Conscription IRS Style: Preparer Penalties and the Duty of the Tax Preparer
Budget cuts have decimated the ability of the IRS to perform its job. From exam to collections the IRS has insufficient resources to work cases and perform basic customer service (the last time I called the Practitioner Priority line I waiting over an hour, and I called at 7 AM, the instant is opened). Nevertheless, Congress expects the IRS to collect revenue. It is no wonder that voluntary compliance is down and the tax gap has increased.
Nevertheless, it appears that the government may be seeking to increase compliance by placing new burdens on return preparers by way of increased application of preparer penalties. We have seen several recent instances where preparers – despite giving accurate advise and performing proper due diligence – are assessed penalties after their client fails to heed the advice. For example, the IRS has always been concerned that S-corp. owners may not take reasonable salaries. Thus, most preparers who have S-corp. owners as clients provide a letter identifying the requirement and suggesting a proper level of salary based on historic income. However, when the client returns the following year for tax preparation, low and behold, the income level taken was too low.
First and foremost, the obligation of the preparer is to accurately report the events that already occurred. Second, the tax year is closed and fixing the problem would require the preparer to convince her client to recognize more salary, amend quarterly employment returns causing the incurrence of large penalties. When confronted with this, and similar scenarios, the IRS is looking to preparers to fix the “problem.”
The preparer has no power to force their client to do anything. By attempting to hold preparers responsible for the pre-existing actions of the clients, the IRS can use the specter of preparer penalties and ethical charges against professionals to cause preparers to perform basic IRS audit tasks.
When confronted with the preparing returns for taxpayer who will be reporting information that may cause a lack of compliance with tax laws, it is incumbent on the preparer to understand available safe harbors and ethical responsibilities. For example, under §§ 6662(d)(2)(B) and 6694(c)(2), preparers are entitled to a safe harbor if they disclose a position taken on a tax return. Preparers should always request that their clients, on a going forward basis, comply with the tax laws and explain how that can be done. Finally, if necessary, preparers should consider not working with clients who chronically fail to adhere to their advice. Having to defend against a preparer penalty assessment or Office of Professional Responsibility investigation is expensive, time consuming, gut wrenching and, simply, not worth it.
The new IRS has fewer resources. Do not be surprised if it leans more heavily on return to preparers to do its job. Preparer penalties constitute a powerful and coercive tool to force preparers to police their own clients. Preparers must prepare.