Over the years we have represented several tax preparers who the IRS selects for examination as part of the Paid Preparer Due Diligence Program. The IRS has gotten better at zeroing in on the preparers who abuse refundable tax credits. These audits can be frightening with the serious potential to lead to criminal investigation.

If you file returns with PTIN and/or EFIN, the IRS is tracking you. These are very effective audits. The IRS can select one preparer with a pattern of abuse and audit several hundred returns. Oftentimes, the preparers are unlicensed. They are not CPA’s, attorneys, or enrolled agents. They may have taken some courses over the years but really do not know what they are doing.

The preparers are often high volume preparers with clients in the hundreds. Oftentimes, their clients have earned income credit, head of household, or the child tax credit along with Schedule C. The dependents may be questionable, such as being on more than one return or not living with the taxpayer. A pattern of using Schedule C to optimize these credits is identified, examined, and seriously questioned. Schedule C abuse is serious in the eyes of the IRS.

The legal basis for these audits is the requirement to be compliant with the due diligence requirements by the regulations under the Internal Revenue Code Section 6695(g). There are penalties under IRS 6695(g) and the quickly add up to be draconian.

Form 8867, Paid Preparer’s Due Diligence Checklist, is implicated. Retention of records and substantiation of credits, schedule C. Various records will be probed by the agent under different scenarios. Worksheets and documentation are critical to persuade the agent of the exercise of due diligence. The credibility of the preparer is on the line.

Feel free to call us if you would like representation.