When can a tax preparer accept your word?

When can a professional tax preparer accept your word without documentation and when must a tax preparer rely on other contradicting information?

These issues came up several times this week in my work. The guiding principles are listed in IRS Circular 230 but are frequently not understood by taxpayers. While almost half of all tax filers use a professional preparer, fewer actually understand the law that guides this work relationship. Consider these examples:

Health insurance premium subsidy

Clients reported that they received more than one Form 1095 about the amount of health insurance premium subsidy they received and that one of them was obviously an error.

One may be an error but the tax preparer cannot ignore the premium subsidy indicated. The Form 1095 must be fixed first before the preparer can file the tax return. There does not appear to be any error-correcting method built into the Affordable Care Act from the consumer’s perspective.

Incorrect wages reported on Form W2

A W2 form showed the incorrect amount of wages earned.

The tax preparer can rely on your verbal statement and there is a method to report a discrepancy on a W2 wage report. Even so, the best method is to have the employer correct the W2 before you file a tax return. 

Medical expense deduction

The taxpayer has receipts for substantial medical bills through a Flexible Savings Account and is adamant that they want the deductions taken on Schedule A. The expenses might be itemized on a state tax return and perhaps this is the reason for the taxpayer’s confusion.

The tax preparer may not include the itemized deductions on Schedule A; doing so would be an offense subject to fine or prosecution.

Missing records

Taxpayer is missing records of deductible business expenses but estimates them to be $500.

A tax preparer can rely on taxpayer’s verbal statement if it seems reasonable although it is within their right as an independent business person to choose to not do so and to refuse to list the deduction.

The common thread in all of these issues is that the tax preparer is usually familiar with what is and what is not going to work on a tax return but is not always effective in communicating that explanation to the taxpayer. Taxpayers are frequently likely to rely on ideas about that they read, heard about from others or positions that they have taken in on past tax returns without objection.

An interesting twist is that many tax professionals, myself included, are noticing that a larger percentage of our business now comes from taxpayers who ignored this type of advice and then later requested representation to deal with taxes and penalties. This is a more expensive proposition that could easily be avoided by approaching taxes with a more logical attitude.