A Warning to the Tax Preparer – Part II

Part one discussed a prominent risk tax preparers face, specifically investigation, prosecution, and indictment for counseling, aiding, or assisting the filing of a false or fraudulent tax return. Now that this common risk is demystified and explained, and to better grasp the IRS’s perspective, it is crucial to understand the relevant law from the Internal Revenue Code and the guidance from the IRS. This is Chapter 31 of the Code of Federal Regulations, section 10.34, as authorized by Chapter 31 of the United States Code, section 330, which states that a tax return preparer may not:
“sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that—
(A) Lacks a reasonable basis;
(B) Is an unreasonable position . . .;
(C) Is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner . . .”

So, what does this legal language actually mean? The underlined portion is particularly important, because it indicates that a tax preparer will be compared to the standard of a competent professional. In other words, it does not matter whether a tax preparer actually knew they were doing something illegal if most other tax preparers would have known. The three sub-points, (A) through (C), relate to what actions the tax preparer must avoid. All three are intended to capture any act of a tax preparer that should have raised alarm bells in his/her mind, but the tax preparer chose to ignore those alarms and act anyway. This gives the IRS significant discretion regarding what actually constitutes an offense.

Additionally, the IRS has offered this guidance to tax preparers:
“In general, tax return preparers should understand the underlying substantive law affecting an item of income or deduction. Tax return preparers must exercise due diligence in preparing or assisting in the preparation, approval, and filing of returns, documents, affidavits, or other papers relating to IRS matters. Tax return preparers also must exercise due diligence in determining (1) the correctness of oral and written representations made by the tax return preparer to the IRS, and (2) the correctness of representations made by the tax return preparer to the client with reference to any matter administered by the IRS.”

The foremost question after reading this guidance should be: what is appropriate due diligence? Unfortunately, the answer is whatever the IRS wants it to be; instead of defining what due diligence is, the IRS gives only examples of what is “generally” sufficient.

Part three will discuss best practices to preemptively protect yourself from the unfortunate event of an IRS investigation.

–By Tony Nasser, Esq., Elevated Law

Tony Nasser is an attorney and founder of Elevated Law, licensed to practice law in Colorado and California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm’s clients or any affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.