6694 wakeup call for all return preparers

I have been "pounding the table" trying to wake up the return preparation industry that there is a new technical paradigm for return preparation that is coming at you like a tsunami. Unless you wake up and make changes, the IRS will hammer you with 6694 penalties that could range from $1,000 to perhaps $25,000 for any tax return in any tax year beginning with the tax returns filed for the 2008 tax year..

Do not assume that you are immune from making a mistake on a tax return that the IRS will view as “reckless” because you did not file a 1099, follow the detailed regulations for substantiation on travel or entertainment expenses, a home office deduction, the correct depreciation formula, or technical requirements for any other personal or business expense. You all have made hundreds of those kinds of mistakes. I represent taxpayers and return preparers in civil and criminal examinations and I am witness to massive negligence by return preparers that today would justify large amount of $5,000 reckless penalties under section 6694(b).

The s—t will not hit the fan until the 2008 tax returns hit the audit cycle in 2010, 2011 and thereafter. The penalties will hit and drive a large body of return preparers out of business and collectible for large amounts of penalties.

Whether you know this or not, the IRS has software that targets return preparer negligence. They check the error rate in the returns you prepare. If the error rate is high, they audit the return preparer in civil and criminal examinations. The IRS does interview the customers of return preparers to check for civil and criminal fraud. Going forward, given the large size of the 6694 penalties, they will go for the penalties.

I am certain that the IRS will be motivated by the large size of the return preparer penalties and that the IRS examination software will be updated to track errors in client’s returns, not only for possible fraudulent returns, but for abusive preparation practices and negligence.

I have criticized your professional organization for lobbying for the “substantial authority” standard when they should have lobbied to reduce the large size of the return preparer penalties. Further, your professional organizations has not giving you the “wake up” call that I am giving you.

It is not only the need for you do prevent negligence on your part (e.g., doing a better job of tracking tax law and regulations, but also the Internal Revenue Manual), YOU WILL HAVE TO BE ABLE TO SUPPORT THE POSITIONS TAKEN WITH AN ANALYSIS OF THE RELEVANT AUTHORITIES whether or not you disclose problematical positions taken to the IRS in compliance with IRS disclosure procedures.

Unfortunately, I have discovered that most of the larger return preparation firms have their “head in the sand” and have not taken any action to reduce the risk of 6694 penalties, including their failure to instruct employees on ways to minimize potential 6694 penalties. That is a formula for “firm self-destruction.”

I appreciate the feedback on this web page and the blog. I have received many speaking invitations. On that topic, if I have enough requests at any specific location, I will endeavor to discuss these issues in person in the form of a seminar.

For those interested, send the request to ab@irstaxattorney.com