Tax season is fast approaching. Before you know it the end of the year will be here, and with it, any last minute tax planning. Now is a good time to review your tax preparer as well.
Hire an Experienced Tax Professional
“Given the complexity of tax codes, it is critically important to understand the skill and expertise level of your tax preparer,” said Janathan Allen, Esq., partner in Allen Barron, Inc. and Owner of Janathan L. Allen, APC. “As is true in all things in the marketplace, there are wildly varying degrees of skill level and competency. And errors by incompetent preparers can mean additional tax liabilities, interest and penalties – and even criminal charges and jail time.”
Over the last 12 months at Allen Barron, Allen has reviewed tax returns brought in by prospective clients. These returns were all prepared by a “tax professional” or in some instances were self-prepared with tax preparation software. Errors include foreign bank accounts that were not disclosed; reporting passive real estate losses as active losses via K-1s from Sub S Tax returns allowing the taxpayer to take losses against earned income they were not entitled to; filing three consecutive years of Schedule C’s (self-employed) with losses; taking expenses as business expenses when they were actually personal expenditures, and other serious lapses.
Important IRS Regulations
There are several applicable IRS regulations to be aware of. The first is 26 USC Section 7207, a misdemeanor provision, states, “Anyone who willfully delivers or discloses to the IRS any list, statement or other document known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $1,000 or imprisoned not more than one year, or both.” The second is 26 USC Section 7206(1) which states, “Anyone who willfully makes and subscribes any return, statement, or other document which contains or is verified by a written declaration that it is made under the penalties of perjury and which he does not believe to be true and correct as to every material matter shall…be guilty of a felony and upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation) or imprisoned not more than 3 years or both together with the costs of prosecution.” The third is tax evasion under 26 USC Section 7201, which states, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof, shall in addition to other penalties provided by law, be guilty of a felony and upon conviction thereof, shall be fined not more than $100,000, ($500,000 in the case of a corporation), or imprisoned not more than 5 years or both.”
“So while you may not understand the tax code, your tax professional should. The cheapest tax preparation fee and/or tax preparation software may not be your best tax prep solution,” said Allen, who added that those solutions could actually cost you money. Your tax professional should be an Enrolled Agent (EA), a CPA or a Tax Attorney. The professional should have experience in preparing tax returns as well as representing similar-size clients and client businesses in the event of an audit by a taxing authority. If you are from a foreign country and have moved to the United States it is important that your tax preparer have international experience as well. Remember, as tax day rolls around, it is what you don’t know that can hurt you.