Jan 2, 2008

Your Tax Return for 2007- your Tax Preparer may be getting personal

The IRS has deputized tax preparers for any returns filed after 1/1/2008 (this appears to include 2007 tax returns (and corresponding information statements and other returns filed through professionals) and deliquent returns filed from this date forward). To emphasize this point, the IRS has published 5 notices and announcements for the new tax preparer penalties and due diligence requirements.

The new rules require the tax preparer to use a realistic possibility standard for items on a return that are not disclosed by a specific statement on a return. However, disclosure will not be a "get out of jail free card." The tax preparer must have a reasonable basis that their position will be supported. This essentially is a change to a 33% assurance requirement to a 51% assurance requirement for the statistic buffs.

Preparers generally can continue to rely on taxpayer representations in preparing returns and can also generally rely on representations of third parties, unless the preparer has reason to know they are wrong. If there is a reason to believe they are hiding something (i.e. client claims no income but drives up to the office in a Ferrari) then the preparer has the diligence to ask some very personal questions.

The best due diligence is to compare your records to the IRS records of Forms W-2, 1099, etc. that are filed each year. They are available for the past 6 years- and will be available for 2007 around the end of May, 2008. At that time, the 2001 documents will fall off line by the IRS. These documents are the minimum to be reported to the IRS: if your documents do not match the IRS documents- you will be audited in some manner.

If you are filing old returns or want to make sure this year's return is minimally processable by the IRS (i.e. gets past audit step #1- match against IRS records), you need a firm that specializes in such returns.

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