Let us say that a client has filled out one of my worksheets stating that the rent collected for the year on the upstairs apartment of a two-family house is $9,600 – or $800 per month. But, when talking to the client he mentions to me that the rent he gets from the tenant is actually $1,050 per month. I now have “direct personal knowledge to the contrary”.
Or perhaps I have a client who does occasional carpentry on the side and gives me a sheet of paper listing his income and expenses that shows $3,500 as total gross receipts for the year. However, in July of the tax year in question I had paid the client $4,000 to install new kitchen cabinets in my home. I have “direct personal knowledge to the contrary” that the client’s gross income for the year was at least $4,000. (To be fair, the client may have split the work with another part-time carpenter, giving him $1,000 for his labor, and is claiming on his worksheet only his share of the fee and not deducting out the $1,000 paid to the other carpenter in his list of itemized expenses – but I must ask the client to find this out.)
And a third possibility – I have a client who each year only reports, to me and to the IRS and NJDOT, income from his W-2 job and some interest and dividends from 1099s. I have another client who had work done on his rental property during the year. Included in the cancelled checks for the repairs that this client shows me is one to the first client for $600 for painting the apartment. The second client tells me that the first client is a self-employed painter on the week-ends. I now have “direct personal knowledge to the contrary” that the client has additional, unreported, taxable income.
In each of these cases I must tell the client that I have “direct personal knowledge to the contrary” and that if he wants me to prepare his tax return I must report the correct amount of income.
Now if one client just happens in passing to mention that another client does not report all his income, but the “complaining” client has no first-hand knowledge of the truthfulness of this statement and is just making a guess based on what he thinks may be true, this is pure hearsay and definitely not “direct personal knowledge to the contrary”. In my opinion I am not even obligated to ask the other client about this contention.
While the Internal Revenue Service considers the tax preparation community as a “stakeholder”, as a tax preparer I am not in any way a representative or agent of the Internal Revenue Service or any state tax authority.
My only obligations and responsibilities to the IRS or a state are, as stated in Part I, “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” – basically to prepare an accurate and honest return - and to comply with the standards required of all tax preparers, unenrolled and otherwise, outlined in IRS Publication 470 and IRS Circular 230.
While, as previously mentioned, I am not obligated or required to personally verify all numbers entered on the 1040 (or 1040A), I am required to do what is called “due diligence” when it comes to information provided by the client. What this means is that I must -
• evaluate information received from clients,
• apply a consistency and reasonableness standard to the information, and
• ask additional questions if the information appears incorrect, inconsistent or incomplete.
Obviously, if a client says or indicates something that does not make sense, or does not seem reasonable, I must ask questions. And if a new client comes in who drives the latest model Mercedes Benz, is wearing a $500 suit and a $5,000 Rolex, and lives in a $1 Million + house, but claims only $50,000 in income for the year, I must dig deeper.
But if what a client tells me, or indicates on a worksheet, appears to me to be reasonable considering the individual facts and circumstances than I do not need to go any further.
When it comes to the Earned Income Credit I am required to be a bit more “due” in my “diligence”. As a side comment, I do not think it is fair for the IRS to require tax preparers to determine if an individual is eligible for federal welfare (which, after all, is what the EIC is).
I must sign all returns that I have prepared for a fee.
I cannot endorse or negotiate a client’s refund check.
I must not charge an “unconscionable” fee (are CPAs and Henry and Richard aware of this?).
If I take a position on a tax return that is excessively controversial, one that may be contrary to regulation, I must attach to the return a schedule or statement disclosing the controversial position taken.
“I collect nonpublic personal information about you from (1) information I receive from you on work-sheets and other documents that I use in preparing your tax return, and (2) information about your transactions with me or with others.
I do not disclose any nonpublic personal information about you to anyone, except as permitted by law.
I am the only person with access to your personal and account information. I maintain physical, electronic and procedural safeguards that comply with federal standards to guard your information.”
Finally, as a member of the National Association of Tax Professionals I am obligated to comply with the Association’s “Standards of Professional Conduct”. The purpose of these standards is to establish a threefold responsibility of members –
“Our first responsibility is to our clients. Members should make every effort to protect the interests of the client and advise the client when the client is taking the wrong course of conduct. The client is responsible for any decisions made when the tax return is prepared. When the client signs the tax return, it has the force of an affidavit.
The second responsibility is to the member himself. Members should conduct their practice so that it will not jeopardize their professional reputation or self-respect. The member should not be unreasonable in requiring proof of statements made by the taxpayer.
The third responsibility is to the government. In this respect, a member should always bear in mind the member is governed by the law, regulations, and decisions that make up their field of tax practice.”
The document goes on to list specific examples of standards of ethical conduct, similar to those imposed by the Internal Revenue Service.
Before I end - What about the client?
A 1040 client also has obligations, responsibilities and requirements regarding the return. In the letter that I give to clients with their finished returns I state –
“There returns are subject to review and examination by the IRS and appropriate state tax agencies. We accept responsibility for the clerical and mathematical accuracy of all returns I have prepared. However, the burden of proving the facts reported on your tax return rests with you. You are responsible for keeping all of the necessary documentation of the income and deductions claimed on these returns for at least three (3) years.”
This letter also says –
“Please examine these returns carefully to be sure all items of income and deductions have been accounted for properly. You are responsible for all the information reported on the returns. If you find anything that is not in order, or that you do not understand, contact us immediately. It is extremely important that you verify the accuracy of all Social Security numbers on the returns before mailing.”
As the NATP Standards of Professional Conduct quoted above says – “The client is responsible for any decisions made when the tax return is prepared. When the client signs the tax return, it has the force of an affidavit.”
Bottom line - you should not take the finished returns from me, or your tax professional, and just sign and mail without actually looking at them. You should carefully review all the forms and schedules that make up the returns before you sign and send.
PS – Now your comments are welcome and solicited!