Tax preparers: Beware the client who says he has those receipts "somewhere." It's no longer okay to take his word for it.
Preparers should worry this year about deductions that are even slightly questionable. An IRS law is requiring preparers to ask more questions and see the receipts with their own eyes. These tougher standards will mean more scrutiny of taxpayers' assertions, and some preparers are charging more for the extra time.
The IRS used to penalize preparers $250 for a tax return containing questionable deductions; now the penalty is $1,000, or 50 percent of their fees, whichever is greater.
The penalties may be imposed not only on income tax preparers, but those who prepare estate and gift tax returns, employment and excise tax returns, and returns for tax-exempt organizations.
S. Dean Saul, an enrolled agent in Lewisville, TX, told the Dallas Morning News that he now goes through a formal checklist after finishing each client's return. As an enrolled agent, he can represent clients before the IRS. He makes sure the record-keeping requirements are met for charitable contributions, auto mileage, and self-employed income, among other things.
"I want to have something in my file that will document that I did everything possible to meet the standard" that the IRS has set out, he said. "It's something that most professionals should do."
The IRS rules require tax preparers to actually flag the deductions they aren't at least 50 percent sure will pass IRS scrutiny, the Denver Business Journal reported. While preparers previously needed to believe the deductions had a "realistic possibility" of being accepted, now they must hold a "reasonable belief" of acceptance. If unflagged deductions are determined to be unreasonable, the penalties kick in.
"Here's a classic example," said Joe Nelson, head of the tax practice for BKD in Denver. "A lot of times you'll ask a client, did you have any non-cash charitable contributions? He'll say, 'Yes, I had $300.' Well, do you have a receipt? He says, 'No, it's an estimate. I know I gave the stuff.' Before, you'd accept that. But now it raises the question of whether that is a more-likely-than-not position ... You could expose yourself to a penalty that is 50 percent of the fee because of an innocuous charitable contribution like that."
Accountants are telling their clients to provide as much documentation and back-up information as possible. For more information, check IRS Notice 2008-13.