Today I got a Letter 4809 from the IRS pointing out that I prepare a
lot of returns with Schedule Cs (admit). The letter advises me that I
should follow certain procedures to make sure that Schedule Cs are
correct. Which I pretty much do.
And I might be selected for a "visit." If that happens I will surely
contact my malpractice carrier to make sure I handle client
"These steps include reviewing the applicable tax law, and
establishing the relevancy and reasonableness of income, credits,
expenses, and deductions to be reported on the return. In general, the
preparer may rely in good faith without verification upon information
furnished by the client. You may not, however, ignore the implications
of information furnished to, or actually known by you, and you must
make reasonable inquiries if the information as furnished appears to
be incorrect, inconsistent with an important fact or another factual
assumption, or incomplete. Additionally, a tax return preparer must
make appropriate inquiries to determine the existence of facts and
circumstances required as a condition for claiming a deduction or
"A review of the tax year 2010 individual income tax returns you
prepared reveals that these returns contain a high percentage of
attributes of returns typically found to have significant errors on
Essentially Mr. Williams, the Director of the Return Preparer Office
(whose signature is on the letter), appears to have convicted me of
failing my tax preparer responsibilities before sending the "visitor"
to see how I conduct my office.
Now, I know that many of the returns I prepare are for people with
unusual businesses (i.e., they don't fit the mold), but I also know
that my approach has always been to ask a lot of questions of my
clients, to elicit the most accurate information with which to prepare
returns. so, unless the "visitor" comes in with the attitude that I
must be an evil preparer who must be put into his proper place, I'll
probably come out OK. But there is clearly an undertone of adversarial
relationship to the preparer community.
I've seen my share of returns prepared by the type of preparer the IRS
should be looking for (I can usually spot the problems in 30 seconds
or so). For example, this past summer I came across a person holding
himself out as a CPA, even though the State Board suspended him a
dozen years ago. A year ago I saw a couple of returns for new clients
(children of a long-time client) prepared by "Fran's Tax Service."
Just after I told them what needed to be done with their returns, they
got a letter from the state department of revenue advising them that
Fran was being investigated, and to send in correct returns or advise
the state that Fran prepared their return correctly.
On Tue, 15 Nov 2011 22:05:21 EST, Tom Healy CPA
wrote Re Re: IRS Letter 4809:
Looks like the IRS is, in effect, co-opting preparers as auditors.
I observed what I consider the beginning of this trend about 8 years
ago when I was doing VITA/TCE and the IRS trainer told us we could be
held responsible for not "adequately" verifying the identity of the
person submitting the previous year tax return along with 1099s, w2s,
I told the trainer that I didn't work for the IRS and didn't want to
do their enforcement. He said I had to do it or I couldn't be a part
of the program. I agreed and quit the program on the spot and walked
out of the class.
"Vic Dura" wrote
I get ID's, usually drivers licenses and SSN cards, from new clients. After
that, I suspect they're the same person when they come back in. My reasons
for getting the ID's are to be sure I spell their name correctly. I'm in
the South you see, where Bubba, Hot, Skeeter, Red, and Junior are given
names on birth certificates.
I think he's wrong. In the AARP Tax Aide program, volunteers help the
individuals prepare and file their returns. They are supposed to verify
clients identities and all SSNs or ITINs; but as long as they operate within
the scope of their training and testing, and do not knowingly enter false
information, they are not liable. I'm not sure what "held responsible"
means, but it sounds like bureaucratic BS.
NOT based on what you said in your original post. You originally said that
the IRS letter stated that you MIGHT be selected for a visit. This is a
standard form letter that is going to tax pros who handle a lot of Schedule
C, E, F and 4835s and/or who have a lot of Schedule Cs with a an UNKNOWN SIC
code. The IRS has been sending these letters out for at least 2 years now,
they started with preparers they THOUGHT might be problematic. Now they've
widened the loop. I believe it is their intention to send such letters to
ALL preparers eventually, though I do not know how long they think will
Just an FYI FWIW - I attended the IRS Nationwide Tax Forum at National
Harbor (near DC) this fall. I almost choked when the IRS speaker (YES, the
IRS employee who put on this part of the presentation) said the following -
paraphrased because I didn't have my recorder with me -
The IRS has determined that going after taxpayers one at a time is a hit or
miss operation at best. So now they've decided when they audit a taxpayer,
be it 1040, 1041, 1065, 1120, 1120S, or whatever form the return is filed
on, AND they find questionable items that they THINK the preparer should
have caught, they will AUTOMATICALLY expand the audit to the Tax Pro who
prepared the return.
