IRS Focus on Information ReportingMs. Greta P. Hicks
June 20, 2013 — 1,728 views
Hottest Topic on the Web? Information Reporting…Here’s Why
In reviewing CPE offerings, articles and announcements, the topic of preparing Forms 1099 and Form W-9 occurs more often than other tax related subjects. One reason may be that there has been little tax legislation the past two years, but the more likely reason in the Internal Revenue Service’s continued, increased and renewed emphasis on perfecting the information reporting system.
The long-term goal of the IRS is to have a tax system that is designed to enable the IRS to calculate the tax based on the W-2s and information documents it receives. If looking at the increased number of times information reporting has been included in recent tax bills, it is easy to see the direction the IRS and Congress are heading. Please see:
- Energy Improvement and Extension Act of 2008, PL 110-343, IRC 6045,
- Housing Assistance Act of 2008, PL 110-289, and
- Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.
The chairman of the Information Reporting Program Advisory Committee (IRPAC) confirms this hypotheses in their most recent report, “As legislative action places increased focus on information reporting and its key role in closing the tax gap and bringing all taxpayers into compliance with ever-increasing complex tax laws…” A copy of the 2011 IRPAC Public Report is available on the IRS website at www.irs.gov.
Two key phrases in the chairman’s statement are “closing the tax gap” and increasing “compliance.” Information reporting is one of the key tools used to meet these two IRS goals.
Generally, the taxpayer is the person responsible for securing Forms W-9, as well as preparing Form 1099 and information on the income tax return, but by placing more far-reaching changes to income tax forms and Circular 230. New responsibilities have been placed on the paid return preparer.
For example, the tax forms have the following questions:
- Did you make any payments in 2012 that would require you to file Form(s) 1099?
- If yes, were they filed?
- If blank or no, would you think that the IRS computer would select this entity audit?
- Or, the audit of all clients of that preparer?
- Or, a query from the Return Preparer Office or the Office of Professional Responsibility (OPR)? Per IRS News Release, IR-2010-107, the Return Preparer Office works in partnership with the Office of Professional Responsibility.
Circular 230, §10.22, Diligence as to accuracy, states: “A practitioner must exercise due diligence – 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.”
Historically, the IRS has led paid preparers to believe that they are not required to audit the client before preparing a tax return. Has that practice changed? The IRS is now going door to door and reviewing a return preparer’s records to verify that “due diligence” has been practiced. The IRS is looking to see if we made what they consider the proper follow-up questions to client-submitted documents. The IRS is calling these visits the “IRS Return Preparer Initiative.”
Focus is on Preparers
In November 2011, the IRS sent out more than 21,000 letters to tax return preparers nationwide to remind them of their obligation to prepare accurate tax returns on behalf of their clients.
During the 2012 filing season, “IRS representatives visited approximately 2,100 tax return preparers who received the above letters to further discuss their responsibilities as a return preparer and to verify their compliance with existing return preparer and e-file requirements.”
The IRS stated the focus of these visits was: “on the return preparer’s activity; not on the taxpayers’ reporting compliance. The IRS is inspecting the taxpayers’ returns to ensure the tax return preparer’s compliance with the preparer requirements under the Internal Revenue Code (IRC) and related regulations. Taxpayers generally will not be contacted as a result of a return preparer visit. Taxpayer contacts resulting from these visits will be to confirm potential violations by the return preparer that may result in the imposition of penalties against the tax return preparer.”
The IRS believes: “tax return preparers should understand the underlying substantive law affecting an item of income or deduction. Tax return preparers must exercise due diligence in preparing or assisting in the preparation, approval and filing of returns, documents, affidavits or other papers relating to IRS matters. Tax return preparers also must exercise due diligence in determining (1) the correctness of oral and written representations made by the tax return preparer to the IRS, and (2) the correctness of representations made by the tax return preparer to the client with reference to any matter administered by the IRS. A tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.”
Additionally, the IRS sends out warning letters to those paid preparers who do not submit Form 8867 with earned income tax credit (EITC) returns. “Penalties will be assessed for 2012 returns.”
Note: The due diligence requirements for the EITC are greater than normal due diligence during return preparation. An online EITC Due Diligence training module is available to help paid preparers avoid penalties.
An additional disclosure form has become a part of the return preparation process and thereby a part of the return preparer’s due diligence requirements. Unlike Form TD F 90-22.1, Foreign Bank and Financial Account Report, which is filed separately in June, the Form 8938, Statement of Specified Foreign Financial Assets, is submitted, when applicable, as a part of an income tax return package and thereby becomes a part of the preparation process.
The IRS has announced that it plans to continue the Return Preparer Initiative during the 2013 filing season.
Potential Issue: The IRS will request that preparers have available tax forms that they prepared in 2012 for their clients along with related work papers. Attorneys and CPAs are discussing the possibility of unauthorized disclosure of confidential tax information occurring during this IRS visitation. Consult with your attorney regarding this potential issue.
Resources available on www.irs.gov include:
- Third Party Reporting Information Center,
- Reporting Program Advisory Committee Public Report (IRPAC),
- IRS Letters and Visits to Return Preparers – FAQs Filing Season 2012, and
- EITC Due Diligence Training.
Ms. Greta P. Hicks
Greta P Hicks CPA
Greta P Hicks is a former IRS Examination manager and Ms Hicks currently serves on the Editorial Board of the Texas Society of CPAs and is Tax Editor of Today’s CPA. Greta is active on the TSCPA IRS Relations Committee and teaches seminars on IRS.