Due Diligence Obligations In Registered Tax Return Preparer Work

Tax return preparers are not required to verify all the figures presented by their clients. But they are obligated to conduct some due diligence in registered tax return preparer work.

Tax professionals evaluate information that clients present for income and deductions. The most obvious measure undertaken is gathering facts about income reported by paying parties. These reporting forms are sent to taxpayers and the IRS. Consequently, a critical tax preparer job is presenting income on a person's return that matches third-party reports.

Taxpayers often provide evidence of their itemized deductions. This includes a Form 1098 showing mortgage interest paid, a receipt for real estate taxes, and letters from charitable organizations indicating donation amounts. However, an RTRP practice may accept a written statement from a taxpayer listing these deductions. The duty of the tax preparer is applying a reasonable standard. For example, someone with only $50,000 of income who conveys mortgage interest of $33,489 encourages some questions.

Due diligence becomes most important in a tax preparer career when dealing with refundable tax credits. The IRS has recognized these situations as common opportunities for abuse by taxpayers. An example of diligent extra effort is assurance of children's ages for the additional child tax credit. Another case demanding careful inquiry by a tax preparer professional entails the American Opportunity Credit, which is only available for education expenses of a dependent when that person is studying for a degree.

By far, the major area of special due diligence is when the Earned Income Tax Credit is encountered. The IRS requires specific inquiries by tax preparers of individuals who appear to qualify for this tax credit. The main concerns relate to qualifying dependents claimed by taxpayers.

Another occasional event involving a due diligence obligation occurs when a tax practitioner takes a controversial position regarding a tax item that isn't entirely clear in the Tax Code. In these instances, tax preparers must disclose to clients that the opinion may not have a well-established basis.

The burden of proving facts on tax returns ultimately rests with taxpayers. However, tax return preparers should advise clients when their course of conduct is apparently imprudent. A client is responsible for final decisions made in preparation of the tax return. When the taxpayer signs a tax return, it has the force of an affidavit. Clients should not sign completed returns without reviewing that all applicable forms and schedules are complete. But tax professionals have a duty to recommend this action.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for registered tax return preparer work and tax professionals. Access to free questions for the tax preparer job is available on their website.