Tax season is fast approaching. Tax deadlines for corporations with calendar year ends on extension is September 16, 2013 and the final extension deadline for individuals is October 15th, 2013. 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. It is critically important that you understand the skill and expertise level of your tax preparer. Why, you ask? You reason, they are the professionals and that is the reason you utilize them to prepare your tax returns. The tax codes are impossible to understand and there are too many forms to fill out. But not all preparers are the same. As is true in all things in the marketplace, there are wildly varying degrees of skill level and competency.
Over the last 12 months, clients have come to the office asking to have their tax returns reviewed. These returns were all prepared by a “tax professional.” We’ve discovered numerous foreign bank accounts that were not disclosed; reporting passive real estate losses as active losses by reporting them on a Sub S Tax return 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. On audit, discovery of these items will cost taxpayers additional tax liabilities, interest and penalties. But that is not all. It could cost them potential criminal penalties and jail time as well.
At the bottom of both your federal and state returns is a statement that all taxpayers sign that says in part:
“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements and to the best of my knowledge and belief, they are true, correct and complete. Declaration of preparer (other than taxpayer) is based on all information in which preparer has any knowledge.”
The IRS has several regulations that can be utilized against your signed statement on your tax return. The first is 26 USC Section 7207, which is the misdemeanor provision and says “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 cast 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.” Failing to file a tax return and the filing of a false statement also may give rise to a tax evasion charge.
Should either the state or federal tax authorities audit your tax returns, you as signatory on the tax return, not the professional, will be held responsible for any understatement of tax and the accompanying penalties and interest. So while you may not understand the tax code, your tax professional should. In this instance, the cheapest tax preparation fee and or tax preparation software may not be your best tax prep solution.
Tax professionals should be licensed by the IRS to practice before it. That means 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 U.S. it is important that your tax preparer have international experience as well. Ask questions of your tax professional and ensure that you review your return prior to signing it (or the E-file authorization). Remember, as tax day rolls around, it is what you don’t know that can hurt you.