bit 23 prac proc pm 2012

Basic Income Tax Practices and Procedures 23-1

Practices andProcedures S e s s i o n 2 3

AAJ J J JA I IA

I IA I IA I IA I IAI IAI IA

Form OMB No. 1545-1629

Department of the Treasury AttachmentInternal Revenue Service Sequence No.Taxpayer's name(s) shown on return

Form (2011)

F 1/9/12

MXA

Taxpayer's social security number

For the definitions of the following terms, see

Enter preparer's name and PTIN

If you checked on line 2, the taxpayer take the EIC. Otherwise, continue.

Does the taxpayer (and the taxpayer's spouse if filing jointly) have asocial security number (SSN) that allows him or her to work or is



If you checked on line 5a, go to line 5b. Otherwise, skip line 5b and go to line 6.

If you checked on line 5a and on line 5b, the taxpayertake the EIC. Otherwise, continue.

Is the taxpayer's


Could the taxpayer, or the taxpayer's spouse if filing jointly, be a of another personfor 2011? If the taxpayer's filing status is married filing jointly, check "No." Otherwise, see Rule 10

If you checked on line 7, the taxpayer take the EIC.Otherwise, go to Part II or Part III, whichever applies.

Is the taxpayer's filing status married filing separately? ....................................

valid for EIC purposes? See the instructions before answering ................................

Is the taxpayer filing Form 2555 or Form 2555-EZ (relating to the exclusion of foreign earned income)? ..........

Was the taxpayer a nonresident alien for any part of 2011? ..................................

Is the taxpayer's filing status married filing jointly? .......................................

more than $3,150? See Rule 6 in Pub. 596 before answering. ............

(Rule 13 if the taxpayer does not have a qualifying child) in Pub. 596 before answering ...................

For more information about Form 8867, see www.irs.gov/form8867To be completed by preparer and filed with Form 1040, 1040A, or 1040EZ. 177

Pub. 596.Investment Income Qualifying Child Earned Income Full-time Student

1

2 Yes No

"Yes" stop; cannot

3

Yes No

"No" stop; cannot

4 Yes No

"Yes" stop; cannot

5 a Yes No

"Yes"

b Yes No

"Yes" "No" stop; cannot

6 investment income Yes No

"Yes" stop; cannot

7 qualifying child

Yes No

"Yes" stop; cannot

For Paperwork Reduction Act Notice, see instructions. 8867

Part I All Taxpayers

Paid Preparer's Earned Income Credit Checklist8867

2011

23-2 Practices and Procedures Basic Income Tax


Lesson I: Preparer Penalties ........................................................................... 23-6

Who Can Be Penalized? ...............................................................................................................23-8

Violations .......................................................................................................................................23-8

Understatement of Liability ................................................................................................23-8

Preparer Negligence ..........................................................................................................23-9

Willful or Intentional Disregard ...........................................................................................23-9

Lesson II: Due Diligence Penalties ............................................................... 23-11Form 8867 ...................................................................................................................................23-11

Calculation of the Credit ..............................................................................................................23-11

Knowledge of Eligibility ................................................................................................................23-11

Recordkeeping ............................................................................................................................23-12

Lesson III: Copies and Signatures ................................................................ 23-14Client Copy ..................................................................................................................................23-14

Preparer Signatures, PTINs, and EINs........................................................................................23-15

Lesson IV: Preparer Recordkeeping .............................................................. 23-16

Lesson V: E-fi le Compliance .......................................................................... 23-17Electronic Return Originators ......................................................................................................23-18

E-fi le System Integrity ......................................................................................................23-18

Notifi cation of Rejects ......................................................................................................23-19

Signature Collection .........................................................................................................23-20

Recordkeeping.................................................................................................................23-20

Taxpayer Information .......................................................................................................23-21

Lesson VI: Power of Attorney ....................................................................... 23-22Requirements ..............................................................................................................................23-23

Form 2848 ...................................................................................................................................23-23

Part I - Power of Attorney .................................................................................................23-24

Part II - Declaration of Representative .............................................................................23-24

Contents


Lesson VII: Tax Information Authorization .................................................. 23-25

Form 8821 ...................................................................................................................................23-26

Lesson VIII: Safeguarding Taxpayer Information ........................................ 23-27

Penalties ......................................................................................................................................23-29

Session 23 Summary ..................................................................................... 23-31

Session 23 Knowledge Check Answers ......................................................... 23-35


IntroductionThis session covers the practices and procedures, or rules and regulations, involved in practicing as a paid tax return preparer. Practices and procedures are often referred to as “practice before the IRS.”

We look at various rules and their associated penalties as they apply to all tax return preparers, including:

Registered Tax Return Preparers (RTRPs)

Enrolled Agents (EAs)

Certifi ed Public Accountants (CPAs)

Attorneys

ObjectivesAfter completing this session, you will be able to

Defi ne “tax return preparer”

Recognize willful or intentional disregard of IRS rules leading to an understatement of taxes

Recognize the Earned Income Tax Credit (EITC) due diligence requirements

Recognize the requirements for providing a copy of the tax return to the taxpayer

Recognize the requirements for signing a tax return

Recognize the requirements for including tax identifi cation numbers (TINs) on a tax return

Recognize the rules governing tax return copies and/or lists of returns prepared by a tax preparer

Recognize e-fi le procedures

Recognize the rules governing powers of attorney

Recognize the rules governing Form 8821, Tax Information Authorization

Recognize the rules for safeguarding taxpayer information

Identify various tax return preparer penalties associated with violating the IRC rules and regulations

Additional information can be found in the following specifi c Internal Revenue Codes (IRCs) and the associated Internal Revenue Regulations and Revenue Procedures: §6694(a) §6694(b) §6695(a) §6695(b) §6695(c) §6695(d) §6695(g) §7216


Lesson I: Preparer PenaltiesIncome taxes and income tax return preparers are generally governed by a set of rules and regulations outlined in United States Code, Title 26, InternalRevenue Code (IRC). In order to ensure the integrity of the U.S. income tax system, the Treasury Department and the IRS are tasked with ensuring that both taxpayers and tax return preparers abide by these rules. The intention of the rules governing tax return preparers is to protect individual taxpayers, tax preparers, and the federal government from unscrupulous tax preparers.

