Registered Tax Return Preparer Ethics Applied To Taxpayer Documentation

December 22, 2011 by  Filed under: Taxes 

The relationship between a tax professional and client is based upon trust. Taxpayers expect confidential treatment of their information. Of course, the professionals in tax preparer employment don’t keep income information completely confidential because it is necessarily conveyed to the IRS. The problem for taxpayers is that they generally wish their financial affairs were entirely private – including from the eyes of government officials.

Whether subconscious or intentional in their privacy concerns, people frequently take shortcuts in the presentation of tax information. That sometimes leads a tax preparer professional to request supporting documentation for certain tax deductions. This isn’t because the client might have lied, but only to verify potential inaccuracies.

When conflicting or doubtful details are revealed, registered tax return preparer ethics demand a reasonable inquiry into the facts and circumstances. An RTRP should not report amounts on a tax return after obtaining direct contrary knowledge. Tax professionals are not trying to make trouble for taxpayers at tax preparation companies. Rather, the objective is keeping taxpayers away from problems with the IRS.

For example, an individual who states that he has no rental income may mention that he owns property other than his homestead. Questioning during tax return preparer work reveals that his nephew lives in the other property “rent-free” by only paying the owner’s property taxes. As anyone who has completed a tax preparer course knows, the property owner has actually incurred reportable rental income.

However, this could become a beneficial situation. For instance, the tax client might have paid for some repairs at what he now discovers is, in fact, rental property. This leads to a potential tax deduction if he is actively involved in managing the property.

Similar tax reporting complexities occur when people have sideline businesses. They may have subcontracted with someone else to handle part of the workload. Accuracy in the execution of tax preparer ethics simply demands that the business owner report all of the income and then subtract the cost of the subcontractor as an expense. Issuing of a 1099 to the subcontractor is often necessary. Tax practitioners should not allow client tax returns to report only net income after subcontracting when uncovering the facts.

By far, the most critical element of tax return preparer ethics unfolds in cases of unrealistic figures presented by clients. An illustration of this is an individual who states that his income from self-employment was $5,000 and that he incurred 20,000 business miles on his personal vehicle. Not only is exactly 20,000 miles suspect, but also this number is too large relative to the income. He basically is expecting the IRS to believe that he spent more money driving to jobs than he charged for his work. An RTRP is not an agent of the IRS, but anyone with this tax preparer license is required to carefully evaluate the reasonable nature of representations to the IRS.

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 tax preparer employment and tax professionals. Access to free questions for the tax preparer professional is available on their website.

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