Back at the desk now. (Enrollment Meetings from 10:00 until 2:00 today).
Can you give me a little more detail as to what you're asking?
Above, I mentioned that the term due-diligence (the term you used in your original question) is used in a LOT of different professions.
It almost always means the diligence that is due the client, (as required by a regulatory board - state regulatory Bar, state board of accountancy, FINRA, state securities dept ... OR ... as modeled by a trade association, such as ABA, or AICPA, or CFP Board).
What I mentioned was that, if you could give me the rules/area in which you wish to be/show compliance, I can dig in a get them for you.
For FINANCIAL STATEMENTS generally, and this is in in line with AICPA's model - there are really three levels of responsibility:
Audit, Review and Compilation.
AICPA articulates it this way; by making three statements and then saying which level (Audit Review and Compilation coincide)
"The accountant is required to obtain an
understanding of the entity’s internal
control and assess fraud risk"
This first one applies ONLY to AUDIT.
The accountant is required to perform
verification and substantiation procedures.
This on applies only to AUDIT.
"The accountant is required to perform
inquiry and analytical procedures"
This one applies to BOTH AUDIT AND REVIEW
Note that compilation is not associated with ANY of these three.
In fact, they define compilation in this way:
"Accountant does not obtain or provide
any assurance that there are no material
modifications that should be made to
the financial statements."
Further, they say that the OBJECTIVE of a compilation is the following:
To assist management in presenting
financial information in the form
of financial statements without
undertaking to provide any assurance
that there are no material modifications
that should be made to the financial
And regarding any assurances that should be made in a cover letter for a compilation?
"None – the report states that no
assurance is provided"
I think that your best risk management (for yourself) will be to use the compilation terminology, state in your cover letter, that you are preparing based on information compiled from existing data, and provided by your client.
And most important, that you are making no assurances of the accuracy of the data.
Then get them to acknowledge this by signature.
In terms of recent trends, the heightened IRS expectations (that started with IRS making the statement that accounting firms had to pro-actively ASK every client if they had signature authority over a foreign bank account (even if they had checked the box "no"), was in 2008.
After that, the National Taxpayer Advocate’s 2009 Annual Report to Congress discussed the possibility of imposing additional due diligence requirements on preparers.
Next came an IRS “information” project in January, 2010 that involved sending letters to 10,000 tax preparers.
Then came the registrations initiative (for preparers).
What has essentially come, through all of this, to be understood as due diligence for TAX PREPARERS is the following:(This is a direct quote from a 2010 piece distributed by the California Society of CPAs)
What is Due Diligence?
Generally, due diligence may be framed as a question: Did the practitioner (and the firm) exercise professional care to ensure that—based on the knowledge of the practitioner (and the firm)—the taxpayer’s return is true, correct and complete?
Dictionary definitions generally view due diligence as the diligence, or care, that a reasonable person (in our context, a tax professional/preparer) would undertake in similar circumstances.
When an examination of taxpayer’s return results in an understatement of tax, the IRS often asks:
Did the preparer apply the law
appropriately to the facts?
What effort was made to obtain the pertinent facts?
Should the preparer have made inquiries about items on the return or verified the evidence in support of the item?
What documentation existed to support the professional duties of the preparer?
What processes existed in the tax preparer’s office or the preparer’s firm to ensure the appropriate evaluation of facts, application of law, discharge of any indicated responsibility to verify information and to document these processes?
There are basically two aspects of due diligence that may impact a CPA preparing a tax return:
(1) Diligence pertaining to representations with regard to interpretations and compliance with tax law (including interpretive regulations and other tax authority guidance). These are tax positions for which the preparer must have knowledge of (or a reason to know of) to be responsible.
(2) Diligence pertaining to facts or evidence to support items reflected on a return. Generally, this is the taxpayer’s representations about “facts” and the taxpayer’s representations about amounts reflected in the return. However, the CPA cannot ignore the implications of the taxpayer’s information or other information of which the CPA has knowledge.
[Peg. Note this next one- a part of the second area of due-diligence]
For example, the client asserts that adequate records to support entertainment deductions
exist, but the CPA knows that adjustments for inadequate records arose in an examination of a prior year return. In that situation the CPA should likely review the supporting documents to ensure that they do exist.
Steps CPAs Should Take
Educate and inform clients in writing: While taxpayer representation (including in an organizer) may suffice for most information placed on a tax return, the IRS could assert (and, in fact, a taxpayer client may claim) that the preparer did not adequately explain the essential requirements for claiming of certain types of tax benefit on a return (including omissions).
Tax practitioners are advised to consider sending informative explanations with respect to the requirements for record-keeping, as well as the basis in tax law for certain types of tax benefits for which they will make representations to the tax practitioner.
This would include an explanation of the necessity for answering any required questions on tax returns
. This may be done either by a separate mailing to the client during the tax year (which makes it a good promotional opportunity), or inclusion with the tax return engagement letter.
An example of sensitive Form 1040 areas where this may be useful might include: real estate loss and real estate professional requirements for claiming losses, the requirements for employees and partners necessary to claim unreimbursed business expenses
, hobby loss rules and the at-risk limitations for claiming deductions or losses. The foregoing items are not all-inclusive.
An Excellent piece...In this particular society's view, you have an issue as it relates to the previous returns.