IRS Cautions Preparers about Schedule C Mistakes

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The Internal Revenue Service reportedly sent over 2,500 letters last month to tax preparers warning about potential errors that the IRS spotted on the Schedule C they filed for their sole proprietor business clients.

The warning letters, originally reported by the Kiplinger Tax Letter, follow up on earlier warning letters that the IRS mailed in December 2013. The form letter was revised this past November, however.

The letter, signed by Carol Campbell, director of the IRS's Return Preparer Office, states that the agency has reviewed tax returns prepared in the past year by the preparer and “found that many have a high percentage of traits we believe typically indicate errors on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship). This letter reminds you of your responsibilities in this area and provides educational assistance. As a paid preparer, you are responsible for ensuring your clients’ returns are accurate. We ask that you pay special attention to these schedules next filing season.”

The letter reminds preparers that they must take steps to prepare accurate tax returns on behalf of clients, including reviewing “the applicable tax law to establish the relevance and reasonableness of income, credits, expenses, and deductions on a return.”

“In general, you can rely in good faith without verification on information your client provides,” Campbell noted. “However, you can’t ignore the implication of the information you have. You must make reasonable inquiries if the information appears to be incorrect, inconsistent or incomplete.”

The IRS warned that both tax preparer and client could face negative consequences in the future from inaccurate returns. “We’ll be looking for improvement in future returns you prepare,” wrote Campbell.

She noted that inaccurate returns may result in additional taxes, interest and penalties. If a a client's return has an understatement of tax liability due to an unreasonable position, the IRS can assess the preparer a minimum penalty of $1,000 per return, and if there is an understatement of tax liability due to reckless or intentional disregard of rules or regulations by the  preparer, the IRS can assess a minimum penalty of $5,000 per return.

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