Preparers who break the rules are subject to penalties that vary based on the severity of the infraction. In most cases, the penalty is a fi ne with a dollar amount as low as $50, with an annual maximum amount of penalty. Figure A shows a summary of these penalties. Details are provided throughout this session.

In addition to the penalties that can be assessed, the IRS can also suspend or disbar a tax return preparer from practice for varying lengths of time. These regulations are intended to weed out the few disreputable tax return preparers that are in the system.


Figure A - Tax Return Preparer Penalties

Conduct Code Section Penalty

Understating the taxpayer’s liability due to unreasonable positions

6694(a) The greater of $1,000 or 50% of the income derived by the preparer for each return or claim for refund

Understating the taxpayer’s liability due to willful or reckless conduct

6694(b) The greater of $5,000 or 50% of the income derived by the preparer for each return or claim for refund

Failing to furnish a copy of a return or claim to the taxpayer by the time such information is presented to the taxpayer for signature

6695(a) $50 for each return or claim; not to exceed $25,000 per year

Failing to sign a return or claim 6695(b) $50 for each return or claim; not to exceed $25,000 per year

Failing to provide identifying number on a return or claim 6695(c) $50 for each return or claim; not to exceed $25,000 per year

Failing to keep a list or copy of the returns prepared for three years after the close of the return period

6695(d) $50 for each return or claim; not to exceed $25,000 per year

Failing to file correct information returns under IRC section 6060, which requires individuals who employ tax return preparers during a return period to file information returns providing the name, identifying number, and place of work of each preparer

6695(e) $50 for each failure to file and each missing item on the return unless it is shown that such failure is due to reasonable cause and not due to willful neglect; not to exceed $25,000 per year

Negotiating or endorsing a federal income tax check issued to a taxpayer

6695(f) $500 for each check

Failing to meet EITC due diligence requirements 6695(g) $500 for each failure to comply with the EITC due diligence requirements1

Promoting abusive tax shelter 6700 The lesser of $1,000 per activity or 100% of the income derived from each activity

Aiding and abetting an understatement of tax 6701 $1,000 per taxpayer if a non-corporate taxpayer ($10,000 if a corporate taxpayer)

Improperly disclosing or using information furnished for, or in connection with, the preparation of a return2

6713 Civil penalty - $250 for each disclosure; not to exceed $10,000 per year

Recklessly and knowingly disclosing or using information furnished for, or in connection with, the preparation of a return2

7216 Criminal penalty - Guilty of a misdemeanor; upon conviction, not more than $1,000, not more than one year in prison, or both; plus prosecution costs

Willful delivery or disclosure of fraudulent or false documentation to the IRS

7207 Guilty of a misdemeanor; upon conviction, not more than $10,000 if non-corporate ($50,000 if a corporation), not more than one year in prison, or both; plus prosecution costs

Corruptly or by force or threats of force interfering with the administration of the Internal Revenue Code

7212(a) Upon conviction, not more than $5,000, not more than three years in prison, or both; plus prosecution costs If only by threats of force - upon conviction, not more than $3,000, not more than one year in prison, or both; plus prosecution costs

Court finding of any of the following for which injunctive relief is appropriate to prevent recurrence: Misrepresenting experience or education as a preparer or eligibility to practice before the IRS; guaranteeing payments of refunds or allowance of credits; engaging in fraudulent or deceptive conduct that substantially interferes with the proper administration of the Internal Revenue laws; engaging in conduct subject to IRC sections 6694 or 6995 penalties or criminal penalty under the IRC

7407 Court action to stop preparer from performing the conduct Stop preparer from acting as a tax preparer for extreme or repeated violations

1 The penalty amount increased from $100 to $500 for returns required to be filed after December 31, 2011. 2 These infractions are related but IRC section 6713 imposes a civil penalty and 7216 imposes a criminal penalty.

Protection for 6694(a) and other penalties 1) Substantial authority – The authorities supporting a position carries more weight than the authorities opposing the position. 2) Adequate disclosure 3) Reasonable basis – The preparer has authority that reasonably supports their position. 4) Had no reason to know


Who Can Be Penalized?

Individuals covered by the IRS defi nition of a tax return preparer are subject to the rules and regulations. RTRPs, EAs, CPAs, and attorneys can all be tax return preparers. A tax return preparer is defi ned by IRC as

An individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund.

Owners of tax preparation services are also covered by this regulation. Currently, these regulations do not include preparers that work as volunteers for the Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), and Low Income Taxpayer Clinic (LITC)programs.

Violations

Let’s review the broader tax return preparer regulations and learn what determines a violation of the rules.

Tax preparers are required to complete a tax return that is true and accurate to the best of their knowledge. This means preparers must know the rules that apply to the tax concepts they are dealing with on an individual’s tax return. If they do not know the rules, they need to know how to look up the information in IRS materials. In addition, tax preparers should ask questions of the taxpayer to ensure they have all the information necessary to create an accurate tax return.

Understatement of Liability

When determining a position on a tax return, a tax preparer is generally only required to follow the “more likely than not” standard set by the IRC. The “more likely than not” standard refers to a tax preparer’s confi dence that the position taken on the tax return can be supported by the authorities. Authorities include the tax code, tax regulations, revenue procedures, internal revenue notices, and tax court decisions. Authorities do not usually include IRS publications. However, on common positions such as including a W-2 on a tax return, the tax preparer can rely on common industry practice and IRS publications for advice.

A position on a tax return is how an item is being treated on the return, and is generally related to how it is reported.The term “position” is often used when looking at tax shelters, but all tax returns have positions. For example, reporting income from a taxpayer’s Form 1099-MISC directly on their Form 1040 is a “position.”


Preparer Negligence

When completing a tax return, a tax preparer is negligent in following the rules and regulations if they knew, or should have known, the specifi c rules regarding a position on a tax return. The negligence penalty for a tax preparer is the greater of $1,000, or 50% of the income derived from the tax return. Negligence occurs when a tax preparer ignores information from the taxpayer, or the IRS rules or guidelines that determine how a tax position should be handled.

