Tax

Have a Tax Question? Ask a Tax Expert

Ask an Expert,
Get an Answer ASAP!

Tax
This answer was rated:

This concerns due diligence and IRS penalties. The same

This concerns due diligence and...
This concerns due diligence and IRS penalties.

The same client who has a 2012 K1 partnership loss with a $71k additional invested capital in 2012 can take this loss based on the 2012 information. However, she informed me that she had taken excess losses in prior years over and above her initial investment (basis).
Now that I know this and confirmed it on a few years returns that she had prepared, I informed her that the returns should be amended. She does not want to hire me to do these amendments. I do not think that she will do these amended returns..

For due diligence, what is my next action?

Will a letter prepared by me " indicating the Form 1040 amendments are necessary and she chose not to hire me" be sufficient for "due diligence". Am I still considered doing my due diligence if I file her 2012 tax return even though she had given me this information about prior years?
Show More
Show Less
Ask Your Own Tax Question
Answered in 5 minutes by:
10/1/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,282
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

Lane :

OK this is where it gets to be art more than Science, I think

Lane :

If it were me I would, as you said, consider "... a letter prepared by me " indicating the Form 1040 amendments are necessary and she chose not to hire me..." sufficient for due diligence and disclosure

Lane :

HOWEVER, if it were me, I would draw the line at doing the 2012 return (having knowledge of the previos years' information).

Lane :

Probably stating the obvious, but as long as the 2012 return can be done in a compliant fashion, you're TECHNICALLY OK, but for example I remember my Fed Tax professor making the statement (and I think you'll see this in the AICPA obligations as well) tax compliance is a part of the job ...

Lane :

To take a bit of a philosophical bent, this could be a defining moment for you. The CRAP that the big eight firms sold for years (not unrelated to why it's now the big four) would be right in line with going ahead and doing this year's return (technically OK) but I'll be that at some time in the past each one of those firm's partners crossed over that line and things started going the way they did .. or a long time ... until Enron, Global Crossing and other blew it all up

Lane :

Sorry I can't help you more, but I think this one's a judgment call ... I CAN tell you that since that time the ABA model rules of conduct have been changed to REQUIRE disclosure in those kinds of situations (especially as it relates to walking away from the client only to let another firm walk right into a bad situation) ... I know you're not an attorney, bet the recent tide as been to err on the side of proactive disclosure, as opposed to waiting on a request

Lane :

Finally, this probably need to be done in terms of whatever professional or membership standards you have to meet ... enrolled preparer, circular 230, etc. Let me know if you'd like some research specific to certain code or rules

Lane :

Hope this helps you flush it out

Lane :

Lane

Ask Your Own Tax Question

Hi,

Never saw you come in on this one.

Let me know if you'd like some analysis particular to as specific set of rules.

The term Due Diligence is used in a lot of areas (investments, tax prep, accounting generally FASB etc)

Let me know if you're referring to something specific

Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,282
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
Ask your own question now
Customer reply replied 4 years ago


Would you mind sending the code it references. I will call the client to discuss this.


Hi Peg,

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
statements.

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.




Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,282
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
Ask your own question now
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,282
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
Ask your own question now
Thanks Peg!

Lane
Ask Your Own Tax Question
Ask Lane Your Own Question
Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,282
13,282 Satisfied Customers
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

Lane is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,300 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,338 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

Robin D.

Robin D.

Senior Tax Advisor 4

13,980 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,651 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

