RANT: There are too many bad preparers out there

[Abby Normal]

Yesterday, I got a final short year 1065 from a respected larger local firm. First thing I noticed was no dates for the short year. They took entire year of depreciation.

Today I get a 1040 faxed and the preparer proudly proclaimed on the cover sheet that they took no depreciation on the rental in 2014 because taxpayer might be selling. AND they didn't back out any amount for land.

I appreciate the extra work and the chance to showcase my admittedly limited competence in tax law, but these are fairly basic issues.

[RitaB]

I agree. And imagine how bad it really is.  We see a very small fraction of what is happening. 

IRS sees it all, but they apparently don't think any prosecutor would press charges.  Sorry, its seemed like I had to.  Sorry.

[Catherine]

2 hours ago, RitaB said:

And imagine how bad it really is.

The thing that frosts me is that, instead of going after the bad apples, they instead levy all sorts of extra requirements across the board.  Well, that's not going to make a gnats-pee-in-hell worth of difference to a crook or "just" an incompetent -- but it does but all kinds of extra burdens on us good preparers to NO effect.  Grrr....  Then we get info like this latest newsletter I just got this morning (see the lines in boldface -  added by me - especially):

Preparers Plan for Shrinking IRS Budgets and Growing Penalties

by Eric L. Green, J.D., LL.M. 

 

Budget cuts have decimated the ability of the IRS to perform its job. From exams 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 waited over an hour, and I called at 7 a.m.). Nevertheless, Congress expects the IRS to collect revenue. It’s no wonder that voluntary compliance is down and the tax gap has increased.

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, after giving accurate advice and performing proper due diligence, are assessed penalties after their client fails to heed that 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, lo 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. Fixing the problem would require the preparer to convince the client to recognize more salary, and 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 preparing returns for a taxpayer who will be reporting information that may not be compliant 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 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 preparers to do its job. Preparer penalties constitute a powerful and coercive tool to force preparers to police their own clients. Preparers must prepare.

Eric L. Green is a frequent instructor for CCH® Webinars and the creator of the CCH® IRS Representation Certificate Program.

[Margaret CPA in OH]

Hmm, I wonder if 'good' preparers somehow banded together and ranted to Congress to better fund the IRS while requiring that the service target malfeasance and cheating of those with very high incomes, offshore accounts, and other tax avoidance schemes.  It seems IRS has to do increasingly more with fewer resources to bring in the revenue to run the country and works with the lowest hanging fruit (fewest resources required) to do so.

I don't like the specter of more preparer penalties than anyone else but maybe see that it is the easier path for IRS.  Personally, I have no idea how IRS would better target the bad preparers that we see over and over again.  It seems, like the poor, they will be with us always. 

[SaraEA]

I used to think the IRS came down too hard on us.  At some seminars IRS liaisons treat us like partners, but others act like we're lazy idiots. (And then there was Karen Hawkins, who thought we were all criminals.)  Gee, most of the tax pros I know spend inordinate amounts of time trying to determine correct basis, whether a household member really qualifies as a dependent, whether a client truly qualifies for a credit or a penalty abatement.  Yet if you read the tax fraud blotters and the criminal proceedings published by Accounting Today every week, you wouldn't believe what goes on in the world of paid tax prep.  These sources provide endless lists of preparers accused/convicted/imprisoned/enjoined for all sorts of crimes against clients and the US gov't. Paid preparers convicted of identity theft, of borrowing dependents from one client to put on another's return, making up income and expenses and donations and other deductions, filing returns for unwitting Puerto Rico residents who have SS#s but don't have to file in the US, giving clients a copy of their return and then changing and submitting it (with the extra refund going into the preparer's account), having all the client's refund going into their own account, it goes on and on.  Unlike the errors Abby shared, and the many we see in our practices every day, these acts are not due to ignorance or sloppiness but to an intent to commit fraud and steal from individual taxpayers and/or all US taxpayers.

Regulation could help curb the errors made out of incompetence because tax pros will have to know more to be allowed to prepare returns.  (We will all still make mistakes--it's unavoidable given the complexity of the tax code and how very much there is to know--but stuff like ignoring depreciation and letting noncustodial parents claim dependents "because they pay child support" won't happen as much.)  Those who intentionally break the law, however, aren't going to be held back by a few silly regs they won't care about.  Catherine is right that the IRS wants us to do their audit work.  Maybe it's also up to us to report fraud when we see it.  Not ignorance, but intentional cheating.

[Abby Normal]

Forgot to mention that the prior accountants for the partnership never recorded their changes in the client's data file, so their books are incomplete. Let's hope they don't get audited for any of those years.

I always record the changes in the client's books and give them a pdf of the GL along with the tax return. I think it's my job to make sure the client's books are complete and accurate.

[BHoffman]

I spend quite some time educating my clients, especially the business clients.  They know all about their profit and loss reports, and I show them the M-1 as where their books, that they understand to the penny, meet their tax return - which loses its mystery once they are shown the "book to tax" adjustments.  

I think a big problem with crappy tax preparers might start with them taking on more decision making than is even remotely wise. Clients don't pay us to make their decisions, they pay us to explain and ask the right questions.  We really should charge more money