Thursday, October 22, 2009


In today’s, and tomorrow’s, post I would like to discuss in depth what I, as a veteran of 38 tax seasons, believe to be my legal and ethical obligations, responsibilities and requirements, to my practice, to my clients, and to the IRS and corresponding state authorities, as the paid preparer of federal and state income tax returns.

When a client “engages” me to prepare his/her individual income tax returns he/she is basically asking me to assist him/her in preparing a government report.

Clients provide the information needed to properly and completely prepare this government report in a variety of methods.

Some clients give their preparer everything – information returns, bank and investment statements, bills, receipts, etc – and the preparer must wade through the piles of “stuff” and determine the specific information to report. The typical stereotype of the “shoe box”, with numbers and notes written on cocktail napkins, like Oscar in the “Odd Couple” tv series.

Other clients simply fill out a multi-page tax questionnaire provided by the preparer, and provide no, or minimal, actual documentation.

I do not use a pro-forma tax questionnaire, and never have. I request specific information returns and documentation and provide a variety of generic and specific worksheets for the client to fill out to provide information on medical expenses, charitable contributions, employee business expenses, self-employment income and expenses, rental income and expenses, etc. Most times a client will fill out my worksheet, but sometimes a client will give me a worksheet of his/her own creation or just a sheet of paper with itemized numbers and notes.

Some “engagements” go beyond just preparing the tax returns. In the case of a Schedule C or extensive rental business or involved investments the tax preparer may also be contracted to keep the “books” of the activity during the year.

For the most part I limit my service to the actual preparation of the federal, state and, if applicable, local returns, based in information provided by the taxpayer.

In my opinion, it is my basic obligation and responsibility, to my practice, my client, and the IRS and state authorities, to report all taxable income and claim all allowable deductions and credits, as identified in the Internal Revenue Code, of which I have knowledge, in a manner that is prescribed or allowed by the Tax Code or IRS and state rules and regulations.

I must prepare an honest and accurate return, based on the information provided. I must not knowingly prepare a fraudulent return.

As a paid tax professional I sign each return that I prepare declaring, under penalty of perjury, that the return is “based on all information of which preparer has any knowledge”.

My obligation and responsibility to my client is to calculate the tax liability so that I take advantage of all deductions, credits and “loopholes” available in federal, state and local tax law so that, based on the individual facts and circumstances as presented to me, and within long-term considerations, the client pays the absolute least amount of combined federal, state and local income tax possible.

In the case of a “grey” area of the Tax Code, an item of income, deduction or credit which is open to interpretation, I believe that I am obligated to interpret the law in such a way to provide the maximum tax benefit to my client.

That being said, in situations where the applicable federal or state tax law is “unsettled” or where the application of the law to the facts at hand is ”uncertain” (i.e. open to interpretation), I am obligated to explain the possible effects of the various alternatives to my client. It is the client who must make the final decision about the position to be taken.

While I do somewhat agree that if you think the worst of people you will never be disappointed, only pleasantly surprised - when it comes to approaching the preparation of tax returns I must assume that, unless I have direct personal knowledge to the contrary, the client is telling me the truth.

I do ask my clients for specific information. In the past I have included the following notice has in various client newsletters and mailings -

In order to make sure that you pay the absolute least amount of federal and state income taxes each year I need complete and accurate information from you at tax time.

This means I need specific numbers for deductions you are claiming. ‘Claim the maximum’ or ‘Whatever I am allowed’ or ‘Same as last year’ don’t cut it. The maximum is what you actually paid – and you are allowed what you actually paid! And it is very rare that an expense or number of miles driven for an activity is exactly the same as it was the previous year (although, I will admit, not impossible). I cannot make up numbers for you– I need you to tell me ‘$1023.50’ or ‘$20.00 per week for 50 weeks’ or ‘4638 miles’!

Each year I include in my January client mailing worksheets that may apply to your individual situation. Please fill them out completely and accurately – or provide me with a detailed listing of your deductions in any other format you choose – but do provide me with specific numbers. If you do not give me the proper information and I have to email or write to you this wastes valuable time and delays the completion of your tax return.

I want to make sure you take advantage of all the deductions and credits to which you are entitled – but I can only do this if you give me complete and accurate information

But if you tell me or indicate on a worksheet that your gross income from a part-time sideline business was $3,525, or that your total medical expenses were $6,257, or that you drove 4,206 miles for business I will believe this to be true (again, unless I have direct personal knowledge to the contrary). It is not my responsibility to personally verify all the numbers or statements given to me by a client. I have no obligation, legal or ethical, to audit your return. This is up to the IRS, if they so choose. I am simply preparing the return, to the best of my ability, “based on information supplied by the client”.

I often say to clients – “I don’t need to see the bills, I just need numbers”.

(Please note that I will discuss the concept of “due diligence” in Part II.)

It is my obligation and responsibility to tell clients about the IRS standards and requirements for documenting income, deductions and credits. But that is where it ends.

I will, for example, tell a client that “You can only deduct cash contributions to a church or charity if you can provide a cancelled check, a credit card receipt, a “bank record” (such as a copy of the check on a bank statement or an identifying credit or debit card entry on a bank or credit card statement), or a written receipt from the charity to document the contribution” (and so state on my Charitable Contributions Worksheet), but I do not need to see each and every piece of documentation. I just need, and ask for on the worksheet, a total amount for the year.

Some clients do include letters or statements of acknowledgement from churches and charities with their tax “stuff”, and this is fine. One couple gives me all of their bank statements for the year (which have copies of cashed checks), their check registers, their annual statement from the church, and a pile of letters of acknowledgement for me to go through and add up, which I do for, of course, an additional charge.

I will also tell a client who uses his car for business, either as an employee or in a self-employed activity, that he/she should keep a travel diary to record the name of client, location, business purpose and number of round-trip miles driven on a daily basis. But I do not need to actually see the diary or personally add up all the individual mileage entries in the diary. Again, some clients do give me their diary, or a similar worksheet, and I do run a tape on the individual mileage entries.

And I will tell a client that only unreimbursed “out of pocket” medical expenses are deductible, less any insurance or employer plan reimbursements. But I do not need (nor do I particularly want) to see each and every medical bill and all statements from insurance companies and flexible spending accounts to verify that the expense was not reimbursed. Yet I do receive a “shoe box” full of medical bills and insurance statements (which I really do not want) and will do my best to determine “out of pocket”, and will charge my hourly rate for taking the extra time to do so.

There is some documentation that I do specifically ask to see when preparing a tax return. I want each client to give me –

• W-2 forms (all copies)
All 1099s, 1098s (including C, T, etc), and K-1s from all sources
All year-end statements from brokerage and mutual fund accounts, plus any booklets or other literature provided by brokerage firms and mutual fund houses
• All AVERAGE COST STATEMENTS received from a mutual fund on the sale of fund shares

I also ask for specific documentation in certain circumstances, such as the Closing/Settlement Statement if you purchased, sold or refinanced real estate.

My website – – includes a “What I Need” page.

But as for most itemized deductions (other than real estate taxes and mortgage interest) and rental income and expenses, self-employment income and expenses, and child-care expenses all I request is a “detailed listing”.

And even though I may ask my clients for specific items of documentation (as discussed above) I am not obligated to do so in order to verify information provided by the client. I do so to make sure I, or the client, do not miss anything, especially something that has been reported to the IRS by a third party.


P.S. - While I do want to “hear” comments on this topic, especially from fellow tax professionals, I ask that you please wait until tomorrow’s (Friday’s) post has been published and I have finished having my say before you submit them. Thanks!

No comments: