IRS AUDIT OF TAX RETURN PREPARERS: The Good, The Bad and The Ugly 1

Objectives What is the Return Preparer Visitation Project? How did the RPVP come about? What is the RPVP’s Objectives? What will be examined during an IRS visit? What do you need to be concerned with? What is the future of the project? 2

Origins – The Good IRS Strategic Plan (FY ) Strengthen partnerships with tax practitioners, paid preparers, and other third parties in order to ensure effective tax administration Ensure that all tax practitioners, paid preparers, and other third parties in the tax system adhere to professional standards and follow the law Tax Return Preparer Review – December 2009 Six-month comprehensive study of paid preparer industry Intended to be an open discussion of the issues within the paid preparer community IRS concluded that implementing higher standards would: significantly enhance protections and service for taxpayers, increase confidence in the tax system, and result in greater taxpayer compliance with tax laws. 3

Beginnings – The Good On January 7, 2010 Service announced the development of the Return Preparer Visitation Project (RPVP). First steps to improve the accuracy and quality of filed tax returns as well as to heighten awareness of paid preparer responsibilities. The initial rollout of the RPVP occurred during FY 2010, with the intention that the RPVPs will be conducted on an annual basis. 4

Selection for RPVP – The Bad FY 2010 – practitioner prepared more than 25 tax returns with schedules commonly containing errors: Schedules A, C and E FY 2011 – inspection of tax returns, relevant supporting documents and records of clients to ensure compliance with Section 6695 FY 2012 – preparers of a large volume of returns with Schedules A, C and E in order to confirm compliance with return preparer requirements 5

Target Goals - The Bad Target Goals for letters and visits: FY ,000 Information Letters 2,500 Visits FY ,000 Information Letters 2,500 Visits FY ,000 Information Letters 2,100 Visits 6

7 Duties of Tax Return Preparers Section 6695 Failure to furnish copy of tax return to taxpayer sign tax return furnish identifying number retain copy or list of tax returns prepared file correct information return (Sec. 6060) Amount of penalty $50 per return $25,000 maximum per year Reasonable cause exception

8 Duties of Tax Return Preparers Section 6695 Negotiation of Refund Check Amount of penalty $500 per event Failure to determine Earned Income Credit eligibility Amount of penalty $100 per failure Due Diligence exception

9 Understatement of Taxpayer’s Liability by Tax Return Preparer - Section 6694(a) A preparer may only agree to the filing of a tax return if it contains a reasonable postion A position taken by a preparer is reasonable if there is substantial authority for the position If position is reasonable, then no penalty will apply “Substantial Authority” has the same meaning as in Treas. Reg § (d)(2) Even if substantial authority does not exist, penalty can be avoided through adequate disclosure Position cannot be frivolous

10 Substantial Authority Standard Section 6694(a) Applies to all returns and information documents Standard aligns preparers with their clients Applies to preparers who were primarily responsible for the position Includes signing and non-signing preparers Excludes non-signing preparers who spent less 5% of aggregate time on the position Applies to position that is a substantial portion of the return

11 Understatement of Taxpayer’s Liability by Tax Return Preparer - Section 6694(a) Section 6694(a) Penalty Amount The greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim with respect to which the penalty was imposed.

12 Understatement of Taxpayer’s Liability by Tax Return Preparer - Section 6694(a) Exception for Tax Shelters and Reportable Transactions Penalty applicable unless preparer has A reasonable belief that the position would more likely than not be sustained on its merits No exception for disclosure Reasonable Cause and Good Faith exception applies

13 Understatement of Taxpayer’s Liability by Tax Return Preparer - Section 6694(b) §6694(b) – Willful or Reckless Conduct Standard Disregards information furnished by the taxpayer or other persons or fabricates items or amounts on the return in an attempt to wrongfully reduce the tax liability of the taxpayer Defenses Adequate Disclosure Reliance on taxpayer

14 Understatement of Taxpayer’s Liability by Tax Return Preparer - Section 6694(b) Section 6694(b) Penalty Amount The greater of $5,000 or 50% of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim with respect to which the penalty was imposed

AICPA Response – The Bad AICPA Comment Letters to Service dated: October 29, 2010 December 22, 2010 Concerns Visits occur during the busiest time of the year Client Confidentiality Review of filed tax returns Review of client files Possibility of assertion of penalties 15

16 FATP – Section 7525 Section 7525 – Federally Authorized Tax Practitioner’s Privilege With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney

17 FATP – Section 7525 Purpose: level the playing field among practitioners Requirements Applies only to the Federal tax matters Same principle and requirements as the attorney-client privilege Must be between taxpayer and federally authorized tax practitioner Must be tax advice Must not be intended to be revealed Does not exist for criminal tax proceedings Does not apply to certain written communications regarding tax shelters

18 FATP – Section 7525 Effective Date Effective for communications made on or after July 22, 1998.

TIGTA Report – The Ugly June 29, 2012 Treasury Inspector General for Tax Administration (TIGTA) issued their report on the RPVP for its FY 2010 and FY 2011 filing seasons Implementation of the Return Preparer Visitation Project was Successful, but Improvement are Needed to Increase Its Effectiveness Report was favorable in that Service fulfilled its objectives for the project 19

IRS Visit Results The results for FY 2010 and FY

TIGTA Report – The Ugly Recommendations: Service should use data-driven selection criteria to specifically identify paid preparers who filed tax returns with errors to make certain the most egregious paid preparers are receiving educational and enforcement visitations. Service should develop specific performance measures and that internal controls that can be used to assess the impact of the RPVP on the paid preparer community. Should include a process to monitor and track the behavior of paid preparers visited to determine whether the quality and accuracy of tax returns improved. 21

TIGTA Report – The Ugly Service Response: Agreed with both recommendations and has already begun implementation 22

Future of the RPVP? A continuing effort to ensure the highest standards of quality and compliance Maintenance of paid preparer lists regarding conduct? 23

IRS Audit of Tax Return Preparers The Good, The Bad and The Ugly Finis 24