1
IRS AUDIT OF TAX
RETURN PREPARERS:
The Good, The Bad and The Ugly
2
Objectives
• What is the Return Preparer Visitation
Project?
• How did the RPVP come about?
• What is the RPVP’s Objectives?
• What will be examined during an IRS visit?
• What do you need to be concerned with?
• What is the future of the project?
3
Origins – The Good
• IRS Strategic Plan (FY 2009 -2013)
• Strengthen partnerships with tax practitioners, paid preparers, and
other third parties in order to ensure effective tax administration
• Ensure that all tax practitioners, paid preparers, and other third
parties in the tax system adhere to professional standards and
follow the law
• Tax Return Preparer Review – December 2009
• Six-month comprehensive study of paid preparer industry
• Intended to be an open discussion of the issues within the paid
preparer community
• IRS concluded that implementing higher standards would:
• significantly enhance protections and service for taxpayers,
• increase confidence in the tax system, and
• result in greater taxpayer compliance with tax laws.
4
Beginnings – The Good
• On January 7, 2010
• Service announced the development of the
Return Preparer Visitation Project (RPVP).
• First steps to improve the accuracy and quality
of filed tax returns as well as to heighten
awareness of paid preparer responsibilities.
• The initial rollout of the RPVP occurred during
FY 2010, with the intention that the RPVPs will
be conducted on an annual basis.
5
Selection for RPVP – The Bad
• FY 2010 – practitioner prepared more than 25 tax
returns with schedules commonly containing
errors: Schedules A, C and E
• FY 2011 – inspection of tax returns, relevant
supporting documents and records of clients to
ensure compliance with Section 6695
• FY 2012 – preparers of a large volume of returns
with Schedules A, C and E in order to confirm
compliance with return preparer requirements
6
Target Goals - The Bad
• Target Goals for letters and visits:
• FY 2010
• 10,000 Information Letters
• 2,500 Visits
• FY 2011
• 10,000 Information Letters
• 2,500 Visits
• FY 2012
• 21,000 Information Letters
• 2,100 Visits
7
Duties of Tax Return Preparers
Section 6695
• Failure to
• furnish copy of tax return to taxpayer
• sign tax return
• furnish identifying number
• retain copy or list of tax returns prepared
• file correct information return (Sec. 6060)
• Amount of penalty
• $50 per return
• $25,000 maximum per year
• Reasonable cause exception
8
Duties of Tax Return Preparers
Section 6695
• Negotiation of Refund Check
• Amount of penalty
• $500 per event
• Failure to determine Earned Income Credit
eligibility
• Amount of penalty
• $100 per failure
• Due Diligence exception
9
Understatement of Taxpayer’s Liability by
Tax Return Preparer - Section 6694(a)
• A preparer may only agree to the filing of a tax
return if it contains a reasonable postion
• A position taken by a preparer is reasonable if
there is substantial authority for the position
• If position is reasonable, then no penalty will
apply
• “Substantial Authority” has the same meaning
as in Treas. Reg § 1.6662-4(d)(2)
• Even if substantial authority does not exist,
penalty can be avoided through adequate
disclosure
• Position cannot be frivolous
10
Substantial Authority Standard
Section 6694(a)
• Applies to all returns and information documents
• Standard aligns preparers with their clients
• Applies to preparers who were primarily
responsible for the position
• Includes signing and non-signing preparers
• Excludes non-signing preparers who spent less
5% of aggregate time on the position
• Applies to position that is a substantial portion of
the return
11
Understatement of Taxpayer’s Liability by Tax
Return Preparer - Section 6694(a)
•
Section 6694(a) Penalty Amount
• The greater of $1,000 or
• 50% of the income derived (or to be derived)
by the tax return preparer from the
preparation of a return or claim with respect
to which the penalty was imposed.
12
Understatement of Taxpayer’s Liability by
Tax Return Preparer - Section 6694(a)
• Exception for Tax Shelters and Reportable
Transactions
• Penalty applicable unless preparer has
• A reasonable belief that the position would
more likely than not be sustained on its merits
• No exception for disclosure
• Reasonable Cause and Good Faith exception
applies
13
Understatement of Taxpayer’s Liability by
Tax Return Preparer - Section 6694(b)
• §6694(b) – Willful or Reckless Conduct
• Standard
• Disregards information furnished by the
taxpayer or other persons or fabricates items
or amounts on the return in an attempt to
wrongfully reduce the tax liability of the
taxpayer
• Defenses
• Adequate Disclosure
• Reliance on taxpayer
14
Understatement of Taxpayer’s Liability by
Tax Return Preparer - Section 6694(b)
•
Section 6694(b) Penalty Amount
• The greater of $5,000 or
• 50% of the income derived (or to be
derived) by the tax return preparer from
the preparation of a return or claim with
respect to which the penalty was imposed
15
AICPA Response – The Bad
• AICPA Comment Letters to Service dated:
• October 29, 2010
• December 22, 2010
• Concerns
• Visits occur during the busiest time of the year
• Client Confidentiality
• Review of filed tax returns
• Review of client files
• Possibility of assertion of penalties
16
FATP – Section 7525
• Section 7525 – Federally Authorized Tax
Practitioner’s Privilege
• With respect to tax advice, the same common
law protections of confidentiality which apply to
a communication between a taxpayer and an
attorney shall also apply to a communication
between a taxpayer and any federally
authorized tax practitioner to the extent the
communication would be considered a
privileged communication if it were between a
taxpayer and an attorney
17
FATP – Section 7525
• Purpose: level the playing field among practitioners
• Requirements
• Applies only to the Federal tax matters
• Same principle and requirements as the attorney-client
privilege
• Must be between taxpayer and federally authorized tax
practitioner
• Must be tax advice
• Must not be intended to be revealed
• Does not exist for criminal tax proceedings
• Does not apply to certain written communications regarding
tax shelters
18
FATP – Section 7525
• Effective Date
• Effective for communications made on or after
July 22, 1998.
19
TIGTA Report – The Ugly
• June 29, 2012
• Treasury Inspector General for Tax Administration
(TIGTA) issued their report on the RPVP for its FY 2010
and FY 2011 filing seasons
• Implementation of the Return Preparer Visitation Project
was Successful, but Improvement are Needed to Increase
Its Effectiveness
• Report was favorable in that Service fulfilled its
objectives for the project
20
IRS Visit Results
• The results for FY 2010 and FY 2010
21
TIGTA Report – The Ugly
• Recommendations:
• Service should use data-driven selection criteria to
specifically identify paid preparers who filed tax
returns with errors to make certain the most
egregious paid preparers are receiving educational
and enforcement visitations.
• Service should develop specific performance
measures and that internal controls that can be
used to assess the impact of the RPVP on the paid
preparer community.
• Should include a process to monitor and track the
behavior of paid preparers visited to determine
whether the quality and accuracy of tax returns
improved.
22
TIGTA Report – The Ugly
• Service Response:
• Agreed with both recommendations and has
already begun implementation
23
Future of the RPVP?
• A continuing effort to ensure the highest
standards of quality and compliance
• Maintenance of paid preparer lists regarding
conduct?
24
IRS Audit of Tax Return Preparers
• The Good, The Bad and The Ugly
•Finis