Example: Misha is preparing a tax return for George. She is not sure how to treat George’s Social Security disability benefi ts, so she leaves the benefi ts off the tax return instead of looking up the proper tax treatment of Social Security benefi ts.

A tax preparer should know how to treat Social Security benefi ts on a tax return. If they are unsure, they need to look up the information in IRS Publication 17, Your Federal Income Tax, or another IRS resource. A tax preparer could be negligent in following IRS rules and regulations, and subject to a penalty, because they ignored the implications of taxable Social Security benefi ts.

Willful or Intentional Disregard

If a tax preparer intentionally disregards IRS rules and regulations when completing a return for a taxpayer, the IRS can fi ne the preparer a penalty. The penalty is the greater of $5,000 or 50% of the income derived, or to be derived, from the tax return. Intentional disregard usually occurs when a tax return preparer ignores the IRS rules governing how an income item, deduction, or credit should be determined.

Example: While preparing Julie’s tax return, Sam noticed Julie had a Form 1099-MISC with a $7,000 entry in Box 7, ‘Nonemployee

compensation,’ along with her other income. Sam questioned Julie about the income, and she told him it was payment received for babysitting her neighbor’s children (before and after school and during the summer). Sam decided he would save Julie some money, and entered the income as ‘Other income’ on Form 1040 instead of entering the $7,000 as self-employment income on Schedule C, Profi t or Loss From Business. Sam could be subject to a penalty for intentional disregard of IRS rules and regulations.


Knowledge Check One

1. Who is not considered a tax return preparer?

CPA

EA

Attorney

VITA volunteer

2. What is the penalty for negligence of IRS rules resulting in an understatement of liability?

The greater of $1,000 or 50% of the income from the tax preparation.

The lesser of $1,000 or 50% of the income from the tax preparation.

The greater of $5,000 or 50% of the income from the tax preparation.

The lesser of $5,000 or 50% of the income from the tax preparation.

3. Intentionally leaving W-2 information off a taxpayer’s return to ensure they get a higher refund is an example of ___________.

Willful and intentional disregard of IRS rules and regulations

Negligent disregard of IRS rules and regulations

Failure to fi le a tax return

Tax planning


Lesson II: Due Diligence PenaltiesTax return preparers must follow regulations governing the EITC due diligence requirements, or they may be subject to the associated penalties.

EITC due diligence requirements include the following:

Completion of Form 8867, Paid Preparer’s Earned IncomeCredit Checklist

Calculation of the credit

Knowledge of eligibility

Recordkeeping

Form 8867

Beginning January 1, 2012, tax return preparers are required to complete and sign Form 8867 for each tax return they prepare with an EITC claim. The form is a checklist that asks the tax preparer a series of questions to ensure that due diligence was performed for the EITC.The answers on the form must be based on information provided by, or reasonably obtained from, the taxpayer.

Calculation of the Credit

The credit must be calculated on the appropriate EITC worksheet, or an approved facsimile. The calculation must be based on information provided by the taxpayer. The method of calculation must also be kept in the taxpayer’s fi les.

Knowledge of Eligibility

The tax preparer must not know or have reason to know that any information used in determining the taxpayer’s eligibility for the EITC is incorrect. Do not ignore the implication of any information provided by the taxpayer, or known by the preparer. Make reasonable inquiries if the information provided appears to be incorrect, inconsistent, or incomplete. Remember to ask questions if a situation appears unusual or unlikely. Include detailed notes in the client’s tax return fi le to document the information given, questions asked, and the client’s responses.


Example: Michael would like you to prepare his tax return. He is 24, single, and has two sons, ages 12 and 14. Michael would have been 10 years old when the older child was born, which seems unusual.Some reasonable questions to ask Michael would include the following:

Are you a step-parent or a foster parent?

Were you ever married to the children’s mother?

Did you and the mother live together during the year?

Do you have a court order verifying you have custody of the children?

Make sure you record the questions asked and the taxpayer’s answers in your notes, and keep these notes in the tax return fi les.

The IRS expects tax preparers to be reasonably comfortable with the answers received from taxpayers, and with their claims for the EITC on their tax returns. If a preparer’s notes do not clearly document and support the information fi led, the IRS could disallow the claim in an EITC audit. The following notes are not detailed enough:

Client states the children live with him all year.

Client provided information on children.

The IRS is looking for more thorough information, such as detailed answers to the questions listed in the previous example.

Recordkeeping

The tax preparer must keep all records used to determine the taxpayer’s EITC, including the checklist (Form 8867), the calculation of the credit worksheet, and any notes taken while ensuring the correct information was used to determine the claim. These records must be kept for at least three years after the date the return was presented to the taxpayer for signature, or the due date of the return, whichever is later. When using computer software to complete the return, the computer fi le of the tax return, worksheets, and (in most cases) the EITC checklist are part of the computer program and do not have to be printed and placed in the taxpayer’s fi le. Having the electronic copy is suffi cient.


Beginning January 1, 2012, tax return preparers must keep copies of any documentation relied on to support an EITC claim. These records can be photocopied, scanned, or kept by any method that provides exact duplication of the information on the documentation.

The penalty for failure to practice EITC due diligence is $500 per incident with no annual maximum penalty. This penalty can also be combined with other tax preparer penalties.

Knowledge Check Two

1. Which of the following is the most effective way to prove to the IRS that you have exercised due diligence when preparing tax returns?

Run a background check on all clients and keep the information on fi le.

Take and keep detailed notes in the client’s fi le.

Keep another set of client records in addition to the individual records maintained within the tax software.

The IRS will take your word and no extra due diligence is necessary.

2. How long should tax return preparers keep tax return records for EITC due diligence requirements?

December 31 in the year of fi ling.

Two years from the fi ling of the return or the due date, whichever is later.

Three years from the fi ling of the return or the due date, whichever is later.

Indefi nitely.


