Tax return preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients are a major concern for the Internal Revenue Service during the upcoming filing season, according to a spokesman for the service.
"Although the taxpayer may not be aware of the mistake, it is the taxpayer, not the return preparer, who must pay additional taxes and interest and possible penalties," he pointed out.
The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution. The IRS can also assert appropriate civil penalties against unscrupulous tax return preparers.
The service expects that, "Reputable preparers will ask to see receipts and will ask multiple questions to determine whether expenses, deductions and other items qualify."
Criminal and civil actions on tax fraud committed by return preparers have resulted in numerous permanent injunctions against abusive return preparers. The incarceration rate for those who are sentenced has been more than 80 percent over the past three years.
As part of this concern, IRS agent and criminal investigator on-site visits are encouraging higher-quality Earned Income Tax Credit claims on 2009 returns to avoid compliance action.
They are using a risk-based scoring system that analyzes certain factors and filing patterns to identify preparers who may have had questionable EITC claims in the past. The visits are educational, with the objective of ensuring that preparers understand the types of errors appearing on their returns and how to improve accuracy. During the outreach and education visits, agents will discuss the errors and trends identified on client returns they filed, offer advice and solutions to improve accuracy, answer questions, and explain the potential consequences of non-compliance.
Although no penalties are assessed, the IRS will monitor returns filed by these preparers to determine whether accuracy improves. Preparers whose returns do not show a significant improvement may be subject to due diligence audits or possible injunctions, depending on the severity and extent of errors.
Paid preparers must meet four due diligence requirements on returns with EITC claims or face penalties. New, expanded regulations clarify these requirements and set a performance standard for the "knowledge" requirement - what a reasonable and well-informed tax return preparer, knowledgeable in the law, would do.
Under the requirements, paid preparers must evaluate information received from clients; apply a consistency and reasonableness standard to the information; ask additional questions if the information appears incorrect, inconsistent or incomplete; and document and retain the record of inquiries made and client responses.
ADVICE FOR THE SERVICE
Meanwhile, there is no shortage of advice for the IRS as it prepares for the upcoming filing season. The Government Accountability Office, the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate have all weighed in on the subject.
They cite the numerous new or expanded credits, particularly the "refundable" credits, as a complicating factor this season both for the IRS and taxpayers.
"While the decision to expand refundable credits is entirely reasonable from a policy standpoint, refundable credits present significant administrative challenges for the IRS," observed Taxpayer Advocate Nina Olson.
Refundable credits, including the EITC, the Making Work Pay Credit, the American Opportunity Education Tax Credit, the First-Time Homebuyer Credit, and credits for certain federal and state pensioners, create significant challenges for the IRS, Olson said.
For example, she noted that refundable credits may present an increased risk of fraud, and that the IRS therefore will need to balance fraud prevention with the timely delivery of refunds.
"Refundable credits require the IRS to perform a delicate balancing act," Olson said. "On the one hand, if the IRS does not do enough to detect and prevent fraud, it may pay out billions of dollars as a result of false and fraudulent claims. On the other hand, if the IRS clamps down too tightly, hundreds of thousands and potentially millions of predominantly low-income taxpayers will not receive timely refunds."
One of the difficulties for the IRS is that it does not have math-error authority, which must be provided by statute for specific purposes, to verify compliance with aspects of some of the credits.
The GAO suggested that Congress should provide the IRS with math-error authority to ensure compliance with the First-Time Homebuyer Credit. Without it, the IRS would have to use labor-intensive audits to ensure compliance with the repayment provision of the 2008 credit, noting that 1.2 million taxpayers claimed the 2008 credit for both 2008 and 2009. "The IRS has to use audits to ensure that taxpayers do not claim the credit for both 2008 and 2009," said the GAO. "Because math-error checks are automated and could substitute for burdensome audits, the IRS could check all returns at relatively low cost with such authority."
TIGTA also urged Congress to give math-error authority to the IRS to disallow ineligible claims for the Hope Credit. Although the credit may only be claimed for two tax years, TIGTA found numerous instances of erroneous claims.
"I am concerned about the IRS's ability to administer the credit effectively," said J. Russell George, the Treasury Inspector General for Tax Administration. "It is imperative that the IRS works with the Treasury Department and Congress to obtain the tools it needs to effectively administer this important credit."
IT'S THEIR BUSY SEASON, TOO
As you'd expect, the Internal Revenue Service is pretty busy this time of year; below are some highlights of their recent activity:
* The IRS publishes guide to latest tax breaks: Publication 17 features details on taking advantage of new tax-saving opportunities, including a wide variety of new credits. The 308-page guide also provides more than 6,000 interactive links to help taxpayers quickly get answers to their questions. Publication 17 has been published annually by the IRS for more than 65 years and has been available on the IRS Web site since 1996. As in prior years, the publication is packed with basic tax-filing information and tips.
* Tip income reporting program extended: The Internal Revenue Service has extended for another two years the Attributed Tip Income Program, which makes it easier for workers in the food and beverage industry to report the money that they earn from tips. The program, which was originally set to expire Dec. 31, 2009, has been extended to Dec. 31, 2011, under the newly issued Revenue Procedure 2009-53.
Employers who participate in ATIP report the tip income of employees based on a formula that uses a percentage of gross receipts, which are generally allocated among employees based on the practices of the restaurant. If employees and employers participate in the ATIP program, the IRS said that it will not initiate a tip examination while they participate. Participating employees also do not have to keep a daily tip log or other tip records.
To enroll, employers check the designated box on Form 8027, "Employer's Annual Information Return of Tip Income and Allocated Tips."
* New Criminal Investigation chief: The IRS has appointed Victor Song as the new chief of its Criminal Investigation Division, replacing Eileen Mayer, who is retiring this month. Song is currently the deputy chief of the division. Rick Raven, who is currently the director of operations, policy and support, will replace him as deputy chief.
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