New Rules for Tax Preparers Could Impact You

If you find your tax preparer being a little more difficult than usual, the reason may be the Small Business and Work Opportunity Act of 2007, enacted last year. This law changed the rules of the game played between you, the IRS and your tax preparer.

To be sure, the tax system is a game. It's not that dollars aren't real and funding government programs such as national defense and Social Security isn't important, but the nature of system itself is a game:

Assess Current Position. Calculate how much income of various types you earned during the period (and options for taking income and expense during the period).

Assess Wager Options. Evaluate various rules, methodologies and strategies for minimizing tax and the relative risk of each maneuver.

Place Bets. Submit tax calculation and payment to the IRS.

Await Outcome. Wait to see if the IRS audits and/or assesses additional taxes and/or penalties (financial and other).

How the game has changed: The Small Business and Work Opportunity Act of 2007 changed the game, increasing the liability borne by tax preparers, by:

• Making it easier for the IRS to claim that tax preparers were accomplices in helping unjustly lower clients' taxes.
• Raising the financial penalty for taxpayers found to have assisted tax preparers in avoiding taxes.

Why the IRS changed the game: As you are aware, the United States is running a stunning budget deficit. It spends about $1.4 billion per day more than it brings in. As a result, the current total U.S. debt stands around $9.2 trillion, or $30,000 per day for every man, woman and child in the country. This is not good. To remedy the situation, the government has only a few choices: reduce spending, increase income or both.

Well, our elected representatives are not very good at reducing spending. This is evident. On the income side, raising taxes is not politically popular. One option is the tax gap, the difference between taxes due (i.e., those that should be paid under current tax laws if everyone "played by the rules") and those that are actually paid. The last time the IRS went to great lengths to estimate the tax gap was 2001. Then the gap was estimated at $300 billion, i.e., about 85 cents of every dollar due under the law ($2 trillion due vs. $1.7 billion collected).

Closing the tax gap: The tax gap exists because of the complexity of the U.S. tax code (which gives rise to honest errors) and lax IRS enforcement (more people cheat when the likelihood of getting caught is low). Unfortunately, ready solutions are difficult to put in place. First, simplification of the tax code requires Congress to agree on a new code and to potentially put a lot of people out of work (tax advisors and preparers). That's a tough one. Second, greater IRS enforcement, such as more audits, requires raising IRS expenses (and the size of the federal budget). These two are also very unpopular with voters. So a third option is to enlist the help -- or reduce the impact -- of enablers, i.e., tax preparers (gatekeepers).

Tax preparers are privy to, and often craft, tax strategies used by taxpayers. So one way for the IRS to potentially lower the number of "cheats" is to deputize tax preparers. In effect, the new law moves us a little more in that direction. Yes, the tax preparers have borne some risk in assisting tax cheats, but the new law lowers the threshold for determining that a preparer is an accomplice and also increases the financial penalty that can be levied on the preparer.

Deputizing tax preparers: The new law expands preparer penalties beyond income tax returns to all types of returns: employment, excise, exempt organization, estate and gift tax. It also raises penalties ("first tier" penalties increase from $250 per return to the greater of $1,000 or 50% of the income from preparing the return, and "second tier" penalties for willful or reckless conduct in preparing a return increase from $1,000 per return to the greater of $5,000 or 50% of the income from preparing the return) and expands the standard of conduct subject to penalty.

The new law also emphasizes the importance to preparers of understanding the legal basis for positions taken on tax returns, the requirement for taxpayers to disclose certain positions, and the need for preparers to advise taxpayers on various penalties that can apply when a position is taken on a return that may not be supported by existing law.

So although "deputizing" may be a bit of a stretch, the new law may cause your preparer to think a little more about the risk he or she may bear in helping you take an aggressive tax stance to reduce your tax bill.

Sources:

http://www.accountingnet.com/x60258.xml

http://accountant.intuit.com/practice_resources/articles/tax/article.aspx?file=tmdd_TempReprieve2007

http://www.brillig.com/debt_clock/