Discussion:Preparer Penalties

§10.21 Knowledge of client's omission A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

§10.22 Diligence as to accuracy (a) In general. A practitioner must exercise due diligence-- (1) In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; (2) In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and (3) In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service. (b) Reliance on others. Except as provided in §§ 10.33 and 10.34, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person.

I don't think this standard requires that you either force a client to amend an erroneious return which you did not prepare nor that you dig deep enough into a prior year return to know whether or not it was in error. But, having said that, if you use information from a prior year return which you know to be incorrect in preparing a current year return, then you may have a problem.

Both of these quotes are from the OLD Circ 230, but I think those would be the standards in play anyway.

For all practitioners here: on reading 10.21, don't you think we better put this advice: "The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission." in writing from now on????? A note in the file you advised them may not cut it.

Please tell us the facts. I have read your bio and it appears that you ar somewhat new at this and is it possible that there was something that you should have known. We refer to it in business law as "the reasonable man" standard. I mean no disrespect, simply would like to help. I agree with JR, it takes a lot to get your ticket punched but this can be a bit over whelming. I recently had an auditor say something similar and I practiced a strong offense but felt I was right.

Do I read Tin Cook correctly in saying the first step is that I would receive written notice of the intent to assess penalties against me and until I've received that notice, nothing is going on? How long is the process going to take if I am going to hear from them again?

NOTE TO ALL: Because Larousse is NOT a Circular 230 practitioner, the rules may be slightly different - what the IRS can do is slightly different, and his appeal rights are slightly different.

Best advice: get an experienced attorney (like Bob McKenzie or others with his level of knowledge) to represent you if the IRS proposes penalties.

I think they can prohibit the preparer from preparing any return, effectively putting the preparer out of business?

Also, with the monetary penalities, I think this will probably be enough to put some out of business also.

I guess I was just thinking that if you didn't already have one (hadn't made the investment in time and effort) you wouldn't have as much to lose as someone whose livelihood and future was tied to his/her license.

"In addition, a tax return preparer may rely in good faith and without verification upon information furnished by another tax return preparer or other third party. Thus, a tax return preparer is not required to independently verify or review the items reported on tax returns, schedules or other third party documents to determine if the items meet the standard requiring a reasonable basis for a position. "

Yes, that's why I thought the whole idea of assessing penalties on my preparation of the return for years following the original charitable contribution was out of line. I never did see the return with the original donation.

Four weeks after I was to receive a call by "Friday, for sure": what does that mean? When can I safely put this to bed?

The sad thing is that this has an ironic effect. I would assume that in such a case, when a new client gets such a letter right off the bat, he will immediately go on the defensive and will actually be harder to educate and bring into compliance. But, 10.21 is what we got, and we got to deal with it as written.

If what you are saying is correct, and we all believe it is, I think you are OK, not perfect but OK. HOWEVER.... that said I once inherited a client with a contribution carry froward of 100K and I did inquire and learned that he sold a business and closed the sale in in 2003 where is income was seven figures, he donated in 2004 where he had very little AGI. I say this because there is merit to the point that when you do a tax return with a significant carry forward, I personally believe you should have inquired. That said, from an IRS stand point, I think you are fine as they can't point to any souce code or primary sources that what you did was wrong. You will most likely never hear from them but if you do, a strong response from you is probably appropriate. If it happens, send me a private note and I will draft a response for you free of charge.

Further, the IRS cannot take away a lawyer's license, or a CPA's license because they don't grant such licenses. They can ban and/or restrict practice before the Service (and no one wants that, of course). I suppose they could also refer to a state licensing body. But you would have due process rights before that body before your license was revoked.