Budget issues may loom large in practice before the Internal Revenue Service in the sense that audits are becoming more thorough, according to Bill Smith, managing director for Top 10 Firm CBIZ MHM’s National Tax Office.
“The IRS budget issues will have a significant impact on how many returns will get audited,” he observed. “There seems to be a shift in an attempt to get more out of each audit, and to expand audits within taxpayer groups to make sure they get everything out of that audit,” he said.
“Instead of bringing in one agent who is a generalist and taking a broad-brush approach, they’re training agents to be specialists and bringing them in on specific issues,” he added.
The increased application of penalties by the IRS has not gone unnoticed by practitioners, according to Smith. “One of the things that’s been troubling us is that the IRS seems to apply a penalty to any deficiency they determine. It used to be that you had to do something negligent or egregious, but now it seems to be an automatic add-on,” he said.
“In the past, they might use the penalty as a trade-off in negotiating. Now, they just tack on the penalties and you have to fight for those. It’s a disturbing development. They’re not saying that this is their new policy, but it seems to be happening in virtually every audit I hear about.”
CPAs should be alert to the requirements of Circular 230, noted Brett Beveridge, special counsel at Chamberlain Hrdlicka. “When a preparer signs a return, Circular 230 requires the preparer to have a reasonable basis that the return being signed is true,” he observed. “2014 returns filed in 2015 are subject to the tangible property regulations, so preparers have the obligation to have a reasonable basis that the return they are signing is compliant with the new regulations.”
“There is a lot of angst among CPAs about the regulations,” he said. “So many are not sure what to do for their clients, and a lot [of people] are trying to profit from that. They’re trying to sell their services to smaller CPA firms, implying that you have to file a Form 3115 [Application for Change in Accounting Method] for every return you file, and if you don’t there’s this parade of horribles that might happen. It’s kind of overblown. I’ve seen materials that are marketed to smaller CPA firms that say if you don’t file a 3115 for every client and hire us to help you, all these bad things will happen to you. There’s peer pressure, because they think that all their colleagues are doing it and if they don’t the IRS will come after them.”
“In reality, you only have to change your method of accounting if your method doesn’t clearly reflect income,” said Beveridge. “So if your method is in substantial compliance with the rules, you are probably fine. If you’re already doing what the regs require, then there’s nothing else for you to do.”
Tax return preparers who are not CPAs, enrolled agents or attorneys were formerly permitted to represent taxpayers on a limited basis before the Internal Revenue Service concerning returns that they had prepared. This will no longer be the case beginning Jan. 1, 2016, unless they have received a Record of Completion of the IRS’s Annual Filing Season Program.
This in itself should be motivation for unenrolled preparers to apply for and receive the Record of Completion as a first step toward becoming an EA, CPA or attorney, according to Cathy Mueller, director of operations for Peoples Income Tax. “Once the Annual Filing Season Program is fully in place, unenrolled tax return preparers must have a Record of Completion or they won’t be able to represent taxpayers before the IRS even in limited fashion,” she said. “Previously, if preparers signed and prepared a return, they could represent the taxpayer on issues on the return in a limited way.”
“EAs, CPAs and attorneys can represent taxpayers at all levels before the service, including collections, audit and appeals,” she continued. “If preparers want to help taxpayers, they have to at least voluntarily complete the Annual Filing Season Program. At the first appearance at audit, the taxpayer doesn’t have to be there and the representative can go for them. Sometimes the issues get settled right there. Since taxpayers have an inherent fear of the IRS, it’s beneficial for their representative to get in the middle and eliminate some of that fear. I’ve seen cases where taxpayers get notices and they procrastinate, don’t even open them, and get to the point where their bank account is going to be seized.”
“If no one in your practice is a CPA, an EA, or an attorney and [the client needs] representation, you have to send them somewhere else,” she warned. “The likelihood that they will come back to you is not good — you’re limiting your practice development if you have to send them somewhere else.”
More than half of taxpayers rely on paid preparers to assist them in preparing their returns, according to the IRS: “While 40 percent of paid tax return preparers are credentialed as attorneys, CPAs or EAs, most of the other 60 percent of paid tax return preparers lack any kind of professional credential or license.”
The IRS seems to have cut back on the whole area of credentials, according to Smith. “With both the Loving case and the contingent fee ban, they have significant losses in the ability to control tax preparer registration,” he said.
THE NEW RULES
In announcing the Annual Filing Season Program in Revenue Procedure 2014-42, the IRS noted that it does not restrict any individual from preparing and signing tax returns and claims for refund, nor does it change the requirement that paid tax return preparers must obtain a Preparer Tax Identification Number. It also noted that the revenue procedure does not in any way affect or limit the ability of attorneys, CPAs or EAs to represent taxpayers before the IRS.
