I like many of my fellow tax preparers have often complained about taking yet "another ethics class". I think you will agree with me, this, if anything, certainly brings a new understanding to the Internal Revenue Service's concern about "ETHICS" of the tax professional. What really gets to me is not only was this person a CPA, but a former Internal Revenue Agent.
Read the article excerpts below and share your opinion on .
The title to this piece is not a literal quote…but it’s effectively what today’s petitioner told both the IRS and the Tax Court. Needless to say, that’s not a good strategy.
The Petitioner worked for the IRS for a few years and is now a certified public accountant (CPA). Now, many CPAs know the Tax Code and rules quite well; however, many CPAs don’t practice in tax. The Petitioners S-Corporation “prepar[ed] tax returns and provid[ed] consulting services.” He also sold insurance through a sole proprietorship.
The petitioner’s S-Corporation return was audited, and the IRS made many adjustments including disallowing travel expenses, depreciation, cost of goods sold, and rental payments. This led to a deficiency of $306,336 and an accuracy penalty of $41,365. The Petitioner challenged this in Tax Court.
Mr. Fox goes on to point out several of the areas the Tax Court took issue with the Petitioner... again, to read the entire article or the court case, click on the links provided.
There were several items in dispute. First was travel expenses. While you can take deductions for ordinary and necessary business expenses you have, you must keep records.
The petitioner is a CPA, worked for the IRS, and he prepares tax returns; surely he had backup for his deductions.
"The Petitioner did not substantiate that he met the requirements under section 1.274-5T(b)(2). Petitioner therefore is not entitled to deduct any of the claimed travel expenses for 2006."
I personally don't understand how someone who worked for the IRS and is a CPA wouldn't think they needed to maintain receipts to back up their deductions.
Petitioner’s claim for depreciation expense didn’t fair better.
"Here, petitioner failed to prove the adjusted basis of the portion of his home with respect to which he claimed the depreciation expense."
Well, he must have had some proof of his cost of goods sold from his insurance business. After all, those expenses should be obvious. There’s a problem, though: What is he selling? He’s selling his services, and there isn’t a cost of goods sold with a service business.
"We have held that a business must involve the sale of a material product to which direct cost may be allocated to reduce gross receipts by the costs of goods sold in computing gross income."
This next part I found extremely disturbing... Mr. Fox's article goes on with the rental Payments..
Then there were the rental payments. The petitioner supposedly rented a portion of his house for his business to his S-Corporation and received just under $33,000; the IRS thought that was compensation. No matter how those payments were characterized, they were income on the petitioner’s return. The difference is that if they were compensation, employment taxes would be owed. So the petitioner undoubtedly provided his rental agreement or other documentation or–well, I’m writing this so I think you know where this is headed:
"Petitioner did not produce a rental agreement between himself and the Company for 2006. Petitioner did not provide any checks or documentation demonstrating that the Company paid him rent for use of his home. More generally, there is no documentation in the record reflecting that the Company rented a portion of petitioner’s home."
The article continues with his correct conclusion that as "TAX PREPARERS" we are held to a much higher standard and goes on to say...
Then there was the accuracy-related penalty. Let me state what should be obvious: If I am ever in front of the Tax Court, I’m going to be held to a higher standard than the average taxpayer because I’m supposed to know the rules. The same was true for the petitioner:
The court ruled:
"Petitioner, a CPA and former IRS revenue agent, prepared the Form 1040 he filed for 2006 and the Form 1120S that the Company filed for the same year. Petitioner exercised a lack of care and reckless disregard for rules and regulations in reporting income and claiming deductions against income on the returns, resulting in the remaining underpayment. Petitioner failed to offer any persuasive evidence that he acted with reasonable cause and in good faith with respect to any portion of the remaining underpayment."
There isn’t much to add to what the Tax Court said. If you have expenses, document, document, and document some more. You will be happy you have done so. And if you’re a tax professional and you don’t, well, have your checkbook handy.
|Post Date: 7/12/2012|
|Last Updated: 7/12/2012|
â€¢ Durden, T.C. Memo. 2012-140, May 17, 2012
The taxpayers deducted $25,171 in charitable contributions, most of which were made by check to their church. In response to a notice of deficiency disallowing the claimed charitable contribution deductions, the taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church which acknowledged their contributions. The IRS did not accept the acknowledgement letter because it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.
The taxpayers then produced a second letter from the church that contained the same information found in the first acknowledgement, as well as a statement that no goods or services were provided to them in exchange for their contributions. The IRS did not accept the second acknowledgement letter because it was not contemporaneous.
IRC section 170(f)( (A) says: â€œNo deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization that meets the requirements of subparagraph (B).â€ For donations of money, the doneeâ€™s written acknowledgment must state the amount contributed, indicate whether the donee organization provided any goods or services in consideration for the contribution, and provide a description and good faith estimate of the value of any goods or services provided by the donee organization.
The regulations under section 170 state that a written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of 1) the date the taxpayer files the original return for the taxable year of the contribution or (2) the due date (including extensions) for filing the original return for the year.
The IRS argued the taxpayers were not entitled to the deduction because the first acknowledgment letter from the church failed to include the language that no goods or services were provided in consideration for the contribution, and the second acknowledgment letter that included the no goods or services language failed to meet the contemporaneous requirement.
The taxpayers conceded that they did not strictly comply with the statute. However, they claimed they did substantially comply with the statute. The Court disagreed with the taxpayers. Nothing in the statue or legislative history requires the IRS to look beyond the written acknowledgment when on its face the acknowledgment fails to provide the information required to substantiate a charitable contribution deduction. The taxpayers did not comply with the clear substantiation requirements of section 170(f)( , and their deduction for charitable contributions was disallowed.