R. Klein, EA

R. Klein, EA

Enrolled Agent

1,839 satisfied customers

Over 20 Years experience

< Previous | Next >

Related Tax Questions
I received email stating that our 2017 federal tax return
I received email stating that our 2017 federal tax return prepared via TurboTax had been completed and filed and accepted by the IRS but no refund amount was stated therefore current refund amount and… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,808 satisfied customers
I would like to open a business:to prepare tax returns for
Hello! I would like to open a business:to prepare tax returns for non resident,more exactly for students who come on a J1 -Visa ("Summer Work and travel" programme=where they work for aprox 3 months i… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
Tax law. California. 2016. I am a tax preparer... I have a
I am a tax preparer... I have a client that is under audit... he unfortunately paid approximately $200,000 to subcontractors CASH... the IRS is not allowing the deduction... is there a way we can prove it?… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,808 satisfied customers
I am preparing 6 years of tax returns, I have an IRS Notice
I am preparing 6 years of tax returns, I have an IRS Notice 2014-7 that states that states "IHSS wages received by IHSS providers who live in the same home with the recipient of those services are als… read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
On line 37 my 2015 Form 1040 I had an adjusted gross income
On line 37 my 2015 Form 1040 I had an adjusted gross income of $291,546. on my Amended 1040X for 2015 I have taxable income of $179,542. How do I get proof of this to get an adjusted MAGI to give to M… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,808 satisfied customers
Penalty for late filing of partnership LLC tax return, not
Penalty for late filing of partnership LLC tax return, not eligible for Rev Proc 84-35 relief because one of the partners is a foriegner… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,808 satisfied customers
W, is there a amend tax return there at IRS there for me? My
Hi, my name is ***** ***** Miller, is there a amend tax return there at IRS there for me? … read more
Fred Rook
Fred Rook
Corporate Controller
BSBA
64 satisfied customers
What are the rules for a utma account. California. Can i pay
what are the rules for a utma account JA: Because laws vary from place to place, can you tell me what state this is in? Customer: california JA: Has anything been filed or reported? Customer: no JA: A… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,084 satisfied customers
Impact of tax changes on filing amended returns... Client
Impact of tax changes on filing amended returns... Client filed a 2016 tax return on time in 2017. If the tax laws change significantly, which laws apply when amended returns are filed... the tax laws… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,808 satisfied customers
Accidentally sent IRS an unsigned copy of our 2016 form 1040
accidentally sent IRS an unsigned copy of our 2016 form 1040 and later received a form 3531 requesting a valid original signature. Should that returned signature be dated to the original submittal dat… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,084 satisfied customers
Lev, I am preparing federal unfiled tax returns for a client
Good morning Lev, I am preparing federal unfiled tax returns for a client of mine. I am also ready to finalize the 2014 tax return and there is an NOL created on his return. The client has already fil… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
For a ny state partnership tax return, if you file an
For a ny state partnership tax return, if you file an extension but don't pay anything and then end up owing a lot. Do they still recognize the extension or do they charge a failure to pay penalty (fo… read more
Lane
Lane
JD, CFP, MBA, CRPS
13,282 satisfied customers
Is a tax return less likely to be audited if it's prepared
Is a tax return less likely to be audited if it's prepared by a CPA or simply a tax person? Secondly, our Rotary Club is a 401 C for we have a 401 c 3 Foundation the question is can individual members… read more
socrateaser
socrateaser
1,031 satisfied customers
Adjusted individual tax return for 2014(Iowa),says no
Adjusted individual tax return for 2014(Iowa),says no response to letter of inquiry,disallowed health insurance. deduction.says my wife and I owe$600.00.she called # and was told to show proof of insu… read more
Lane
Lane
JD, CFP, MBA, CRPS
13,282 satisfied customers
I filed my Form 1040, prepared on TurboTax and filed
I filed my Form 1040, prepared on TurboTax and filed electronically via TurboTax. I got nothing back and was told by the IRS that the refund was sent to a different bank transit number than the one sh… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,808 satisfied customers
Attorney, my ny state tax return was audited. Finally it
Attorney , my ny state tax return was audited . Finally it says the case was closed and a letter will be mailed out . Anyone to access this info… read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
A Form 1065 partnership return is being prepared for a
A Form 1065 partnership return is being prepared for a partnership whose General Partner is a single member LLC. In the Analysis of Net Income (Loss) section at the top of page 5, is the LLC's portion… read more
taxmanrog
taxmanrog
Master\u0027s Degree
778 satisfied customers
I am preparing a partnership tax return for 2016. The
I am preparing a partnership tax return for 2016. The partnership holds commercial rental property. one of the partners, 50%owner, passed away in April 2016 and left his interest to his spouse. i woul… read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x