Tax preparer penalties are on the rise and you, as a taxpayer, may think this will either not affect you, or help you. The law was passed because they believed that it would promote more accurate tax returns.
However, as usual, they didn't think this law out very well before they passed it.
What this law has actually done (or will do, as it is not yet effective), is make the disclosure requirements for tax preparers higher than that of taxpayers.
This means that if you pay to have your return prepared, and the person who prepares your return is not 100% sure that the position you are taking is "more likely than not" to be upheld upon audit, then they are required to disclose this on your tax return. This disclosure is required even if the tax preparer doesn't believe you will be audited or is not sure if the IRS would even bring this
question up, if you were audited.
What this will actually do is alert the IRS that they may want to take a look at your return.
As a simplistic example of how this law may play out is whenever a taxpayer wishes to take a deduction for which they do not have adequate documentation. Taxpayers are required to have adequate documentation for all deductions that they claim. If a paid preparer is aware that:
- a taxpayer does not have adequate documentation OR
- if the paid preparer suspects that the taxpayer may not have adequate documentation (did you show your mileage log book to your paid
- the paid preparer should have known that the taxpayer did not have adequate documentation,
their paid preparers to provide them much more information than they were ever required to provide to their paid preparers. The paid preparers will have to review much more documentation than they were previously required to review; thus the time it will take them to prepare your return will increase. If the paid preparer must spend more time on your return, then your fee will be higher.
My second simplistic example of how this law may play out is whenever a taxpayer wishes to take a position that is not specifically supported by substantial authority. Since the tax code is so large, most taxpayers that I encounter assume that everything that they, being a typical taxpayer, are doing has been documented, as "everyone" is doing it.
Not necessarily so.
For example, many taxpayers are using a very popular, relatively inexpensive, software package by Intuit, called QuickBooks to keep track of their books and records. One of the flaws in QuickBooks is the way QuickBooks keeps track of inventory. The ONLY method that QuickBooks allows to value inventory is by "Average Cost". The IRS allows you to value, for tax purposes, inventory based on one of three methods:
- Specific Identification
- Last-In, Last-Out (LIFO)
- First-In, First-Out (FIFO)
There is not substantial authority to support the use of average cost for valuing inventory for IRS purposes. Thus, if you use QuickBooks to value your inventory for financial reporting purposes, your tax preparer will have to determine if by doing so, upon audit, would the value and method that you are using be "more likely than not" upheld by the IRS? If your paid preparer is unsure, then they will be required to disclose to this to the IRS. Again, in this example, the tax preparer will be spending more time and money recalculating your inventory and determining, not only if the "value" is more likely than not to be upheld, but also if the "method" is more likely than not to be upheld.
Above I only stated two, somewhat simplistic examples....there are many more examples in real life. How will this ultimately affect the taxpayer? In my opinion, one of three ways:
- More taxpayers will self-prepare their return, as there is no required disclosure if you prepare your own return.
- More taxpayers will seek out questionable tax professionals, who will not prepare the necessary disclosures.
- The fees to prepare your tax return will increase, as the work performed by the paid preparer will increase.
If the IRS wants more accurate tax returns, make both the taxpayer and the paid preparer equally responsible.
As for what would need to be disclosed, Revenue Ruling 2005-75, may provide some guidance. You can read the Small Business and Work Opportunity Act of 2007 online at TaxAlmanac.