Lesson III: Copies and SignaturesTax return preparers are required to follow specifi c rules relating to how they must sign and retain copies of the tax returns they prepare.

Client Copy

Tax return preparers are required to provide a copy of the completed tax return to the taxpayer when the taxpayer signs the return. The copy does not have to be on offi cial IRS forms, but can use approved facsimiles of the forms (such as print-outs from a software program.) If the copy is in any format other than a facsimile of the IRS forms, all entries must be identifi ed by the associated form or schedule, and line number, as shown in Figure B.

Figure B - Tax Return Recap from Jackson Hewitt’s proprietary tax program, ProFiler

aa

a


Preparer Signatures, PTINs, and EINs

All tax returns completed by a tax return preparer are required to have the preparer’s signature and Preparer Tax Identifi cation Number (PTIN) on the copy of the return that is transmitted or mailed to the IRS. Additionally, if the tax business that is owned by or employs the preparer has an Employer Identifi cation Number (EIN), this must also be included on the tax return.

The penalty for not signing the tax return is $50 per failure, limited to a maximum penalty of $25,000 annually.

The penalty for not including the PTIN or EIN is $50 per return where one or both identifying numbers are not included. The penalty is limited to a maximum of $25,000 annually.

Knowledge Check Three

1. Tax return preparers are required to provide a copy of the ___________ to each taxpayer.

Tax return

Software used to create the return

Working papers

Tax preparer’s business card

2. George is a tax return preparer who owns his own tax business. He does not sign or include his PTIN and the business EIN on any of the tax returns he prepares for his clients. What is the fi ne per tax return?

$50

$100

$150

$25,000


Lesson IV: Preparer RecordkeepingTax return preparers are required by IRC to keep a completed copy of each tax return they prepare. Or, instead of the completed return, the tax preparer can retain a list with the taxpayer’s name, SSN or individual taxpayer identifi cation number (ITIN), taxable year of the return, and type of return. The copies and/or lists must be kept for three years after June 30 of the year the taxpayer signs the return.

Example: Jill fi led a return for Marshall on February 28, 2012. She must keep a completed copy of his return, or retain a list containing his identifying information, until July 1, 2015.

If Jill filed a return for Hillary on August 31, 2012, she must keep acopy of Hillary’s completed return or identifying information untilJuly 1, 2016.

The fi ne for not keeping a copy of a completed tax return or list of information is $50 for each failure, with a maximum penalty of $25,000 per year.

Knowledge Check Four

1. How long are tax return preparers required to keep a copy of the completed tax returns, or approved list information?

Until December 31 of the year the return was fi led.

Three years after the due date or fi ling of the return, whichever is later.

Three years from the end of the year the tax returnwas fi led.

Three years after June 30 of the year the tax returnwas fi led.


Lesson V: E-fi le ComplianceThe rules and requirements governing IRS e-fi le can be found in the following IRS materials:

IRS Publication 1345, Handbook for Authorized IRS e-fi le Providers of Individual Income Tax Returns

Publication 3112, IRS e-fi le Application and Participation

Revenue Procedure 2007-40 Internal Revenue Bulletin (I.R.B.) 1488 (or the latest update).

Violating a provision of these requirements can result in sanctions against the e-fi le provider.

The following represents categories of authorized IRS e-fi le providers:

Electronic Return Originator (ERO) - Originates the electronic submission of returns either prepared in their offi ces or collected from taxpayers who bring in completed returns to e-fi le. Generally, tax preparation fi rms are EROs. An ERO can transmit tax returns for tax return preparers who do not participate in the e-fi le program, in addition to the tax returns generated by their own tax return preparers.

Intermediate Service Provider - Receives tax information from an ERO, processes the information, and either forwards the information to a transmitter or sends the information back to the ERO.

Transmitter - Transmits tax returns directly to the IRS.

Reporting Agent - Collects and submits payroll tax deposits and their associated forms to the IRS.

Software Developer - Develops software for the purposes of formatting electronic returns according to IRS regulations and/or transmits electronic returns directly to the IRS.

Online Provider - Allows taxpayers to self-prepare tax returns from an online, or downloaded, software application.


E-fi le providers must submit an application to and be approved by the IRS. Approved providers, EROs, intermediate service providers, and reporting agents will receive an Electronic Filing Identifi cation Number (EFIN) for each location where they will be transmitting tax return information collected from tax preparers. Intermediate service providers, transmitters, and online providers all receive an Electronic Transmission Identifi cation Number (ETIN).

Electronic Return Originators

EROs must follow the rules and regulations as outlined in IRS revenue procedures, regulations, publications, and other written materials. The regulations include

Maintaining the integrity of the e-fi le system

Notifying taxpayers of any e-fi le rejects

Collecting signatures of the taxpayer, spouse, and tax return preparer

Keeping copies of required documentation

Protecting taxpayer information under federal privacy regulations

E-fi le System Integrity

EROs must ensure their business principals and responsible offi cials are listed on Form 8633, Application to Participate in the IRS e-fi le Program. The names listed must be current and eligible participants. An individual is not eligible to participate in the e-fi le program if their personal or business taxes are in arrears or have not been timely fi led, or they are under suspension from a federal, state, or local agency from practicing tax preparation. An eligible individual must be free of fi nancial crime convictions.

The responsible offi cial is the fi rst point of contact with the IRS and isresponsible for ensuring the business adheres to the provisions governing the IRS e-file program. They, or their designated representative, must be available to the IRS e-fi le program throughout the year to respond in a timely manner to any questions or requests for information from the IRS.

Principal - The individual or individuals in charge of a business, including the sole proprietor, each partner with a 5% or more ownership in a partnership, and the president, vice president, secretary, and treasurer of a corporation.

Responsible Offi cial - An individual with authority over the IRS e-fi le operation of the offi ce, or offi ces, of the e-fi le provider.


EROs must fi le a tax return within three days of receiving the taxpayer’s signature on the return. Providers that keep signed tax returns longer than three days after signature are considered to be “stockpiling” and can be suspended from the IRS e-fi le program. Tax returns completed and signed in anticipation of when the IRS starts accepting tax returns for the tax season are not considered to be stockpiled as long as the returns are transmitted within three days of the opening of the IRS e-fi le system. The IRS can assess a penalty of $50 per incident, with a maximum of $25,000 annually.

