What on earth is the connection between a vintage cartoon and a paid tax preparer investigation?
Some of us may remember those 1980s G.I. Joe public service announcements, which taught us that knowing is half the battle. Apropos of nothing, vigilant viewers, or those who just watched too much television during the 1970s, may have realized that the would-be pedophile’s voice bore a striking similarity to Freddy’s voice in the old Scooby Doo shows. If that black car had been the Mystery Machine, we’d have known for sure.
Nevertheless, Roadblock, who was aptly portrayed by Dwayne Johnson in a 2013 feature film, had a point. The best way to eliminate the consequences of a dangerous situation is to know how to avoid that situation in the first place. Just like the bad guy in this PSA inquired into a couple of key areas, the IRS looks into three areas to determine if a paid tax preparer investigation is warranted.
Circular 230 Violations
The IRS first published this document in 1921, and it was last amended in 2005. Circular 230 is an arbitrary enforcement tool, because the IRS is essentially the sole authority for what it covers and what it means. However, there are a few judicial decisions that touch on these issues, including Loving v. IRS, a 2014 case from the D.C. Circuit Court of Appeals. The most frequent violations in a paid tax preparer investigation include:
- Making a “false, fraudulent, or coercive statement or claim” in any advertising materials or other publically available documents (Section 10.30(a)(1)),
- Giving any “false or misleading information” to any Treasury official, if the paid tax preparer knows the information is false. Section 10.51(a)(4) covers a broad swath of territory, including tax returns, supporting documents, statements made to investigators, and “any other document or statement, written or oral,”
- Willfully participating in any tax evasion (Section 10.51(a)(6)), a directive that relates back to the post on paid tax preparer duties, and specifically the duty to interview clients and take what they say with a grain of salt, and
- Contemptuous conduct, which Section 10.51(a)(12) broadly defines as abusive language, false accusations, and/or malicious statements.
Disbarred attorneys, non-practicing accountants, and other unlicensed professionals who collect fees to do taxes may also find themselves at the center of a paid tax preparer investigation.
Using The Agency’s Name in Vain
31 U.S.C. 333 prohibits anyone from implying that the IRS in any way endorses or approves of their services or activities.
While not as common as the other two areas discussed, there are a surprising number of these incidents in paid tax preparer investigations. Typically, advertising disclaimers are not clear enough or the preparer uses a prohibited IRS logo.
EITC Due Diligence
This is the big one. There is a lot of economic pressure on paid tax preparers to deliver big refunds, and shortcuts and the Earned Income Tax Credit is the best way to deliver the goods. However, true to our “knowing is half the battle” theme, these kinds of paid tax preparer investigations are rather easy to avoid, if there is clear evidence of due diligence, which is:
- A completed and submitted eligibility checklist
- Correct computation
- Actual knowledge of key facts
- Plenty of records
Due diligence is not a guarantee that the EITC calculation is 100 percent true and accurate, but rather a guarantee that the paid tax preparer has done everything within reason to ensure accuracy and reliability.
In a future post, we’ll examine more aspects of paid tax preparer investigations, including IRS methods, the possible penalties, and some possible resolutions.
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