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What Does Due Diligence Mean in Tax Preparation

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Example 9: S prepares R Corp.`s 2009 Form 1120. She did not prepare R`s 2008 Form 1120 and is requesting a copy. Reading the statement, she notices that there is no deduction for repairs and maintenance on line 14. Curious, she investigates and finds that by mistake, the deduction – $75,000 – was omitted from the return. S does not detect any other errors in the return, has no reason to question the accuracy of another item and confirms that the items have not been customized by inspection or otherwise. U.S. tax advisors are subject to tax laws that require them to do their due diligence when filing tax returns for taxpayers who claim certain financially advantageous credits: And if the creator does nothing and hopes that everything will disappear, unfortunately, it will not happen. Within 30 days, the file will be closed and the penalty specified on Form 5816 will be assessed. Now, in fiscal 2020, the penalty will be increased to $530 by default for modified returns and returns.

The IRS refers educators who intentionally file fraudulent returns to our CI office or the Office of Professional Liability, or we can work with the Department of Justice`s Tax Division under the Civil Injunction Program to obtain a court order called an injunction. Injunctions can prevent one person or business from filing tax returns for others. Now, I`m going to share one final method that the IRS can use to verify the due diligence of a paid preparer. We have what is called a correspondence due diligence check. We conduct due diligence correspondence reviews in areas where there are not enough revenue officers or where there are no revenue officers in that geographic area to visit the office. Last season, about a thousand due diligence reviews were conducted, including about 230 by correspondence. Now we can increase the number of remote checks performed in the future. So if there`s a creator near an IRS office, that doesn`t mean the IRS can`t do your due diligence.

It just means that we will do it by mail. Well, before we finish our presentation today, Denise will share some of the IRS resources we have that can help you avoid the letters I shared with you today, a possible phone call, or the penalties and other consequences discussed during this presentation. Denise. HELLAND: Thank you, Shanonda. And before we get to all the great educational resources we have, I just want to say that there were a few key points that I`ll keep in mind from your discussion. The first is that this is not the case, it is important not to forget to fill out my form, my favorite form 8867, the first paid creator`s due diligence checklist for each return prepared with one of the loans and/or the registration status of the head of household. Another point you raised is that the IRS uses different methods to communicate with creators who are not fulfilling their due diligence obligations. Therefore, tax advisors need to make sure they address all IRS letters, phone calls, or educational visits to really avoid compliance due diligence. I`m sure I would.

And the other point I take away is that there are consequences to not fulfilling the duty of care of the paid creator. But the good news is that the IRS will try to educate creators who don`t seem to meet the requirements before moving on to more aggressive actions. So, on what we have available. It is important that we have a resource for you as part of an important part of our educational efforts, and we have one. We have a great resource tool through It has been developed for you and our goal is simply to assist you in the exact preparation of your customer`s return. And all you have to do is use the search box on and type the words Preparer Toolkit. And what`s in the Preparer toolkit, you may be wondering? Well, it provides due diligence information, including articles and publications and examples of various treatment letters that Shanonda talked about. When you open the page, you`ll also find compliance messages to the minute under what we call hot topics, and guess what else? We have humorous but educational videos that guide you through the more complex customer scenarios we`ve covered today and how you can navigate through an interview to complete your due diligence to help you prepare your return accurately. We produced them this year for the national tax forums, and all you have to do is search the toolbox for videos or videos of the tax forum on this website. We also have a video or two that guides you through the due diligence process that Shanonda just covered, and sometimes the images are sure to say over a thousand words, so watch these videos. So, for Naomi.

Do a parent for the head of household and a parent living in Mexico or Canada need an ITIN if they are citizens of Mexico or Canada? MBUGUA-DILLARD: So, Veronica, I would definitely suggest and there is also a publication for that and that is publication 972 and that is, conversations that, it talks and contains information about the registration status of the budget manager. Basically, for the registration status of the head of household, the parent must have an ITIN and the client who claims that the parent should have provided more than 50% of the support to the parent, and in the case of the 2019 tax year, the parent should have earned less than 4,200. If it had been for 2018, it would have been 4,150. But I would certainly like, you know, to encourage publication 972, which is an excellent reference and available online. The Internal Revenue Service (IRS) assesses due diligence penalties for non-compliance with the knowledge requirement to carefully determine a taxpayer`s eligibility for certain tax benefits under Section 6695(g) of the Internal Revenue Code (IRC). Example 8: Q prepares Form 1120 2009 for P Corp. She did not prepare the 2008 Form 1120 and is requesting a copy. She reads the tax return and notes that it includes a timeline showing that P Corp has a net operating loss carry forward of $1 million and another net operating loss carry forward of $850,000 in alternative minimum taxes until 2009. Q finds no errors in performance, has no reason to question the accuracy of these figures and confirms that positions have not been adjusted by review or otherwise.

In order to fulfil its duty of care when preparing the 2009 declaration, it is not necessary for Q to carry out any further procedures with regard to the transfer figures. In particular, it is not necessary for it to review the working documents in support of the 2008 declaration as a predicate for the preparation of a 2009 declaration using the transfer. Tax advisors now have a new duty of care: document their investigative efforts to confirm clients` eligibility to apply for household status. His father has an ITIN and lives in Mexico. Dad also takes all the other tests to be your client`s qualified parent. The client cannot claim his father for the loan for other parents because he does not meet the U.S. citizenship, nationality or residency test. But he may be able to claim his father as a person eligible for head of household status because his father lives in Mexico.

Now, again, the head of the family that this parent must be an American citizen, an American citizen. A citizen or resident of the United States, or in turn a resident of Canada or Mexico. There is an excellent publication, Publication 519, U.S. Tax Guide for Aliens. It`s a great resource for you to reflect on these particular situations. Well, Veronica, I love these investigative questions. Do you still have one for the head of household? TUBMAN: Great minds think the same way, Denise. Our next survey question is about the head of household. Audience, now remember what Denise said earlier. A dependent alien must be a U.S. citizen, citizen or resident alien, or resident of Canada or Mexico. All decisions must be taken with this particular point in mind.

OK, here it is. Can the client living in New York claim head of household status from a dependent relative living in Guatemala? Is the correct answer A, no, the parent does not live with the client; B, no, the parent does not live in Canada or Mexico; C, no, because the parent does not live in the United States; or D, it depends on whether the parent is a U.S. citizen or a citizen. ALL RIGHT. Most importantly, if you`re in your office sorting through these tax identification numbers and citizen requirements for the CTC and ODC, I hope you`ll find this chart very useful when you`re trying to make the right decisions for your client. We did this because we know that the word will fade quickly, but the pressure will last a lifetime. So, I hope that this impression, this visual here will serve as a good resource and tool for you. As you know, the changes to the 2017 tax reform introduced the status of head of household under Article 6695(g) of the Internal Revenue Code under the due diligence of paid creators. Here to discuss HOH in more detail with you is my colleague, Denise Helland, Denise. HELLAND: Thank you, Piper, and good morning everyone.

I very much appreciate the opportunity to address you today. So, as you know, under the new tax law, none of the rules for asking for the head of household has changed. The only change to the law at this time is that this status is subject to due diligence. Unless A has reason to believe that the information provided in the Promoter is incorrect or incomplete, A has acted with due diligence in creating Appendix D of B using such information without further request. In particular, if he has no reason to believe that the information contained in the organizer is incorrect or incomplete, he can prepare the return with reasonable care, even if he does not check the transaction confirmations or brokerage statements. Example 5: Unlike Example 4, J does not inquire at all about the existence of the required records, and K makes no statement about the required documentation. .

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