The IRS speaker said that the IRS intends to use PREPARER PENALTIES to help
close the tax gap.
Imagine, if you will, that one of your Schedule Cs gets audited and its
determined that you made a mistake. If the IRS can assert that you failed
to exercise due diligence, even it was an honest mistake, the PREPARER can
be fined UP TO $1,000 PLUS all the fees charged for the engagement.
Let's assume that the average Tax Pro does 300 returns, 100 of which are
Schedule C, E, F or Form 4835. Also assume that your average fee any of
these returns is $1,000 - I know some will be more and some less, but we
need to start somewhere. Now the IRS catches a mistake on one return and
pulls the remaining 99 Schedule Cs and finds a similar error on HALF of the
returns - keep in mind that the error could be a simple misclassification of
the fixed asset category for depreciation (say you set an asset up as 5 year
property when it should have been 7 year property).
Now you have 50 returns that are wrong. The IRS assesses a $1,000 penalty
for each return - 50 returns is $50,000. AND they also take all your fees
for those returns - earlier we assumed that the average fee for one of these
was $1,000 - so you have an additional 50 times $1,000 for another $50,000
in confiscated fees. Now, because of an honest mistake - which could have
been nothing more than a key punch error by an assistant that seemed so
inconsequential at the time that you decided to let it go - you're on the
hook to the for $100,000 AND your license could be suspended, leaving you
not only unemployed but unemployed in your chosen profession.
STINKS, but that's how they want it to work.
The IRS agent that did this presentation on preparer penalties shared what
she said was a "real live case" with the names changed to protect the
guilty. Here's how she laid it out:
A - 2 brothers decide to go into business together so they form an LLC;
B - Brother A uses his accountant (called Tax Pro A) to prepare the 1065 and
K-1s along with his personal 1040;
C - Tax Pro A prepares the 1065 which passes a $185,000 Ordinary Business
Loss through to each of the brothers;
D - Brother B uses his own accountant (called Tax Pro B) to prepare his
E - when Tax Pro B does Brother B's return he sees the K-1 and asks for
verification of basis before deduction the loss;
F - Brother B produces canceled checks made out to the LLC for MORE than the
loss passing to him;
G - Tax Pro B is satisfied and deducts the $185,000 loss on Brother B's
FAST FORWARD -
H - IRS audits the 1065 and determines that what the brothers bought was a
tax scam with no substance. All the expenses claimed on the 1065 turn out
to be personal living expenses of the brothers.
I - IRS fines Tax Pro A for preparing a false return - and RIGHTLY SO in my
Watch close, here's where it gets ugly -
J - IRS also fines Tax Pro B for NOT exercising due diligence by AT LEAST
NOT getting a complete copy of the 1065 and at a minimum giving it a cursory
look see. The IRS "determined" that by not looking at the full 1065, Tax
Pro B failed to exercise due diligence and fined him $1,000 PLUS his fee for
the preparation of the 1040.
K - Tax Pro B lost in administrative appeals and is trying to determine what
legal action may be available to him. Its unclear whether this preparer
penalty can be adjudicated in the Tax Court or if it has to go to District
So keep your ears open and your eyes peeled - the IRS has once again that no
action is too low or reprehensible for them to take to get the government
the money it needs wherever they can find it.
BTW - expect your state to jump all over this. You may need to amend the
state return as well since the IRS will report the change related to MORE
income and MORE tax, but they don't usually report reduced income and
reduced tax resulting from adjustments to the various states.
Gene E. Utterback, EA, RFC, ABA
I assume that is the Fran in Belgrade/Bozeman. If you're talking about
another Fran, you should consider providing more specific
identification info so innocent Frans don't take undeserved heat.