I guess desperate times call for desperate measures.
You may have heard about the infamous
Notice 4809 from IRS making the rounds among tax professionals. The Notice is part of the IRS’ “hands-on effort to improve the accuracy and quality of filed returns and to heighten awareness of preparer responsibilities.”
In other words, dear taxpayers, these notices are all an effort to save you from yourselves and potentially unscrupulous tax preparers (feeling safer already, I’ll bet.)
So, must be serious, right? The IRS probably used some pretty sophisticated criteria. Maybe they looked at an unusual numbers of kicked back returns? Disproportionately high numbers of refunds? Numerous inaccuracies on the returns?
Nope, nope and nope.
Tax return preparers who received one of the more than 21,000 letters which were sent out were targeted because they “complete large volumes of tax returns” which have “a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of tax law.”
So, that means foreign tax credits? EITC? AMT? What are those confusing attributes?
Why, the popular schedules A, C and E, of course. Schedule A is for itemized deductions. Schedule C is for the self-employed or business owners. Schedule E is for landlords. Clearly, dangerously confusing.
One of my readers, Ron Cohen, received one of these notices. Ron is a tax preparer in Fremont, CA, where he is a partner at
Greenstein, Rogoff, Olsen & CO., LLP.
Cohen wasn’t exactly thrilled with the way IRS handled the matter – and with good reason. He passed along
Notice 4809 (downloads here as a pdf) which read:
“ Department of the Treasury
Internal Revenue Service
Date: November 10, 2011
Dear Tax Return Preparer,
You are receiving this letter because the returns you prepared for clients during the most recent filing season have a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of tax law. The enclosed document addresses some income tax issues our review suggests you may have misunderstood or misinterpreted. Please review this information carefully.
Tax return preparers are expected to be knowledgeable in tax law and prepare accurate returns while exercising due diligence. In general, preparers may rely in good faith upon client-provided information but they may not ignore the implications of information known or reasonably suspected to be untrue, incomplete, inconsistent or inaccurate.
Both you and your clients may be adversely affected by incorrect returns. These consequences may include any or all of the following:
- If your clients’ returns are examined and found to be incorrect, your clients may be liable for additional tax, interest, additions to tax and penalties.
- Tax return preparers who prepare a client return for which any part of an understatement of tax liability is due to an unreasonable position can be assessed a penalty of at least $1,000 per return (IRC section 6694(a)).
- Tax return preparers who prepare a client return for which any part of an understatement of tax liability is due to reckless or intentional disregard of rules or regulations by the tax preparer, can be assessed a penalty of at least $5,000 per return (IRC section 6694(b)).
We will visit some tax return preparers who receive this letter beginning in November to confirm compliance with return preparer requirements. If we select you for a visit, an IRS representative will contact you to schedule an appointment and to provide you with additional information about the topics we will cover.
In addition to your responsibility to exercise due diligence in preparing accurate returns for your clients, you should be aware of the fRS’s tax return preparer requirements, including proper entry of a preparer tax identification number (PTIN) on all returns you prepare for compensation and adherence to electronic filing regulations. For more information on these requirements, visit our website at www.IRS.gov/taxpros.
We hope this letter has heightened your awareness of your responsibilities as a tax return preparer and provided you with information on how you can meet your obligations.
Sincerely,
David R. Williams
Director, Return Preparer Office
Enclosure:
[Target Area of Concern A, C or E) ”
Yes, the enclosure line was just that generic.
For the record, Cohen received Targeted Area of Concern E. It says:
Targeted Area of Concern
Schedule E, Supplemental Income and Loss
As a paid tax return preparer, you must take all necessary steps to file accurate federal individual income tax returns on behalf of your clients. These steps include reviewing the applicable tax law, and establishing the relevancy and reasonableness of income, credits, expenses, and deductions to be reported on the return. In general, a tax return preparer may rely in good faith without verification upon information furnished by the client. You may not, however, ignore the implications of information furnished to, or actually known by you, and you must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. Additionally, a tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required as a condition for claiming a deduction or credit.
A review of the tax year 2010 individual income tax returns you prepared reveals that these returns contain a high percentage of attributes of returns typically found to have significant errors on Schedule E, Supplemental Income and Loss.