Tax preparers are not permitted to receive (directly or as a direct deposit), endorse, or otherwise negotiate a taxpayer’s refund check. The penalty for negotiation of, or endorsement of, a taxpayer’s refund check is $500 per incident with no annual maximum.

Providers must be diligent in recognizing fraud and abuse in the tax system, reporting any suspected fraud and abuse to the IRS and preventing it when possible. Providers must also cooperate with IRS investigations by making information and documents related to suspected fraud and abuse available to the IRS upon request.

Notifi cation of Rejects

EROs must attempt to notify a taxpayer if the IRS e-fi le program rejects their tax return from “acknowledgement for processing” within 24 hours of receiving reject notifi cation from the IRS. A rejected tax return hasnot been accepted into the IRS system for processing and is notconsidered fi led. Tax return rejects can occur for a number of reasons, and the IRS e-fi le system includes an error reject code (ERC) andexplanation to help the preparer resolve the reject issue. After the issue has been addressed, the tax return can be retransmitted. For some issues, the return must be sent by mail.

The IRS can fi ne an ERO up to $50 per incident, with an annual maximum of $25,000, if the ERO does not attempt to notify a taxpayer of an IRS reject.

Attempts to notify the taxpayer include

Leaving a message at the provided phone number

Sending an e-mail to the provided e-mail address

Sending a letter to the provided address


Signature Collection

EROs are required to receive and maintain on fi le the signatures of the taxpayer, spouse (if applicable), and tax preparer for each tax return fi led. Although e-fi led returns use an electronic signature, the IRS uses Form 8879, IRS e-fi le Signature Authorization, or Form 8878, IRSe-fi le Signature Authorization for Form 4868 or Form 2350, to gather the taxpayer’s signature and approved personal identifi cation number (PIN). This is equivalent to signing the paper return. The PIN is entered as the taxpayer’s electronic signature for their tax return. Forms 8879 or 8878 must be signed by all parties prior to electronic transmission of the return or extension of time to fi le. By signing, the taxpayer and tax preparer are authorizing that the tax return is true and accurate to the best of their knowledge.

Their signatures also acknowledge that

No income has been intentionally understated or left off thetax return

No deductions have been intentionally infl ated

All dependents listed are eligible dependents

The IRS can fi ne an ERO up to $50 per missing signature, with an annual maximum of $25,000.

Recordkeeping

EROs must keep a copy of all required documentation for at least three years from the due date of the tax return, or the fi ling date of the tax return, whichever is later. The documents must be maintained securely on the premises where the tax return was prepared, or in a location where the responsible offi cial has immediate and ready access to the documents should the taxpayer or the IRS request information.Electronic storage of all copies is authorized by the IRS.

The required documentation includes

Copies of all W-2s

Copies of all Forms 1099 with income tax withholding

Copies of all signed Forms 8879 or 8878

Copies of the tax return


Certain tax situations require additional documentation to be fi led with the tax return. The necessary documents cannot be created by thetax preparer, but are provided by the taxpayer. In such cases, mailForm 8453, U.S. Individual Income Tax Transmittal for an IRS e-fi leReturn, to the IRS with the additional documents attached. The papers must be sent within 72 hours of receiving an e-fi le acknowledgement from the IRS.

The following documents must be mailed to the IRS with Form 8453:

Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes (or equivalent written acknowledgement)

Form 2848, Power of Attorney and Declaration of Representative (or equivalent power of attorney statement that grants the agent authority to sign the tax return)

Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent

Form 8949, Sales and Other Dispositions of Capital Assets, (orequivalent statement with the same information), if electing notto report transactions electronically on Form 8949

The penalty for failure to practice the required recordkeeping is $50 per incident, with a maximum of $25,000 annually.

Taxpayer Information

EROs must ensure that taxpayer information is protected under the rules relating to safeguarding taxpayer information. In addition, EROs and other providers must not disclosetaxpayer information to another individual or business without proper authorization from the taxpayer and/or a sanctioned request for information. The penalty for improperly disclosing taxpayer information can be a fi ne of up to $1,000, imprisonment for up to one year, or both.


Knowledge Check Five

1. What form must be mailed to the IRS with a copy of a taxpayer’s Form 8332, or power of attorney statement?

Form 2848

Form 8453

Form 8826

Form 1289

2. When must an ERO attempt to notify a taxpayer of anIRS reject?

Within 48 hours of IRS notifi cation

Before April 15



3. How long must an ERO keep required records?

Until December 31 of the fi ling year

Two years after the return has been fi led

Three years after the return has been fi led

Four years after the return has been fi led

Lesson VI: Power of AttorneyA power of attorney (POA) is a written authorization giving one individual the authority to represent or act on another individual’s behalf in certain matters. If the authority is not limited to tax matters, the appointed individual can perform all acts the original individual can perform.


Requirements

The IRS requires taxpayers to submit a POA to authorize another person to sign their tax return for them. A POA is also required if the taxpayer authorizes their tax preparer to prepare and fi le a written response to an IRS request, or to represent them at a conference with the IRS. The level of representation varies based on the professional level of the tax return preparer.

A registered tax return preparer (RTRP) can only represent a taxpayer whose return they prepared. They can appear before a customer service representative, revenue agent, or examination offi cer in respect to examination of the return they fi led. Representation includes receiving copies of notifi cations and letters from the IRS about the tax return in question, and submitting information requests to the IRS on the taxpayer’s behalf. An RTRP cannot sign paperwork for a taxpayer.

An enrolled agent (EA) or certifi ed public accountant (CPA) can represent any taxpayer at all levels of the IRS except in a court of law. An attorney can represent any taxpayer at all levels of the IRS.

Form 2848

The representative authorized to sign another taxpayer’s tax return must include a copy of a properly executed Form 2848 with the return. A properly executed general POA that specifi es tax matters can also be used. Generally, a spouse needs a POA to sign a tax return for their spouse. A POA is not needed to provide information requested by the IRS.

