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IRS News – IRS Shares Study Results For Regulating and Testing Tax Return Preparers
WASHINGTON –– The Internal Revenue Service kicked off the 2010 tax filing season today by issuing the results of a landmark six-month study that proposes new registration, testing and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.
To bring immediate help to taxpayers this filing season, the IRS also announced a sweeping new effort to reach tax return preparers with enforcement and education. As part of the outreach effort, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.
“As tax season begins, most Americans will turn to tax return preparers to help with one of their biggest financial transactions of the year. The decisions announced today represent a monumental shift in the way the IRS will oversee tax preparers,” said IRS Commissioner Doug Shulman. “Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation’s tax system. In addition, we are taking immediate action to step up oversight of tax preparers this filing season.”
Based on the results of the Return Preparer Review released today, the IRS recommends a number of steps that it plans to implement for future filing seasons, including:
- Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.
- Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.
- Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.
- Extending the ethical rules found in Treasury Department Circular 230 — which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS — to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.
Other measures the IRS anticipates taking are highlighted in the 55-page report released today.
Currently, anyone may prepare a federal tax return for anyone else and charge a fee. While some preparers are currently licensed by their states or are enrolled to practice before the IRS, many do not have to meet any government or professionally mandated competency requirements before preparing a federal tax return for a fee.
First Step: Letters to 10,000 Preparers
The initiatives announced today will take several years to fully implement and will not be in effect for the current 2010 tax season. In the meantime, the IRS is taking immediate action to step up oversight of preparers for the 2010 filing season.
Beginning this week, the IRS is sending letters to approximately 10,000 paid tax return preparers nationwide. These preparers are among those with large volumes of specific tax returns where the IRS typically sees frequent errors. The letters are intended to remind preparers to be vigilant in areas where the errors are frequently found, including Schedule C income and expenses, Schedule A deductions, the Earned Income Tax Credit and the First Time Homebuyer Credit.
Thousands of the preparers who receive these letters will also be visited by IRS Revenue Agents in the coming weeks to discuss their obligations and responsibilities to prepare accurate tax returns. This is part of a broader initiative by the IRS to step up its efforts to ensure paid tax return preparers are assisting clients appropriately. Separately, the IRS will be conducting other compliance and education visits with return preparers on a variety of issues.
In addition, the IRS will more widely use investigative tools during this filing season aimed at determining tax return preparer non-compliance. One of those tools will include visits to return preparers by IRS agents posing as a taxpayer.
During this effort, the IRS will continue to work closely with the Department of Justice to pursue civil or criminal action as appropriate.
Steps Taxpayers Can Take Now to Find a Preparer
In addition to the stepped-up oversight of preparers, Shulman also announced a new outreach effort to help make sure taxpayers choose a reputable preparer this filing season. That’s particularly important because taxpayers are legally responsible for what is on their tax returns — even if those returns are prepared by someone else.
“Taxpayers should protect themselves from unscrupulous preparers,” Shulman said. “There are some simple steps people can take to choose a reputable tax preparer.”
Most tax return preparers are professional, honest and provide excellent service to their clients. Shulman offered the following points for taxpayers to keep in mind when selecting a tax return preparer:
Consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return.
More information about choosing a tax return preparer and avoiding fraud can be found in IRS Fact Sheet 2010-03, How to Choose a Tax Preparer and Avoid Tax Fraud.
Resources for Taxpayers this Filing Season
This filing season, the IRS has many free resources to help taxpayers prepare and file their returns.
IRS.gov has a variety of features to help taxpayers. There’s a special section to help taxpayers get information on a variety of Recovery tax benefits. The web site also has information for people who lost a job or experienced financial problems in 2009.
IRS.gov also has information to help people track their refund.
IRS.gov will once again host the IRS Free File program, which allows virtually everyone to file their taxes for free through the web site. Free File and the rest of the IRS e-file program will open later this month.
More filing season resources are available on IRS.gov:
1040 Central: Help for Individual Filers
Tax Breaks in the American Recovery and Reinvestment Act
Lost your job or the victim of foreclosure? The IRS can help in difficult situations
E-file and Free File
Taxpayer assistance centers
Joe Schmo Didn’t Think He Needed Any Tax Planning
By Stacie Clifford Kitts, CPA
Joe Schmo’s [cash based] business did exceptionally well during the year. He closed the biggest deal of his life and collected a large amount of cash. Joe was very pleased with his performance and knew he deserved a reward for all his hard work.
Now Joe had always wanted to own a BMW. The problem being, the fully loaded price of Joe’s dream car was approximately $100,000. For the first time in his professional career, Joe felt he could indulge in his dream and buy the expensive car. So sometime in the year, Joe headed to the dealership where on behalf of his company he skillfully negotiated a pretty good price on that expensive car. And by the end of the day, Joe had written a check that paid for his dream, and substantially reduced the balance in his business bank account.
With his wealth of cash, Joe felt he should get some other things he wanted too. So one day when the summer heat was causing him to sweat through his suit, Joe decided to purchased a new air-conditioning unit along with some other building improvements for his office – the cost $50,000.
Joe also learned that his computer system needed an expensive overhaul, the cost of which would be approximately $75,000. Although Joe had the system installed by December, he didn’t get around to actually writing the check until January of the following year. Pulling out his checkbook, he wrote a check making sure to back date it to December 31. With that, he had successfully spent all the remaining money in his business account.
But was Joe worried about the lack of funds in his account? Nope.
Joe remembered that in previous years his tax advisor had counseled him to determine what items he needed to purchase for his business and to make sure he bought them by the end of the year. This would reduce his taxable income, and hence no income taxes would be owed. He certainly didn’t need to pay his advisor to give him the same advice each year. Spend what you make – he had no problem doing that.
Poor Joe, was he in for a shock. When he met with his advisor, he learned that he owed a substantial amount of tax with no way to pay it.
“Why,” he asked his tax advisor. “I spent all the money I made. I have nothing left. How can I owe taxes?”
“Because,” his advisor explained. “You didn’t consult with me on what things to spend your money on.”
As it turns out Joe didn’t understand the tax rules and therefore made poor “tax” choices. His advisor laid it out:
1) Because of the tax rules, only a portion of the amount that Joe had spent for his new car, and the air-conditioning unit would be deductible on his current tax return. The balance of the cost would be deducted over a number of years based on depreciation rules – sadly, the special section 179 depreciation deduction that may have applied to other purchases, and would have allowed for a greater deduction in the current year, did not apply to his purchase of the car or the air-conditioning unit.
2) Because Joe didn’t deliver [or mail] the check by December 31, the amount spent on the computer system would not be deductible until the next year.
“You know Joe, I don’t begrudge you a new car,” the advisor told him. “But had you consulted with me first, we could have figured out a better cash plan for the purchases that you made.”
What a gloomy outcome for Joe.
So how about you, did you complete some tax planning or consult with your advisor about major purchases during the year?
If not, now is the time to contact your advisor to determine how you might pay any potential tax obligation. No need to be a Joe Schmo.
Stacie's Tax Stuff 