Threat of punishment only hurts conscientious preparers

January 25, 2010
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While health care, “cap and trade” and card check legislation all are frequently in the headlines, the changes that threaten the small business community often do not draw media attention.

Little noticed is a Jan. 5 letter sent to CPAs by Monica Baker, examination director of the Small Business and Self-Employed Division of the IRS. The letter contains a not very subtle threat.

The letter states: “Returns preparers must ask sufficient questions and review sufficient taxpayer records to determine that income and expenses reported are correct and complete.”

That’s a simple enough statement. The letter then lists the punishments for not doing so, including suspension and referral for criminal investigation. That gets your attention if you are a tax preparer.

Here are the problems with the IRS intimidation tactic.

IRS commissioner Doug Shulman recently stated that he does not fill out his own 1040 tax form, due to the complexity of the tax code. Charles B. Rangel, chairman of the U.S. House of Representatives Ways and Means Committee, and U.S. Secretary of Treasury Timothy Geithner have made significant errors of income omission on their tax returns.

These events are due to the mind-numbing complexity of the income tax system. Mr. Rangel’s and Mr. Geithner’s errors must have been due to complexity. If it had been fraud, they would have been fined and disciplined like any other American taxpayer.

The system is simply too complicated. My office — and most of the CPAs I know — spend thousands of dollars on training. We then must compete with those tax preparers who have little or no education or training. With little cost and quality control, their fees are significantly lower than quality preparers.

Who is going to pay for the additional time required to comply with IRS demands on the preparer in a world where money is scarce and the government threatens the preparers unless they do a more thorough job of evaluating a client’s records?

A client may be crooked or incompetent. When clients lie, they should be held responsible for their acts. If a client is not competent, what costs should the preparer be forced to absorb to see that the return is accurate?

QuickBooks software is the preferred method of keeping records for many small businesses. Buying the software does not make a person an accountant any more than buying a scalpel makes you a surgeon. The time now spent untangling clients’ QuickBook messes is hard to bill.

If an accountant is now to be held responsible for errors or fraud buried in a client’s data, that client is going to balk at the conscientious accountant’s fee to do the work thoroughly, and he will go to a less conscientious preparer. Quality preparers will be more hard pressed than ever to support their offices.

Doing small business tax returns is a daunting task. Threatening the accountants with holding them responsible for the dishonesty or carelessness of their clients seems counterproductive to me.

The accounting profession as a whole is made up of honest, hardworking people who take pride in the quality of their product. Most treat IRS personnel with respect, and co-operate in clearing up issues with the taxing authorities. There was at one time a working relationship between tax professionals and the IRS that I feel will be damaged by the threats made by Ms. Baker.

I have had the experience of competing with dishonest or incompetent preparers. The potential clients who came to our office had a simple analysis of the situation: They were going to be charged more for our services and they also would pay more in taxes.

What do you suppose they decided to do?

When the heavy hand of government becomes hostile and threatening, it creates an environment where compliance is even less likely.

CPAs will continue to do their best to follow the complex and contradictory tax structure with which Congress has, in its infinite insanity, burdened us. Honest preparers are already striving for accuracy and trying to balance cost with quality.

The threatening attitude of the IRS only reinforces those hostile to government with additional rationales for not following the rules.

And having the people in Washington who are directing this hostile environment make significant understatements of income without consequences doesn’t help.

Paul A. Hense, CPA, is president of Hense & Associates, a local accounting firm. He is also past chairman of the National Small Business Association and the Small Business Association of Michigan.

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