In some cases the representative may be able to file the POA electronically. If not, mail or fax Form 2848 to the appropriate address located in the Form 2848 Instructions.

When using a POA to sign a tax return, always include a copy of the executed Form 2848. If the return is e-fi led, attach a copy of Form 2848to Form 8453, and mail within 72 hours of receiving acknowledgement of the return by the IRS.

For information on submitting a POA equivalent (other than Form 2848),refer to IRS Publication 947, Practice Before the IRS and Power of Attorney.

For more information, refer to the Form 2848 Instructions.


Part I - Power of Attorney

Form 2848, Part I, is where the taxpayer names their representative and specifi es the authority being granted.

Box 1, Taxpayer information - Enter the taxpayer’s name, address, SSN or taxpayer identifi cation number (TIN), and a daytime phone number.

Box 2, Representative(s) - Enter the representative’s name, address, phone number, PTIN, Centralized Authorization File (CAF) number, and fax number. Check the box to authorize the representative to receive copies of notices and communications from the IRS.

Box 3, Matters - Enter a description of the matter before the IRS, such as an audit, an EITC penalty, signature, etc. Include the applicable tax form number, and the tax year for which representation is being granted.

Line 4, Specifi c Uses Not Recorded on CAF - Check this box if the POA is for an issue not recorded on the CAF, such as application for an EIN, requests for a private letter ruling or technical advice, requests to change accounting methods, and Freedom of Information Act requests.

Line 5, Acts authorized - Check the appropriate box to expand or reduce the scope of the representative’s power. Include an explanation to further limit or expand the power as necessary.

Line 6, Retention/revocation of prior POAs - Filing this form will automatically revoke all earlier POAs on fi le. Check this box only if you do not want to revoke a prior POA.

Line 7, Signature of taxpayer - The form must be signed and dated by the taxpayer to be valid. If a joint return was fi led for the tax year covered by this POA, the taxpayer and their spouse must each complete and sign a separate POA.

Part II - Declaration of Representative

The representative named in Part I must complete this section. They must include their correct professional designation (choose a - r from the included list), the licensing jurisdiction, the licensing/bar/ or enrollment number, their signature, and the date signed.

The POA must be signed and dated by both the taxpayer and the representative to be effective.

Central Authorization File (CAF) - A computer fi le system containing information regarding the authority of individuals appointed under Powers of Attorney.

The CAF gives IRS personnel quicker access to authorization information without requesting the original document from the taxpayer or representative.


Knowledge Check Six

1. Which of the following situations require a power of attorney?

To receive information from a taxpayer’s return

To have a wife sign a return for her husband when he is away on a business trip

To fi le a tax return electronically

To amend a tax return

Lesson VII: Tax Information AuthorizationPOA is not needed to authorize the IRS to discuss and provide specifi c confidential tax return information to any individual or business designated on Form 8821, Tax Information Authorization. Form 8821 is used strictly as a disclosure authorization form and does not designate an individual or business to represent a taxpayer before the IRS.

Form 8821 is entered into the CAF system, and must be revoked if no longer applicable.

Example: Alison wants her associate, Suzi, to be informed about her personal tax accounts. To have this information disclosed to Suzi, Alison fi lls out Form 8821. This will allow Suzi to receive Alison’s tax information from the IRS, but will not allow Suzi to perform any action with the IRS on Alison’s behalf.


Form 8821

Form 8821 must be received by the IRS within 120 days of the date it was signed and dated by the taxpayer. A taxpayer can fi le their own tax information authorization without using Form 8821, but they must include all the same information requested on Form 8821.

Box 1, Taxpayer information - Enter the taxpayer’s name, address, SSN, TIN, or EIN (if applicable), and phone number.

Box 2, Appointee - Enter the following information for the individual or business who will be receiving the tax information: name, address, CAF number, PTIN, and telephone numbers.

Box 3, Tax matters - Enter the tax matters the appointee is permitted to receive: type of tax, tax form number, years or periods, and any specifi c tax matters.

Line 4, Specifi c use not recorded on CAF - Check here if the tax information authorization is for a specifi c use not recordedon CAF.

Line 5, Disclosure of tax information - Check the appropriate box if the taxpayer wishes the appointee to receive, or not receive, copies of the information requested.

Line 6, Retention/revocation of tax information authorizations - Check the box to revoke a previously granted authorization.

Line 7, Signature of taxpayer(s) - The taxpayer must sign the authorization. If the tax year covered is for a joint return, eitherthe taxpayer or their spouse must sign.

Knowledge Check Seven

1. Which form is required for the IRS to provide tax return information to the tax return preparer of a tax return?

Form 8821

Form 2848

Form 8879

Form 1040


Lesson VIII: Safeguarding TaxpayerInformationSafeguarding taxpayer information is a top priority for the IRS, and should be for all tax preparers. With identity theft on the rise, it is important to ensure all information received, transmitted, stored, and maintained is protected at all times from unauthorized use, identity fraud, or destruction of information.

Taxpayer information includes, but is not limited to the following:

Name and address

Any SSNs used on the tax return or shared

Income and expenses

Receipts

Deductions

Exemptions

e-mail address

Phone numbers

All tax preparation businesses, including tax return preparers, data processors, transmitters, affi liates, service providers, and others involved in fi nancial products and services associated with income tax return preparation, are governed by the Gramm-Leach Bliley Act (GBA). The GBA requires businesses to provide their customers with a copy of their privacy notice explaining their information collection practices and information sharing practices.

Clients have the right to limit some sharing of their information, and businesses may be limited in their ability to use the information gathered. These rights include, but are not limited to, refusal to allow their personal information to be used for training purposes, and marketing purposes.