To prepare accurate Schedules E, you should ask your clients sufficient questions to determine that the expenses claimed are correct. Taxpayers may not fully understand the tax laws and may incorrectly believe they are entitled to claim deductions on Schedule E for non-qualifying expenditures. The most common Schedule E issues involve:
· Rental income and expenses not being properly reported.
· Rental depreciation not being correctly calculated.
· Limitations surrounding passive activities, basis and at-risk rules not properly
considered or calculated
For more information on issues related to Schedule E, please visit www.irs.gov. There’s so much wrong about this letter – starting with the premise. Cohen thought so, too, which is why he prepared this response to Mr. Shulman:
“ Mr. Douglas Shulman
Commissioner
Internal Revenue Service
National Office
10th St & Pennsylvania Ave., NW Washington, DC 20004
Dear Commissioner:
I don’t take kindly to receiving your Letter 4809, enclosed.
Once again, and having read many of your speeches, you prove that the greatest threat to our country and our civilization is a salaried government employee who wraps himself in the flag, and while supposedly trying to “enforce the law” crushes our economy with bureaucratic processes.
Your letter stating that due to “a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of the tax law” you feel the need, in some blanket campaign, to accuse me of improperly preparing tax returns. You supply a review of the rules and the penalties that apply to Tax Return Preparers.
The threat is a possible visit to my office.
Let me coach you on how to write a letter.
“Dear Tax Return Preparer:
Based on a mindless computer analysis, we have determined the obvious; in that you prepare tax returns for many clients who have rental properties. We are too dim-witted to understand that taxpayers often seek out tax preparers because they have rental properties and become subject to the Cost Recovery, Passive Loss and At-Risk Rules.
Therefore, we may stop by your office to discuss these tax returns concerning rental properties. When we stop by, I’m not sure what we will do, because you are not allowed to provide any confidential information without the consent of the taxpayer, and they are unlikely to consent to such a non-specific inquiry and without the initiation of an audit specifically of their returns for a specific year. Therefore, when my staff visits, we will most likely stare at each other in a desperate attempt to find some justification for wasting your time and paying the salary of the IRS employee.
Thank you for your cooperation.”
All humor aside, I look forward to a visit from your hapless staff. In most cases when I respond to a Notice or audits, I end-up educating your employees on how the law and the IRS Forms work. We look forward to providing another training session.
In all seriousness, the accusatory tone of your letter was completely unnecessary. The non-specific nature of your request, what action
you will take, and the lack of identification of the suspected problem leave me with no action to take. Further, as a tax preparer with 250 clients who sees to it that millions of tax dollars are accurately and timely paid each year, I find your letter insulting.
Nice Job!
Ronald H. Cohen, CPA
Between my address, my PTIN and my SSN, I’m confident you know how to contact me.
”
–
I know that preparers across the country are similarly incensed at what is perceived as an ill-conceived and poorly executed attack against tax professionals.
We *get* that there are bad tax pros out there. I’ve dealt with them. We all have. The IRS isn’t alone in its frustrations at folks who would either take advantage of taxpayers or willingly assist in committing tax fraud. But the answer isn’t to punish all preparers by sending out ugly notices with veiled threats.
Letters like are a huge waste of what are already
admittedly limited resources. If you’re going to use the word “targeted” to describe exams and enforcement actions, why not, I dunno, actually pick a target? I guess it’s easier to keep throwing stuff out there and hope that, eventually, something sticks. If that’s the plan, brace yourselves, kids. I have a feeling that the 2012 filing season is going to be a wild ride.
What do you think about this article or the IRS’ “hands-on effort to improve the accuracy and quality of filed returns and to heighten awareness of preparer responsibilities.”? Post a comment and let us know! And as always we are here to help with any questions, stress, or confusion the IRS might be causing!
Security Tax Services LLC
North Sound South Sound
2802 Wetmore Ave, Suite 212 33530 1st Way S, Suite 102
Everett, WA 98201 Federal Way, WA 98003
425.339.2400 253.237.0751
fax 425.259.1099 fax 253.237.0701
