Discussion:Preparer liability with Sch C audit

Car & Truck Exp,& other Exp. My question is this! The return was prepared based on info he provided on Excel Spreadsheet.I did not verify all his info.

Client is now saying he can't come up with all the documentation recorded on Spreadsheet. I don't have a problem with him paying I'm concened about my reputation with the IRS.

I have very little experience with Office audits I've been to 1 in 14 years of Tax prep.

I am not an enrolled agent or CPA.Can I still help this client via form 8821 or POA.

And does this cause any more scrutiny to other returns I've prepared. I am by the book but will admit I don't always have the time and resources to verify all info from Clients

You can have limited practice before the IRS in certain situations for TY's of returns you have prepared. See Sec 10.7(c)(viii) of Circular 230 and you should read Publication 470

You'll need a Form 2848 Instructions for form 2848. A 8821 is only good if you are only recieving return transcripts and the like.

There are no penelties for relying on your clients information unless you knew or should have known that something was wrong. You do not need to verify a clients info. If that were the case only CPA's could prepare returns, since only they can do attest work.

You may not need reciepts to establish some business expenses. For certain things, like travel, the least you need to do is establish busines purpose, time, and place.

You should also check out Cohan v. Commissioner, 39 F.2d 540 (2nd Cir. 1930).

Hopefully your client paid his expenses by check or credit/debit card, and that he maintained a mileage log book.

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I try my best to fill out accurate and honest returns. Now he tells me he doesn't have all the info from his spreadsheet. I'm Just venting I guess !!!!

Then His comment was I "Should have listened to my music buddy and started a C-corp or S-Corp less chance of being audited"

To me that comment implies he's a cheater.

He is fired after this! My other problem is they want his 2004 & 2006 returns brought to exam

The Audit is for 2005

I thought they did that with the recent Jackson Hewitt case.

I prepare taxes in Philly and South Jersey area and have at least a half dozen musicians from my area!

If this guy tanks his audit whose to say they don't suspect me of being fraudelent and pull my 6 musicians returns!

Some of these guys are a piece of work! I once had 2 guys in the same band about 10 years ago they both got 1099'd from the the same 3 clubs except the one band members total 1099-Misc's were about $6000.00 less than his buddy

When I asked him he said I gave one of the club managers a bogus address and 1 digit off on his SS#. Oldest trick in the book he says! both were immediately fired

Rock On!

The IRS Return Preparer Program (see http://www.irs.gov/newsroom/article/0,,id=134094,00.html) focuses on really extreme cases of preparers knowingly putting incorrect figures on tax returns, which obviously isn't your case.

But, I think we all have our moments when we worry a little.

Not that I really have anything important to say, except that my tax business is comprised of 80% musicians and entertainers, and I've only had one audit in 16 years and the guy got raked over the coals. They wanted to see contracts on all out-of-town gigs and disallowed all M&E expense where there was something as simple as coffee and donuts in the morning at the hotel. They were pretty lax on mileage, just verifying the information that we added up. Of course there was the "if you want to fight on this year on this item we'll just go back two more years and find more shit to disallow", I swear the IRS auditor was getting paid a commission, to see her drive up in her Lexus convertible and $600 suit. And of course, the whole audit is my fault and the client hates me and is trashing me, but I did the best I could do, and he came up owing 5g's for 2 years which is average, even my friend that was prepared with everything on spreadsheets owed the same amount that wasn't my tax client, honestly I thought it was going to be three times higher. If I had it to do all over again I would have sought better counsel for my client, but I think he would have just owed an attorney that amount. Get together with your client ahead of time and find exactly what he has and doesn't have, and do the best you can if you're going to the audit with him. I've heard through the vine that ALL schedule C's, well, a great many more, will be examined by the IRS to find more money to send over to Iraq, which is why I just formed a Partnership with my wife to try and move my LEGIT figures onto a form that is not as audit-prone, so I hope. Btstax, I have an entertainer's tax organizer on my website at www.musiciantax.com, feel free in this dark hour to download it and see how many expenses you can come up with. Also, the auditor doesn't give two shits about you, and unless you're really way off base, there's really no way they're going to ask for all of your tax clients' information, they're too busy with their pending work assignments, they'll take a bunch of money, you'll lose a tax client, and they'll ride off into the sunset practically together. Good luck!

You are hardly describing a situation where you could be accused of criminal aiding/abetting under 7206! Relax already. Poor sec 274 documentation is common, and a preparer can rely on oral assurances that the documentation exists.

To place a preparer in a "project" requires strict approval procedures, basically indication on examined returns where the preparer may be liable for the penalty under 6694(b) due to "willful and reckless conduct." Did you do that? Didn't think so.

Requesting copies of prior/subsequent returns for inspection is normal procedure, and it does not imply they will be examined. 2004 if timely filed by April is restricted to big money as to its being added to the pot.