Section 6 of the procedure states: “This section permits unenrolled tax return preparers who obtain a Record of Completion to represent taxpayers before the IRS during an examination of a tax return or claim for refund that they prepared and signed (or prepared if there is no signature space on the form), provided the individual had a valid Annual Filing Season Program Record of Completion for the calendar year in which the tax return or claim for refund was prepared and signed; and has a valid Annual Filing Season Program Record of Completion for the year or years in which the representation occurs. The representation permitted under this section does not permit an individual who has a Record of Completion to represent the taxpayer before appeals officers, revenue officers, Counsel, or similar officers or employees of the IRS.”
Revenue Procedure 2014-42 modifies and supersedes Revenue Procedure 81-38 for tax returns and claims for refund prepared and signed (or prepared if there is no signature space on the form) after Dec. 31, 2015.
Unenrolled tax return preparers may not represent taxpayers during an examination of a tax return or claim for refund prepared and signed after Dec. 31, 2015, but may rely on it to represent taxpayers during an examination of a tax return or claim for refund prepared and signed before Dec. 31, 2015.
There are three issues that, if they converge, can be a real problem to the tax system, according to Roger Harris, president of Padgett Business Services: “One is the continued complexity of the Tax Code, which doesn’t show any signs of changing. Two, because of the Loving case we now have unregulated tax preparers and taxpayers using off-the-shelf software who try to interpret that complicated Tax Code in preparing tax returns, and three is the IRS, whose resources are being cut back to the extent that now we at least have the appearance of less enforcement. When those three things come together, it presents a very real risk to our voluntary tax system.”
“How fast would you drive if you knew the police weren’t patrolling the highways — and why do you think tax preparation would be any different?” Harris said.
“Preparing a tax return is not practice before the IRS, and that is why the IRS lost the Loving case,” he said. “The IRS argued that it was practice before the IRS, so unless and until Congress rewrites the law to include tax preparation as practice, it will be hard to regulate tax preparers. What they’re left with is a voluntary program.”
The Annual Filing Season Program gives some abilities to represent clients before the IRS that a person who is not an EA, CPA or attorney doesn’t have, Harris indicated. “It’s an incentive to get people to move toward taking CPE and abiding by Circular 230. It’s controversial as to whether or not what it requires you to do is enough. There are people on both sides of the issue.”
According to the service, the Annual Filing Season Program “aims to recognize the efforts of un-credentialed return preparers who aspire to a higher level of professionalism. Those who choose to participate can meet the requirements by obtaining 18 hours of continuing education, including a six-hour federal tax law refresher course with test. Upon completion of the requirements, the return preparer receives an Annual Filing Season Program — Record of Completion from the IRS.”
Annual Filing Season Program participants are included in a public database of return preparers on the IRS Web site. The Directory of Federal Tax Return Preparers with Credentials and Select Qualifications includes the name, city, state, zip code, and credentials of all attorneys, CPAs, enrolled agents, enrolled retirement plan agents and enrolled actuaries with a valid PTIN, as well as all AFSP Record of Completion holders.
One of the concerns of the American Institute of CPAs in its lawsuit against the IRS over the Annual Filing Season Program is the confusion in creating another credential, noted Mark Luscombe, principal federal tax analyst at Wolters Kluwer. “They think that people might think it means more than it does,” he said.
The AICPA filed suit in the U.S. District Court for the District of Columbia on July 15, 2014, to stop the program. The court granted the government’s motion to dismiss the suit.
“To the extent that IRS budget problems make it difficult to do audits, or track down unscrupulous preparers, there might be less pressure to sign up for the voluntary program,” said Luscombe. They might think they can keep running under the radar screen.”
“If you come to me and someone else prepared your return, I’m going to have some problems helping you — that’s really the incentive to become a CPA, EA or to be an attorney,” said Harris.
“Anything, whether on an examination or a request for more information relevant to a line on the tax return, is practice before the service,” said George Jones, senior federal tax analyst at Wolters Kluwer. “Revenue Procedure 2014-42 discussed the voluntary program, and made it clear that for returns and claims for refunds singed after Dec. 31, 2015, unenrolled preparers will not be permitted to represent the taxpayer unless they are certified in the voluntary program, and even then, the certification only gets you into limited practice.”
“But there are still all the returns that were filed before then that any preparer can, by implication, represent the taxpayer on matters pertaining to these earlier returns,” Jones said. “However, now [the Office of Professional Responsibility] is saying that irrespective of these rules, they’re going to be considered as practicing before the IRS immediately and will be subject to Circular 230. I think they are being cagey in that the revenue procedure says one thing but the IRS is giving presentations seeming to imply another.”
Smith noted that just because a preparer is a CPA, attorney or EA, they’re not necessarily good at what they do: “There are a lot of unqualified CPAs, attorneys and EAs who haven’t done a good job at keeping up with what they should be keeping up with, and there are some brilliant superstars without credentials who are competent. Of course, it’s easier to check credentials with CPAs, attorneys and EAs.”
Harris agreed: “Just because I give you a driver’s license doesn’t mean you can drive, and just because you can practice before the IRS doesn’t mean you are any good at it,” he said. “Conversely, there are a lot of qualified people out there that are not CPAs, EAs or attorneys. They just never saw the need to get credentials, but those days are changing. Now, you need to have a credential.”
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