Basic Due Diligence Requirements for Tax Preparers
Christmas usually comes a little late for most third-party tax preparers, as most of these professionals do the bulk of their business in the first quarter of the year. Although various do-it-yourself platforms, such as TurboTax, have cut into their market-share over the past several years, there are still lots of people with little time, financial literacy, and/or English proficiency who flock to a neighborhood tax preparer almost as soon as they receive their W-2s.
But for several reasons, this time of year is not as holly jolly as it used to be. There’s the aforementioned market shrinkage, which means there is more pressure on tax preparers to deliver big refunds in order to keep business coming in the door. Moreover, not all the clients are on the up-and-up, as some of the people who saunter into a tax preparer are looking to commit some level of tax fraud and they need someone to take part of, or most of, the blame if things go sideways.
The biggest bummer may be that, since 2011, paid tax preparers have been in the crosshairs of the IRS. So, as if there wasn’t enough to worry about, a friendly neighborhood auditor might come snooping around. More on that in subsequent posts. But for now, let’s examine the duties of the average tax preparer, because that’s where it all starts.
If trouble comes, it’s usually related to the interview in some way.
Before they even consider filling out forms, tax preparers must interview their clients to determine not only which returns to file, but also the contents of the return. Substantial failure in either area usually means stiff penalties. In both these areas, preparers may reasonably rely on the information that the clients provide, but willful blindness is not a defense, and neither is asking the wrong questions. The four main inquiries are:
- Deductions, and
It’s a lot easier for a tax preparer to interview existing clients, because the previous year’s return is available as a baseline. If the prior return is unavailable or unreliable, the preparer can probably rely on any information that raises no red flags.
Also, be on the lookout for necessary schedules and supporting forms. If the client had any kind of business, had any overseas assets, or did any buying or selling of any tangible assets, more work is required.
Gather Financial Information
This element, and the one that follows, are fairly objective, because if one does the right things during the interview, the other steps often fall into place.
Most tax preparer clients only have W-2 or 1099 income, although some people may also have some interest income and nominal capital gains. It’s also not unusual to see at least a little bit of gambling income, or more commonly, some gambling losses.
Expense and deduction documents may be a little more complex, as there are still some people who bring a shoebox full of receipts or some spreadsheets that only they can adequately translate. The preparer also needs hard information when it comes to Social Security numbers and other data. You simply cannot take the client’s word for it.
File Completed Forms
There’s no excuse for missing deadlines, and computer glitches (the 21st century equivilant of “my dog ate my homework”), whether they are yours or the government’s, are no defense. There’s also no excuse for incomplete forms, because if you fail to properly account for all the information that either the client provided or you should have discovered through exercise of due diligence, guess who the IRS is going to blame?