To help ensure taxpayer information is protected by tax preparers and tax preparation businesses, there are a number of laws, regulations, standards and best practices in place. The processes needed to safeguard information include:

Maintaining a list of locations where client data is collected

Assess the risk of unauthorized use, disclosure, modifi cation, or destruction of the information handled

Assess the impact to your clients if the information is compromised

Write and follow a security plan for your business

Test, monitor and revise your security plan on a periodic basis

Add additional safeguards as needed

Follow all federal, state, and local laws and regulations governing privacy

There are many simple, yet effective, ways to secure taxpayer information. Keep fi ling cabinets locked at all times to protect the information inside them. Ensure that only trusted employees have a key to the cabinets, and never leave the keys in the lock for quick access. Lock all computers when not in use, and require a password to access tax software or the tax data created by the tax software.Physically tether computers to a stationary object, such as a desk. All paperwork that is not part of the fi nal tax fi les for the client or the tax offi ce should be shredded immediately. Remember, any notes taken over the phone or reminders to hold information until a later date should also be shredded.

When working in a tax return, all information should be safeguarded.Once the information on a document has been verifi ed with a client, turn the information over, so no one can read over your shoulder. Use a privacy screen on your computer to ensure no one else can see the information you have on your monitor.

Never discuss a client’s information with another individual without receiving permission from a client fi rst. If you must discuss a client’s tax situation with another individual, do not use names, social security numbers, or other identifying information.


Penalties

There are a number of penalties for tax return preparers and tax businesses that do not practice due diligence in protecting taxpayer information.

IRC 6713 - Disclosure or use of information by preparers of returns. Tax return preparers that disclose information received in connection with the preparation of a tax return, or who use the information for purposes other than the preparation of taxes, without receiving permission from the taxpayer, may be subject to a $250 penalty for each disclosure, not to exceed $10,000 annually.

IRC 7216 - Disclosure of information. Any person who is engaged in the business of preparing, or providing services in connection with the preparation of tax returns who knowingly or

recklessly discloses any information provided for the preparation of, or assistance in the preparation of a tax return shall be guilty of a misdemeanor and upon conviction can be fi ned up to $1,000, imprisoned for up to one year, or a combination of both.

Both penalties can be assessed in connection with the same taxpayer. Information shared to complete state, local, or estimated tax returns for the same taxpayer is exempt from the penalty. Information shared under a court order, offi cial IRS request, or by permission of the taxpayer is also exempt from the penalties.

Knowledge Check Eight

1. What is the penalty for sharing taxpayer information with another individual or business without the taxpayer’s permission?

$250 per disclosure limited to $10,000 annually

$25 per disclosure

$250 per disclosure

$25 per disclosure limited to $25,000 annually


Session 23 Summary The intention of the rules governing tax return preparers is to

protect individual taxpayers, tax preparers, and the federal government from unscrupulous tax preparers.

A tax return preparer is defi ned by Internal Revenue Code (IRC) as an individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund.

Tax preparers are required to complete a tax return that is true and accurate to the best of their knowledge. In addition, tax preparers should ask questions of the taxpayer to ensure they have all the information necessary to create an accurate tax return.

When determining a position on a tax return, a tax preparer is generally only required to follow the “more likely than not” standard set by the IRC.

A tax preparer is negligent in following the rules and regulations if they knew, or should have known, the specifi c rules regarding a position on a tax return. The negligence penalty for a tax preparer is the greater of $1,000, or 50% of the income derived from the tax return.

If a tax preparer intentionally disregards IRS rules and regulations,the IRS can fi ne the preparer a penalty of $5,000 or 50% of the income derived, or to be derived, from the tax return, whichever is greater.

Tax preparers must follow regulations governing the Earned Income Tax Credit (EITC) due diligence requirements, or they may be subject to the associated penalties.

Tax preparers are required to complete and sign Form 8867, Paid Preparer’s Earned Income Credit Checklist, for each tax return they prepare with an EITC claim.

The credit must be calculated on the appropriate EITC worksheet or an approved facsimile.

The preparer must not know or have reason to know that any information used in determining the taxpayer’s eligibility for the EITC is incorrect.

Ask questions if a situation appears unusual or unlikely, and include detailed notes in the client’s tax fi le to document the questions asked and the client’s responses.

The preparer must keep all records used to determine the taxpayer’s EITC for at least three years after the date the return was presented to the taxpayer for signature or the due date of the return, whichever is later.


The penalty for failure to practice EITC due diligence is $500 per incident with no annual maximum penalty. This penalty can be combined with other tax preparer penalties.

Tax preparers are required to provide a copy of the completed tax return to the taxpayer when the taxpayer signs the return.

All returns completed by a tax preparer are required to have the preparer’s signature and Preparer Tax Identifi cation Number (PTIN) or Employer Identifi cation Number (EIN) on the copy of the return that is transmitted or mailed to the IRS.

The penalty for a preparer not signing the tax return is $50 per failure, limited to a maximum penalty of $25,000 annually. The penalty for not including the PTIN or EIN is $50 per return where one or both identifying numbers are not included and is limited to a maximum of $25,000 annually.

Tax return preparers are required by IRC to keep a completed copy of each tax return they prepare (or a list with the taxpayer’s name, SSN, taxable year, and type of return). The copies or list must be kept for three years after June 30 of the year the taxpayer signs the return.

The fi ne for not keeping a copy of a completed tax return or list of information is $50 for each failure, with a maximum penalty of $25,000 per year.

Violating a provision of the IRS e-fi le compliance requirements can result in sanctions against the e-fi le provider.

E-fi le providers must submit an application and be approved by the IRS. Authorized IRS e-fi le providers include electronic return originators (EROs), intermediate service providers, transmitters, reporting agents, software developers, and online providers.

EROs must follow the rules and regulations as outlined in IRS revenue procedures, regulations, publications, and other written materials.

EROs must ensure their business principals and responsible offi cials are listed on Form 8633, Application to Participate in the IRS e-fi le Program.

EROs must fi le a tax return within three days of receiving the taxpayer’s signature on the return, or the IRS can assess a penalty of $50 per incident, with a maximum of $25,000 annually.

Tax preparers are not permitted to receive (directly or as a direct deposit), endorse, or otherwise negotiate a taxpayer’s refund check. The penalty for negotiation of, or endorsement of, a taxpayer’s refund check is $500 per incident with no annual maximum.


