Tips For Tax Preparers To Avoid IRS Investigations

Venar Ayar, Tips For Tax Preparers To Avoid IRS Audits
Things Preparers Keep In Mind To Avoid An IRS Audit

Competition among tax preparers is fierce, but tax professionals must be careful not to run afoul of IRS regulations in their quest to grow their business.

The IRS is particularly interested in investigating tax preparer fraud because it affects so many returns. If the IRS shuts down a single corrupt tax preparer, it could prevent hundreds of fraudulent returns from being prepared each tax season.

Most tax preparers, however, are honest professionals who want to avoid accidentally creating a problem with the IRS. The following tips can help increase the odds you’ll have a successful tax season without receiving any unwanted mail from the IRS:

Understand Your Due Diligence Requirements

You have the ability to reasonably rely on a client’s statements. The client has their own duty to tell the truth on their tax return. However, you also have to verify the information and ask the right questions, especially when certain red flags are raised.

It’s not uncommon for clients to go to multiple tax preparers, complete the interview, then see which preparer is offering the biggest return. Although each return should be identical, this puts the preparer in a tough position because they want to keep their client’s business.

Don’t make the mistake of turning a blind eye to obvious errors or omissions in order to give a client a bigger refund. It’s not worth an IRS investigation. Ask the right questions to get the refund they deserve under our tax laws, even if it’s not the refund they want.

Patterns Can Cause Problems

The IRS can detect patterns among returns that see unusual in two different ways. First, if all of your clients have a similar amount of a certain item, this could raise a red flag. It would be quite a coincidence if all of your clients actually had business expense deductions of exactly the same amount, or the same amount of daycare expenses used for the Child and Dependent Care Credit.

The other type of troubling pattern is when your returns are outliers among the returns of the general population. This could be due to legitimate reasons if most of your clients are of a certain income level of family status. However, if your clients’ returns are consistently and noticeably different than the returns of your overall geographic area, the IRS may want to take a closer look.

Beware of the Common Red Flags

Some tax regulations are more ripe for abuse than others. The Earned Income Tax Credit (EITC) is one of the most common areas of tax fraud for several reasons.

First, the EITC is refundable, so even taxpayers who don’t owe any federal income taxes for the year can get a refund. EITC eligibility can also result in sizable refunds, particularly for taxpayers with multiple defendant children.

Because of these factors, the IRS spends a lot of time and effort looking into EITC fraud. On the other hand, many taxpayers who are eligible for the EITC don’t know about it and don’t receive it.

Make sure you know the EITC eligibility requirements in great detail. Tax preparers with many lower-income clients, in particular, should make the EITC one of their major areas of expertise, both to help their clients get the maximum allowable refund and to avoid a potential problem with the IRS.

Have a tax question? Contact Venar Ayar.



Venar Ayar

Ayar Law’s expertise is not only in dealing with the tax code, but in favorably resolving Federal and State tax problems. We know the procedural rules inside and out, and we know how things actually work at the IRS. Feel free to call or email Venar Ayar anytime (no charge) and he’ll be happy to answer any tax law questions you might have. 248.262.3400

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