Over the past decade, there has been a marked increase in the Internal Revenue Service’s (IRS) scrutiny of tax preparers. This heightened scrutiny has resulted in a chilling effect on the tax services industry. Whereas the IRS’s role should ideally be to minimize penalties and promote productive regulatory measures, the current practices engender a climate of fear, posing potential penalties for an unreasonable or hasty omission.
Professionals working in the realm of tax preparation and as tax attorneys, are bound by an ethical duty to advocate for their clients. They are not, however, agents of the IRS. The intensification of IRS burdens and liabilities threatens this autonomy, potentially discouraging professionals from practicing. Legal professionals must therefore keep abreast of new preparer penalties and rules to avoid unexpected noncompliance penalties.
Among the existing regulations is the due diligence required of professionals preparing returns for an earned income tax credit. This necessitates additional steps to assure the accuracy of return-related information, affecting eligibility for the earned income tax credit. This stringent and vigilant regulation is one among many used to caution tax preparers. The list of penalties levied on tax preparers, shared with readers here includes fines for infractions such as tax liability understatement owing to the tax preparer’s unreasonable position or willful misconduct, and failure to provide identifying information or sign a return.
Turning to drastic measures, upon identifying a preparer practicing in a manner they consider unacceptable, the IRS, under Section 7407 of the tax code, can engage the Department of Justice to enjoin the preparer from preparing tax returns, ostensibly to prevent recurrent violations. Certain criteria must be met for injunctive relief to be extended, such as violations of penalty laws, misrepresentation of eligibility to practice before the IRS or of past experience or education, guaranteeing a tax refund payment, and conduct that substantially interferes with the proper administration of tax laws.
The IRS’s wider role was evidenced in a case UnitedStatesvShugarman , where an injunction was issued against tax advisors who were deemed to be directing taxpayers towards “imminent lawless action”. This set a precedent, consequently enabling the IRS to provide guidance to its agents in issuing a summons anticipating a tax payer’s defense under the First Amendment of the Constitution.
Advocate roles of tax preparers are facing threats under the heavy IRS scrutiny that has successfully obtained court orders barring preparers from various activities, from taking an “unreasonable tax position” to minimize client’s tax liability, to opposing the current tax structure and misconstruing the IRC.
The best strategy to counter these odds lies in simplification of the tax code and tax flattening by the IRS and Congress. This will enable a more comprehensive understanding of the tax code, reducing taxpayers’ reliance on paid preparers and decreasing IRS oversight of preparers’ actions.
Without these changes, government intrusion into tax preparation will continue to exert a chilling effect on the industry. This is particularly detrimental to small businesses offering affordable tax preparation services, and may suppress natural competition.
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