Tax Preparer Ethics Course Generates Focus on Areas of IRS Scrutiny
As the debate continues over a long-term solution to funding US government spending, closing the “tax gap” is becoming increasingly important. This gap is the difference between taxes collected and the estimate of actual taxes that are legally payable. The IRS is certain to scrutinize tax return preparer work more closely than ever.
In order to recover as much of the tax gap as possible, the IRS has targeted specific groups. First within the IRS sights are people in the tax preparation industry. Individuals involved in preparing tax returns already have to register with the IRS. The next step is implementing the registered tax return preparer exam in 2012.
Also on the agenda for all federally authorized tax preparers in 2012 is completion of tax preparer continuing education. Part of this ongoing training includes teaching tax return preparers about the tax gap along with recognizing and eliminating cases that create it. Therefore, among the annual course requirements are 2 hours of learning in a tax preparer ethics course.
A focal point of IRS ethical scrutiny is taxpayers with high incomes, substantial investment holdings, and complex tax returns. The IRS has expanded its operations against wealthy individuals by creating a unit of tax agents specifically assigned to the Global High Wealth Industry. A team of auditors is now available to examine tax returns with diverse sources of income and deductions. No more IRS concern that some tax returns are too much for only one tax agent to tackle.
The addition of this new group is likely to increase IRS audits of high-income earners. That means the tax preparer career of anyone serving the wealthy is also certain to receive greater IRS judgment.
One of the matters catching IRS attention recently is property transfer. The annual exclusion from gift tax is presently set at $13,000 and is indexed to cost-of-living adjustment each year. This amount applies to the combined giving of cash and the fair market value of property to any one person.
The IRS has been examining local real estate deed records to locate property transfers among family members. A gift tax return is required whenever a transfer of property valued at greater than $13,000 occurs – even if the transaction escapes gift tax by utilizing part of the giver’s $5 million lifetime exemption.
Another area of concern is deduction of losses from passive activities against regular income. The IRS has found instances of taxpayers deducting losses from businesses in which they are not actively involved from their income derived by a business they actually operate. Professionals engaged in small business tax preparation should exercise care in identifying passive activities.
IRS attention has also been drawn to taxpayers with overseas income, who shelter it in foreign bank accounts. US citizens and resident aliens are taxed on their income from all sources, including those originating overseas. The IRS has also raised a red flag over large home loan interest deductions. The limit for this deduction is interest on the first $1,000,000 of mortgage indebtedness for home purchase or constructions plus the first $100,000 of borrowing against equity. Exercise of tax preparer duties therefore demands more than ever an ethical reporting of income and deductions.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.