With increased scrutiny on preparers comes more questions for taxpayers

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.

 

You may like these other stories...

A new Gallup survey found that 58 percent of smokers in the United States see increased state and federal taxes on cigarettes as an act of unjust discrimination, while 39 percent believe the tax hikes are justified.The...
Liberal groups object to bill barring taxes on Internet accessThe Internet Tax Freedom Act hasn’t been a controversial bill. In fact, it’s so popular that senators are seeking to pair it up with a far more...
As complex as federal tax can get, at least you're only dealing with one agency: the IRS. But when you get into state and local sales tax, you're coordinating hundreds of jurisdictions that are constantly changing....

Upcoming CPE Webinars

Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.
Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.