The IRS Due Diligence Audit and Penalty

COMPLETE IRS & TAX REPRESENTATION

The Most Insane IRS Penalty Against Tax Pros

 

What is an IRS Due Diligence Audit?

 

The IRS expects that some return preparers will cheat the system, in order to create illegally large Earned Income Tax Credit refunds for their clients. Let’s start there.

Spoiler Alert: There is no such thing as a return preparer that knows how to get “the bigger refunds” for it’s customers. Nearly all preparers know the same laws, and have the same tools, guides, and access to software. The difference is that some tax preparers will be more aggressive, even unreasonable for their customers. 

Preparers that cross the line of reasonableness are penalized.

Tax Code Section 6695(g) is meant to discourage preparers from filing unreasonable tax returns for their clients. Because there is the possibility for certain tax accountants to abuse the tax system, the IRS added more burden on the preparers. 

To fight this abuse of refundable credits, the IRS reviews tax return preparers’ required documentation under Section 6695(g), for tax returns with:

  • Earned Income Tax Credit (EITC)
  • American Opportunity Tax Credit (AOTC)
  • Child Tax Credit (CTC)
  • Additional Child Tax Credit (ACTC)
  • Credit for Other Dependents (ODC)
  • Head of Household Filing Status (HOH)

The audits are extremely imposing on the preparer. The meetings with the auditor may take several days, or even weeks. The IRS examiner will inquire about your customer intake, data intake, interview techniques and questions, policies on client acceptance or rejection, and documentation of it all. The auditor will physically inspect a sample of requested documents, including customers’ social Security cards, photo identifications, children’s birth certificates and school records, etc. 

Return preparer staff are often interviewed as well. Note: The Tax Lawyer representing the preparer can control whether employees will speak with the IRS.

It is customary that the IRS (or state tax agency) will interview a sample of your customers. Often, many of those customers were interviewed long before the IRS contacted you about the Preparer Project exam. It is common that IRS contacted the preparer after multiple customers’ returns were audited, and their tax credits or benefits were disallowed.

Customers are routinely faced with a tax liability because of a disallowed credit. Very often, those customers will blame the return preparer for making errors on that return. In this case, the customer becomes a witness for the government, against the tax preparer.

The exam should be conducted by licensed tax representative. The return preparer should not represent himself or herself during the audit.

Tax Law Offices suggests that the Due Diligence doubles as a preliminary, informal investigation for willful tax fraud by the tax preparer. Therefore, it is highly advised that the preparer be represented by a Tax Defense Attorney who can handle criminal tax matters in your state.

 

What is the preparer’s penalty from the IRS “Due Diligence” audit?

 

The penalty applies to any preparer who fails to comply with those due diligence requirements. 

Each finding under the IRS Section 6695(g) exam incurs a $500 penalty. 

This limitless penalty is imposed based on audit findings against the tax return preparer. A preparer could easily be penalized over $100,000 for just one tax year. That’s for only 200 tax returns.

The penalty is unusually harsh. Having strong representation really matters here. The Tax Code does not create a clear method for disputing this penalty 30 days after the penalty is determined. In that case, the Tax Code suggests that the penalty must first be paid before it can be protested.