Section 1.6694-1(e)

The following is a quotation from section 1.6694-1(e) of the proposed regulations which indicates that a return preparer can rely on information submitted by a client unless there are specific requirements in the Code or regulations that must be met; in those circumstances, the return preparer must verify that information. The classic example are the specific regulations dealing with travel and entertainment expenses with very specific substantiation requirements. You need to understand that it is going to be very difficult to just plug numbers into return preparation software without checking out the statute and regulations when the 2008 tax returns are filed in 2009 and the years thereafter. A great deal more time will need to be devoted to the prepraration of tax returns and clients will need to understand that they will have to pay for that additional time. This creates a conflict of interest between the return preparer and the client because the extra time is needed to protect the return preparer from the 6694 penalty. The response to the client is that one also needs to protect the client from the 20% negligence penalty. The problem is that this extra effort cannot be done at the last minute. Return preparation clients should be contacted now to see what kind of expenses are being generated so that the research and analysis can be done now. On another point, the reliance cannot be on a legal conclusion, but the "reasonable cause" part of the regulations should be considered when one needs to rely on a tax professional for compex issues and problems. There are also many published IRS positions identifying problematical positions (e.g., tax shelter issues) that will not justify reliance on other tax advisors.


1.6694-1(e) Verification of information furnished by taxpayer or other party --(1) In general . For purposes of sections 6694(a) and (b) (including meeting the reasonable belief that the position would more likely than not be sustained on its merits and reasonable basis standards in §§1.6694- 2(b) and (c)(2), and demonstrating reasonable cause and good faith under §1.6694-2(d)), the tax return preparer generally may rely in good faith without verification upon information furnished by the taxpayer. A tax return preparer, however, may not rely on information provided by a taxpayer with respect to legal conclusions on Federal tax issues. A tax return preparer may also rely in good faith and without verification upon information furnished by another advisor, another tax return preparer or other party (including another advisor or tax return preparer at the tax return preparer's firm). The tax return preparer is not required to audit, examine or review books and records, business operations, or documents or other evidence to verify independently information provided by the taxpayer, advisor, other tax return preparer, or other party. The tax return preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some provisions of the Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintain specific documents) before a deduction or credit may be claimed. The tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit.

-------------------

If you have any questions about the above section of the regulations, send an e-mail to ab@irstaxattorney.com or add comment to this blog.