Note: The following is the text of Letter 5102 the IRS sent out to selected tax return preparers nationwide in November 2014.
Recommendation to take Continuing Education programs about Schedule C
Our review of tax returns you prepared in the past year shows many have a high percentage of traits we believe typically indicate errors in preparing Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship). To reduce the potential for future errors, you may benefit from available continuing education (CE) programs on this topic.
Continuing education is voluntary and there is no requirement that you complete courses to prepare a federal tax return. However, we believe that participation in some educational programs related to business income and expenses may benefit you in preparing more accurate Schedule C returns. Information about courses and a list of IRS-approved CE providers is available at irs.gov/taxpros/ce.
As you prepare returns for the next filing season, please pay special attention to your work on Schedule C returns, recognizing that both you and your clients may be adversely affected by incorrect returns. Incorrect returns may result in any of the following consequences:
- If your clients’ returns are examined and found to be incorrect, your clients may be liable for additional tax, interest, additions to tax and penalties.
- Tax return preparers who prepare a client return that has any part of an understatement of tax liability due to reckless or intentional disregard of rules or regulations by the tax preparer can be assessed a penalty of at least $5,000 per return under IRC Section 6694(b).
- Tax return preparers who prepare a client return that has any part of an understatement of tax liability due to an unreasonable position can be assessed a penalty of at least $1,000 per return under Internal Revenue Code (IRC) Section 6694(a).
It may be helpful to familiarize yourself with the following:
Return preparer responsibilities
A paid tax return preparer is expected to take multiple steps to prepare accurate tax returns on behalf of clients. These include reviewing the applicable tax law, and establishing the relevancy and reasonableness of income, credits, expenses, and deductions to be reported on the return. In general, you may rely in good faith without verification of information furnished by the client. However, you may not ignore the implications of information furnished to, or actually known by you. You must make reasonable inquiries if the information appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.
Schedule C reminders
To prepare accurate Schedules C, you should ask your clients sufficient questions to determine the expenses claimed are correct and allowable. Taxpayers may not fully understand the tax laws and may incorrectly believe they are entitled to claim deductions for non-qualifying expenditures. You should also ask your clients if they have receipts or other documentation to support the expenses if requested by the IRS.
Based on our analysis of the Schedules C you prepared, in addition to considering CE programs, we encourage you to review the Schedule C instructions and other IRS publications available at irs.gov, search keywords: Recommended Reading for Small Businesses.
New for filing season 2015
If you’re considering taking CE courses, be aware that for the 2015 filing season, the IRS is introducing an Annual Filing Season Program (AFSP) to recognize the efforts of preparers improving their professional competence through continuing education. Information on the new program is available at irs.gov, search keyword: AFSP.
We hope this letter increases your awareness of your responsibilities, and helps you to prepare accurate Schedules C for your clients.