What is a Tax Preparer?
For my first article through the Tax TeleGraf I want to get down to the basics with the facts and philosophy of what a Tax Preparer isn't, what it is, and what it should be. There are incorrect assumptions from the general public surrounding what a Tax Preparer is expected to do and it's time to set it straight. This article is for everyone - taxpayers using a preparer, taxpayers not using a preparer, Tax Preparers, and Grandma Jo (my grandma's name is actually Jolene).
What a Tax Preparer Isn't
An auditor/bookkeeper. If you engage a Tax Preparer to prepare your return the Preparer is not required to audit every number you give them and make sure your books include every expense and income item applicable. Let me explain. Unless a Tax Preparer knows something is incorrect, inconsistent with another fact or assumption, or incomplete then the Tax Preparer "may rely in good faith without verification upon information furnished by the client." That excerpt is from Circular 230 which you'll learn more about later. This fact must become common knowledge and the norm. Every number given to a Tax Preparer is taken at face value unless the Tax Preparer knows they need to inquire further and exercise due diligence.
Fellow Tax Practitioners love to blur the line between what a Tax Preparer is supposed to do and what an auditor/bookkeeper does. Why is that? Could be because a Tax Preparer's value drops when it's known that all they really are is a glorified number inputter so they must create an illusion of being more than that. If a client engages to prepare a tax return then the client is ultimately responsible for what numbers are on the tax return if those numbers are what the Tax Preparer uses. Sorry, your tax fraud is not shielded by the fact that a Tax Preparer's signature is on your return.
A Tax Advisor. A Tax Preparer is not a Tax Advisor. Say it with me again, a Tax Preparer is not a Tax Advisor. Think of this as Rule #1 and #2 in Fight Club for Tax Professionals: A Tax Preparer does not talk about tax advice. A Tax Preparer must set the expectation that he/she is not required to give tax advice because they prepared a tax return for you. I know that is a big shocker to every taxpayer out there but that's the way it is. Does this mean a Tax Preparer shouldn't give tax advice? No. They most certainly can if they choose to. However, the general public that use Tax Preparers must know is that Tax Advice/Planning should be seen as a separate service or engagement.
A Tax Preparer's job is to prepare a tax return with the information provided by the client and that should be the only expectation. If you disagree then next time you get your oil changed ask the mechanic if they can replace the brakes while they have the car lifted up, no extra charge. Or maybe next time you're getting your physical ask the Doctor to stitch up the gash on your head and expect to not pay for it. Get the picture? Just because the professional can do it, doesn't mean they have to. At my firm, we love to play the Tax Advisor role through our Tax Consultation service but that service is different from our Tax Preparation Service. If you waited until it's time to prepare your return for us to be a Tax Advisor and a Tax Preparer then in the stern words of Rooster Cogburn "I can do nothin' for you, son."
What a Tax Preparer Is
What is a Tax Preparer? A Tax Preparer is someone who prepares tax returns - you saw that coming, didn't you? Let's dig a little deeper. Who can prepare tax returns as a service for money? Anyone with a Preparer Tax Identification Number aka PTIN. You don't have to have a specialized education or training to be a Tax Preparer. Jack, the high school dropout, can apply for a PTIN and be able to file tax returns for money in 15 minutes and a $50 fee (as long as Jack is 18). Sketchy Uncle "Cash Only" Ron can prepare your tax return if he has a PTIN. Suddenly, you come to the realization that almost anyone can be a Tax Preparer. Have a shocked look on your face? Surprise! Look around, you're on Candid Camera! Only kidding.
Enter the Office of Professional Responsibility (OPR). The OPR regulates Tax Preparers based on the rules set by Circular No. 230 from Title 31 Subtitle A, Part 10. Say what now? Circular 230 are regulations that the following individuals, but not limited to, must follow: State-licensed attorneys and Certified Public Accountants (CPAs) who interact with tax administration, Enrolled Agents (EA), Enrolled Retirement plan Agents, Enrolled Actuaries, those providing appraisals in connection with federal tax matters, individuals who represent taxpayers before IRS examination, customer service, and Taxpayer Advocate Service in connection with returns they prepared and signed, individuals who give written advice that has potential for tax avoidance or evasion, individuals that submitted a power of attorney in connection with limited representation of a taxpayer before the IRS. Might as well be "everyone who has anything to do with tax returns or has a PTIN."
Time to get your attention back. How is a Tax Preparer supposed to operate when preparing a return? If a Tax Preparer finds an error or omission in documents given by a client, they are to advise the client promptly of what is wrong and advise the client on the consequences of not correcting the noncompliance. The Tax Preparer should let you know if something is not "up to code" and should tell you what happens if you don't get up to code. A Tax Preparer cannot willfully, recklessly, or through gross incompetence sign a tax return that knows or should know contains a position that: lacks reasonable basis, is an unreasonable position, or is a willful attempt to understate the tax liability/intentional disregard of rule and regulations. Same rules above applies for tax advice given to a client. If there are potential penalties based on the Tax Preparer's advice/return they prepared and signed, then the Tax Preparer must inform the client on them and how to avoid them if possible.
What a Tax Preparer Should Be
Competent and exercise due diligence. A Tax Preparer should know how to prepare your return or consult with experts before they start preparing your return. If there is ever a position/number presented to the Tax Preparer then the Preparer should know based on experience whether more questioning is needed. In short, a Tax Preparer should be a mix between everything stated under "What a Tax Preparer Is" section and part "What a Tax Preparer Isn't" section, shaken, not stirred.
Not everything should be taken at face value but the Tax Preparer can only do so much without becoming an auditor or bookkeeper. That line will always be blurry because a Tax Preparer should deliver great service where they may dip into the role of "auditing" specific numbers or making adjustments that should be made to the books in order to prepare an accurate tax return. Is it required that a Tax Preparer play an auditor/bookkeeper role? If you read any of the above the answer is no. In the end, when it comes to Tax Return preparation, we can't audit every number. As much as we'd like to, that is your job to provide an honest number.
Link to Circular 230: https://www.irs.gov/pub/irs-pdf/pcir230.pdf
