Due diligence: CPAs take note: IRS is increasing expectations.

• Author: Dellinger, Kip
• Position: Professionalissues

due diligence is a hallmark of a CPA's performance and there are indications that the IRS intends to focus more closely on tax return preparer and adviser due diligence responsibilities. In light of this, CPAs are advised to review their processes and procedures to ensure compliance.

There are also indications that the IRS may have some expectations for preparer due diligence that extends beyond what the tax profession has come to believe is required and appropriate. This may lead to problems for tax professionals with the IRS in the examination process.

Background Indications

A hint of increased IRS expectations surfaced two years ago when U.S. Department of the Treasury and IRS representatives asserted that Circular 230 practitioners had an affirmative duty not just to ask their clients if they had signature authority over a foreign bank account, but were required to have a specific conversation with every client of the tax preparer concerning the foreign account reporting requirements even if there was no evidence the client had an account and where the client has indicated "no" or "none."

It should be noted that the IRS is in the process of issuing guidance in this area that may focus only on a heightened tax preparer "awareness" without the necessity of a "conversation" in every case.

Then the National Taxpayer Advocate's 2009 Annual Report to Congress discussed the possibility of imposing additional due diligence requirements on preparers.

While the report has not always carried great weight with Congress, the Treasury or IRS, one can safely assume that it will garner the full attention of the IRS when it comes to using the tax preparer as an enforcement tool.

Next came an IRS "information" project in January that involved sending letters to 10,000 tax preparers explaining a variety of due diligence responsibilities with regard to return preparation. The letter (as it indicated) was followed by a meeting between an IRS agent and the preparer at the preparer's office in a majority of cases.

Also, the forthcoming process of registering all tax preparers and subjecting them to Circular 230 professional standards is indicative that the Treasury and the IRS hope to measurably close the "tax gap" through increased compliance that will include enforcement activities with respect to tax preparers not adhering to appropriate standards of practice.

Buried, and perhaps overlooked by many practitioners and commentators, in the recent Circular 230...