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Tax Preparers, are they safe from Audit?

Earned Income Tax Credit Audits of Tax Preparers, CPAs and Enrolled AgentsMost tax preparers, Enrolled Agents and CPAs think completing the Form 8867 and EIC worksheets meets the due diligence requirements of Reg.Sec 1.6995-2(b)(3).  This is false!  You must additionally document your knowledge and due diligence and retain substantial supporting records.  Failure to meet all requirements of the Regs exposes you to draconian penalties…some tax service providers are facing penalties of  hundreds of thousands of dollars plus mandatory referral to the OPR.

This is a major audit area of the IRS at this time.  Absolutely no tax preparer, Enrolled Agent, or CPA who has been selected for audit, should appear himself or herself.  If you have made the mistake of doing so, the proposed assessments are appealable and subject to Tax Court jurisdiction.

Know the Tax Law

Reg. Sec 1.6995-2(b)(3) states “The Preparer must not know, or have reason to know, that any information used by the Preparer in determining the taxpayer’s eligibility for, or the amount of the EIC is incorrect.  The Preparer may not ignore the implications of the information furnished to, or known by, the Preparer, and must make reasonable inquiries if the information if the information is furnished to, or known by the Preparer, to be incorrect, inconsistent or incomplete.  The tax return preparer must also contemporaneously document in the files the reasonable inquiries made and the responses to these inquiries.”

Few tax preparers keep manual due diligence files;  even these can be challenged by a Revenue agent as not being contemporaneous, complete or accurate.  Only a dated, video tape of the taxpayer intake interview can provide unequivocal proof that the tax preparer had the knowledge and exercised due diligence in asking the probing questions, the Reg requires – no one in the tax business keeps these.

The record keeping requirements are staggering:  For a schedule C, you must keep copies of the business license, journals, bank statements and checks.  While this might not be much of a problem for an accountant doing the monthly books of a business, it is a nightmare for a seasonal tax preparer.

All tax preparers, CPAs and Enrolled agents should think carefully before even preparing EITC returns at this time.  If you have or are doing so, and are selected for audit you need representation.


Dana M. Ronald

Tax Crisis Institute

January 18, 2013

photo credit: Alan Cleaver via Flickr