This article is not for those of you who prepare your own tax returns. Let’s face it, when you prepare your own return, you are responsible for what is, or is not, included on the forms. What if you have a CPA or other tax practitioner prepare your annual state and federal income tax returns? Who’s responsible for the numbers on your Form 1040 then?
Many people have the misconception that, once you turn over your tax information to a preparer, all you have to do is sign the final result and mail it in (or electronically file it). Nothing can be farther from the truth. That’s not to say the tax preparer has no responsibility for the numbers included in the return. In fact, in Internal Revenue Service Circular 230, the government specifically states that a practitioner must exercise due diligence in preparing a tax filing, including determining the veracity of oral or written client representations. This doesn’t mean a tax preparer must verify everything you tell him, but he or she must be satisfied that the amounts included on a tax return make sense.
So what is your responsibility - and how readily can you blame a preparer for incorrect numbers on your return? Consider the results of a recent case of ‘tax preparer fraud’ that affected a UPS driver. The UPS driver hired one Gregory D. Goosby to prepare and electronically file his tax return for the years 1999 and 2000. In 2006, Mr. Goosby was found guilty of 30 counts of willfully aiding and abetting in the preparation of false and fraudulent income tax returns.
In March 2005, the Internal Revenue Service issued a notice to the driver assessing taxes for 1999 and 2000 that totaled $12,212. The understatement in taxes was due to Mr. Goosby claiming false itemized deductions. The taxpayer alleged that the IRS was barred by the normal three-year statute of limitations from collecting taxes. Since Mr. Goosby filed the returns electronically, he claimed he was not a party to filing fraudulent returns. Unfortunately, the court concluded that ‘tax preparer fraud’ subjects the taxpayer’s returns to an indefinite period of scrutiny because there is no statute of limitations with respect to fraudulent returns.
The real problem in a case like this is not that additional tax was due, though that was bad enough. The real problem is that the understatement of taxes opens a taxpayer up to both penalties and interest. At a minimum, interest would be due because the IRS cannot, by law, forgive or abate interest. Add to that the potential for penalties on the late payment of income taxes, negligence, or filing of fraudulent returns - and it doesn’t take long for your tax bill to double.
Many times, taxpayers simply sign their returns and put them in the mail (snail or electronic) without reviewing the numbers. Either they trust the preparer implicitly (even if the numbers look wrong) or they are simply happy to have the tax return chore out of the way for another year. Whatever the reason, many taxpayers fail to double-check the preparer’s numbers.
Wait a minute - did you notice the error in that last paragraph? The error is in characterizing amounts on a tax return as the “preparer’s numbers.” Sure, the calculations may come from your CPA’s computer, but those numbers had better be the amounts you provided to your tax accountant. Any good preparer will welcome a second, or third, set of eyes checking the numbers to make sure the amounts are correct. That’s because he or she knows that the taxpayer is ultimately responsible for the amounts included in the return. The preparer simply makes sure they are in the right place on the return.
Without naming names, there have been many recent cases where taxpayers were held liable for understated taxes plus penalties and interest. Simply put, ignorance of the law, or the numbers, is not considered an excuse for filing false and misleading returns.
What is your best defense against getting an unexpected bill from the IRS? First, make sure you are dealing with a reputable preparer. Ask for a copy of the practitioner’s license to do business as a tax preparer. Ask your friends for references of reputable CPAs or other tax practitioners.
Finally, review your tax return and ask questions about anything that you do not understand. Reputable preparers take pride in their work and are honest enough to admit when a mistake has been made. Do not be afraid to ask questions for fear of offending your preparer.
Returning to our original question, just who is responsible for your tax return? The simple answer is: you are. Good tax preparers realize this and make every attempt to provide you with an accurate return because protecting you is their job. If you have just such a professional, we congratulate you on your wisdom. If you are looking for someone who fits that bill, please consider giving us a call.
Have a great Thanksgiving.