Remind preparers of Circular 230 due diligence responsibilities
4. When will the visits take place?
Visits are expected to start in November 2012 and be completed as soon as possible, hopefully before January 2013.
5. What if a tax return preparer is busy and cannot meet with the revenue agent? What are the consequences?
The IRS is providing approximately a 3-month timeframe to conduct the visits to ensure tax return preparers are given adequate notice to schedule their visitation.
6. Will the visit take place in my office or at an IRS office?
The visit will take place at your place of business.
7. Will the IRS review any of the returns I’ve prepared? Am I expected to do any advance preparation?
No. The visit is for an educational discussion. It is not an audit or you or your clients.
8. What due diligence requirements apply to tax return preparers?
In general, tax return preparers should understand the underlying substantive law affecting an item of income or deduction. Tax return preparers must exercise due diligence in preparing or assisting in the preparation, approval, and filing of returns, documents, affidavits, or other papers relating to IRS matters. Tax return preparers also must exercise due diligence in determining (1) the correctness of oral and written representations made by the tax return preparer to the IRS, and (2) the correctness of representations made by the tax return preparer to the client with reference to any matter administered by the IRS. Tax return preparers who prepare returns for taxpayers who may be eligible for the earned income tax credit have additional due diligence requirements. See the EITC Return Preparer Toolkit.
9. Can a tax return preparer rely upon documentation that hasn’t been verified?
Generally, yes. A tax return preparer generally may rely in good faith without verification upon information furnished by a taxpayer. A tax return preparer also may rely in good faith and without verification upon information and advice furnished by another advisor, another tax return preparer or other third party (including another advisor or tax return preparer at the tax return preparer’s firm). A tax return preparer, however, may not ignore implications of information furnished to the tax return preparer or actually known by the preparer. A tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some provisions of the Internal Revenue Code or regulations require that specific facts and circumstances exist (for example, that a taxpayer maintains specific documents) before a deduction or credit may be claimed. A tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required by an Internal Revenue Code section or a regulation as a condition for claiming of a deduction or credit.
10. Does a tax return preparer have to audit books and records prior to preparing a tax return?
No. A tax return preparer is not required to audit, examine, or review books and records, business operations, documents, or other evidence to independently verify information provided by a taxpayer, advisor, other tax return preparer, or other party. However, as discussed above, a tax return preparer may not ignore implications of information furnished to the tax return preparer or actually known by the tax return preparer and must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.
11. Does a tax return preparer have an obligation to make inquiries of a taxpayer?
Yes, a tax return preparer must make inquiries of a taxpayer in order to prepare an accurate tax return. In some situations, inquiries may be general, such as asking questions about whether or not the taxpayer made charitable contributions or if they own their own home.
Similarly, the tax return preparer must make general inquiries or have existing knowledge of the taxpayer's sources of income, such as whether or not the taxpayer received alimony, a refund of state taxes in the previous year, or received interest or dividends, and for Schedule C taxpayers, a more in-depth discussion to include what accounting method the taxpayer uses.
Tax return preparers should ask for taxpayer records where appropriate, such as the previous year’s tax return or copies of depreciation schedules for Schedule C or E taxpayers or stock basis for Schedule D taxpayers.
During these normal exchanges or discussions, the tax return preparer will gain a good deal of knowledge about the taxpayer. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.
Additionally, as discussed above, some provisions of the Internal Revenue Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintains specific documents) before a deduction or credit may be claimed. These questions are necessary in order to ascertain enough information about a taxpayer to prepare the taxpayer’s tax return accurately.
The following is an illustrative example. Client visits tax return preparer to have his tax return prepared and filed. Client tells tax return preparer that he is married and has three children. Client hands tax return preparer a piece of paper that lists the Social Security number and date of birth for each of his children. Client also tells tax return preparer that he has one Form W-2 for $60,000, but that he failed to bring it with him. Client then says that his wife has her own business and that, while she did not have any gross income, she incurred $20,000 in expenses.
Tax return preparer then prepares Client’s tax return as a married filing joint return with three exemptions, EITC, and a Schedule C loss (showing $0 gross income) without asking any questions or reviewing additional documentation. Tax return preparer has neither exercised due diligence, nor met the standards prescribed by Treasury Regulations.