EROs must attempt to notify a taxpayer if the e-fi le program rejects their tax return within 24 hours of receiving reject notifi cation from the IRS. If rejected, the return has not been accepted for processing and is not considered fi led.

The IRS can fi ne an ERO up to $50 per incident, with an annual maximum of $25,000, if the ERO does not attempt to notify a taxpayer of an IRS reject.

EROs are required to receive and maintain on fi le the signatures of the taxpayer, spouse (if applicable), and tax preparer for each tax return fi led.

Use Form 8879, IRS e-fi le Signature Authorization, or Form 8878,IRS e-fi le Signature Authorization for Form 4868 or Form 2350,to gather the taxpayer’s signature and approved personal identifi cation number (PIN).

The IRS can fi ne an ERO up to $50 per missing signature, with an annual maximum of $25,000.

EROs must keep a copy of all required documentation for at least three years from the due date of the tax return or the fi ling date of the tax return, whichever is later.

If additional documentation is needed, mail Form 8453, U.S.Individual Income Tax Transmittal for an IRS e-fi le Return, to the IRS with the additional documents attached within 72 hours of receiving an e-fi le acknowledgement.

The penalty for failure to practice the required recordkeeping is $50 per incident, with a maximum of $25,000 annually.

EROs and other providers must not disclose taxpayer information to another individual or business without proper authorization from the taxpayer and/or a sanctioned request for information. The penalty for improperly disclosing taxpayer information can be a fi ne of up to $1,000, imprisonment for up to one year, or both.

The IRS requires taxpayers to submit a power of attorney (POA) to authorize another person to sign their tax return for them, or to authorize their tax preparer to fi le a written response to an IRS request, or to represent them at a conference with the IRS.

Use Form 2848, Power of Attorney and Declaration of Representative (or equivalent POA statement), and include a copy when fi ling the return. If the return is e-fi led, attach a copy of Form 2848 to Form 8453, and mail to the IRS within 72 hours of receiving acknowledgement of the return.


Use Form 8821, Tax Information Authorization, to authorize the IRS to discuss and provide confi dential tax return information to any individual or business designated by the taxpayer. It must be received by the IRS within 120 days of the date it was signed and dated by the taxpayer.

Safeguarding taxpayer information is a top priority for the IRS, and should be for all tax preparers.

All tax preparation businesses, and others involved in fi nancial products and services associated with income tax return preparation, are governed by the Gramm-Leach Bliley Act (GBA). The GBA requires businesses to provide their customers with a copy of their privacy notice explaining their information collection practices and information sharing practices.

When working on a tax return, all taxpayer information should be safeguarded. Tax return preparers and tax businesses that recklessly disclose any information provided for the preparation of a tax return shall be guilty of a misdemeanor and upon conviction can be fi ned up to $1,000, imprisoned for up to one year, or a combination of both.

Never discuss or disclose a client’s information with another individual without receiving permission from the client fi rst. Tax return preparers that disclose information received in connection with preparing a tax return, or who use the information for purposes other than the preparation of taxes without receiving permission may be subject to a $250 penalty for each disclosure, not to exceed $10,000 annually.


Session 23 Knowledge Check AnswersUse the following to help verify your Knowledge Check responses.

Knowledge Check One

1. VITA volunteer. CPAs, EAs, and attorneys are all tax return preparers if they are paid for completing a tax return for a taxpayer. A VITA volunteer is not considered a tax preparer because they do not prepare returns for compensation.

2. The greater of $1,000 or 50% of the income from the tax preparation. The penalty for negligence of IRS rules resulting in an understatement of liability is the greater of $1,000 or 50% of the income from the tax preparation.

3. Willful and intentional disregard of IRS rules and regulations. When a tax return preparer intentionally leaves off income to lower the taxpayer’s tax liability it is willful and intentional disregard of IRS rules and regulations.

Knowledge Check Two

1. Take and keep detailed notes in the client’s fi le. To prove to the IRS you have practiced due diligence you should keep notes of all your additional questions and the answers you received in the client’s fi le.

2. Three years from the fi ling of the return or the due date, whichever is later. The IRS requires the records for an EITC claim to be kept for three years after the return due date or the actual fi ling date, whichever is later.

Knowledge Check Three

1. Tax return. Tax return preparers are required to provide either a copy of the tax return or a transcript of the return when the taxpayer signs the return.

2. $100. The maximum fi ne is $50 per return for not signing the return, and $50 per return for not including the preparer PTIN or business EIN. George would have to pay a penalty of $100 per tax return.


Knowledge Check Four

1. Three years after June 30 of the year the tax return was fi led.Tax return preparers are required to keep a copy of the completed tax return, or list of information, for three years after June 30 of the year the return was fi led.

Knowledge Check Five

1. Form 8453. For e-fi led tax returns, any Forms 8332, 2848, 1098-C,and other necessary supporting documentation must be mailed with Form 8453 to the IRS within 72 hours of receiving e-fi le acknowledgement from the IRS.

2. Within 24 hours of IRS notifi cation. EROs must attempt to notify a taxpayer of an e-fi le reject notice within 24 hours of receiving the IRS acknowledgement stating the tax fi le has been rejected.

3. Three years after the return has been fi led. EROs must keep copies of required taxpayer documentation for items on a tax return, and a copy of the tax return for three years following the due date of the tax return or the actual fi ling date, whicheveris later.

Knowledge Check Six

1. To have a wife sign a return for her husband when he is away on a business trip. An individual must have a power of attorney to sign a tax return for their spouse.

Knowledge Check Seven

1. Form 8821. Form 8821, Tax Information Authorization, is the form used to authorize the IRS to release taxpayer information to a third party.

Knowledge Check Eight

1. $250 per disclosure limited to $10,000 annually. The penalty for disclosing taxpayer information without authorization is $250 per disclosure limited to $10,000 annually.

bit 23 prac proc pm 2012

Documents

privacy notice explaining

internal revenue code

leach bliley act

situation appears unusual

employer identication number

unscrupulous tax preparers

knowledge check one1

knowledge check three1