When preparing freelancers, you come to realize that most of the 'meals' occur when they have a rehearsal in the afternoon and a gig that night, and eat nearby......not deductible. Or when they travel to Bethlehem or Princeton to play for an evening and stop for a meal on the way. Then there is the practice area in the home, which was upheld in Drucker, but often they share an apartment with another musician and use the same space so you must ask the right questions to get at this fact. Most freelancers think anything black is 'concert attire' and if they wear black to your preparation meeting, point out that what they are wearing is street ware.

But the worse sin I see is often done by the preparer. Freelancers receive both 1099s and W-2 forms and they cannot control how they are paid. I have even seen promoters/orchestras give 1099s for the Feds and W-2s for the State and City on the same income [the Philadelphia Opera Company many years ago]. So what does the preparer do? I see so many put all the expenses on Schedule C. This is a definite no-no, unless the amounts reported on W-2 are so minimal [such as recording royalties, or MPTF gigs) or the W-2 represents income from teaching at a school. Putting all the expenses on the Sch C makes me question the preparer's knowledge.

As for income, there are days you can get runover by freelancers rushing to cash checks at the banks that the checks are issued against. Freelancers will bitch like hell when someone sends a 1099 for less than $600, as if it is their right to take in that income tax-free.

You are probably fortunate the audit concerns only expenses and that they are not checking bank deposits. Of course, the Examiner could expand the audit and ask for these. I took over a case of a freelancer whose return was prepared by my former partner. This was a case where he recorded his gross at 'net' after paying his two other players, who were his brothers. No 1099 had been issued to him....God only knows why not, but without even looking at bank statements I knew we would have a mess since he had not issued 1099s. I let the case be 'stat noticed' and then submitted his expenses, which like yours, were short in a number of areas. The expenses submitted were accepted and the case closed with an adjustment.

But you relied on his information, and cannot be held liable, but do not let him represent himself. Who knows what he might say should IRS propose a penalty against him? Thus it is better that you represent him, and not let him be there. If you truly are uncomfortable, follow Tin Cook's advice and get someone to help.

You will be fine, the tp, he made up #'s...sounds like at least...so pay the piper!!

DC I will take you up on that organizer from your website. Hope everyone has a nice Labor Day weekend!

Doing an audit also requires sitzfleisch, that quality so prized by chess players and defined as the ability to sit, sit and sit some more, until you find out where the examiner is going. At their offices, your resources are not readily available, and most examiners bring certain misconceptions to their thinking. They never pull out publications, code or regs, but rather spout their reading of code. I used to carry Publication 17 at minimum.

I have never had an office or field auditor threaten to go back to other years during the audit itself when I disagreed with the conclusions, though sometimes when we sit down they might mention that all open years are subject to change.

IRS prefers false documents be hand-delivered. Could get lost in the mail.

"I have never had an office or field auditor threaten to go back to other years during the audit itself when I disagreed with the conclusions."

That would be a clear Code of Conduct violation. Report it to TIGTA if it ever happened.

Actually, this may a clear example of Congressional intent. False docs/statements laid before other agencies, like the SEC in a civil matter (as Martha Stewart found out), is a felony under Title 18. By policy, DOJ will not prosecute a misdemeanor as sole charge, especially in a tax case. For IRS, and were this a felony, it would inhibit the free flow of information. A CPA/EA in an audit as rep would be accompanied by Counsel. Who would answer the first question, "To the best of my client's knowledge and belief, he is fine today. How are you?"  :-)

It will give you plenty of tips on what the auditors look for. Even though you can't substantiate everything (do to the CLIENT'S actions - not yours) it will give you an outline as to how to prepare for the audit.

If done by a rep and a blatant act, though, it's possible DOJ will rationalize prosecuting under felony 18 USC 1001, which does not require aiding/abetting.

http://www.taxboard.net/SurviveIRS/MSSP

At a meeting with District Counsel, they proposed a partial disallowance, allowing the after hours entertainment but not lunches, which were covered by the employer's letter and guide. I agreed. Attorney said she would draw up documents, settling this and the other matters, then she picked up the diary and noted that no one had ever really looked at it. Our file only had a copy he had given me that first morning. Most of the entertainment was below $25 but he gave great detail.....the year was 1981....a box seat at the Phillies cost $8 so the total was under $25 and no receipt was needed.....so much of his entertainment was that way.

On my way back to the office from that meeting it suddenly hit me: Major League Baseball was on strike that summer! The tax lawyer and I checked the diary and realized it was a sham. We discussed calling the Attorney but he wanted to meet with his client first and have him there. Before he could set an appointment, District Counsel called, noting that of the 47 games listed [he also bought 76er and Flyers tickets] only 5 had happened. She proposed a total disallowance of everything and a 50% or 75% civil fraud penalty [not sure if the penalty could be 75% in those days]. A day later she sent a list of potential witnesses to get subpoenae including names from his diary and ME. My boss called her and asked why I would be a witness: 'to give testimony that our client had turned over the diary.'

We told the client to take his medicine and not go through trial, though he said "I spend a fortune on customers." I knew people who knew him who told me that too, but once a liar, always a liar. He had destroyed his credibility.