I was asked by the Editorial Staff of Accounting Today if I could put an article together on the use of Form 8275, Disclosure Statement, and its protective use for preparers and taxpayers alike.
It is our pleasure to include the article here in “A Tax Blog”.
This was a very difficult piece to write, and I was never entirely comfortable, although some of my “tax gurus” reviewed it and gracefully approved. It’s a complex area, and very hard to put into plain language as the use of Form 8275 encompasses various penalty code sections and Circular 230 (which governs practice before the IRS). I found it very hard to write without citing the law and including all the disclaimer caveats one normally reads in such an article. But, I think we covered it fairly well in a plain language tone.
Getting to the substance, fear comes with this uncertainty. Frankly I don’t trust the IRS to use the rules governing paid preparers objectively or fairly. As competent and ethical preparers we know the type of situation where a paid preparer has violated the rules of Circular 230. But we don’t know how the decision is made within the confines of the IRS. Preparer penalties are determined by local office personnel.
Here’s a hypothetical example. A taxpayer is examined in a civil case, and the tax preparer, who is also the representative, is told by the IRS examiner that the examiner wants to interview the taxpayer. While most representatives “cave” on this issue and allow the interview (presumably to stay in the “good graces” of the IRS – tantamount to client “treason” in my opinion), a prudent practitioner may simply produce IRC Section 7521, which states pretty clearly that the taxpayer can have his or her representative act in their place for the interview. It’s the law. In general, that means the questions would be reduced to writing, and the representative and taxpayer together will later respond in writing to those questions.
Local IRS offices don’t like this, and the interview issue usually ends in disagreement between representative and examiner. The examiner may even bring in his or her group manager to discuss with the representative. If the representative (with the law clearly on his or her side) sticks to his position, that position will prevail. The law is the law.
However, there was the inevitable “tension” during the exchange, and this is human nature. Now, if there is a change on the tax return that results in a proposed assessment, where will the IRS draw the line on preparer penalties? Will the IRS “search” for a reason to assess preparer penalties on this tax preparer because he zealously represented the taxpayer, without prejudice, and was successful in an argument during the course of the examination? Will the examining agent, and/or group manager, retaliate by assessing preparer penalties, because of a competent but “zealous” preparer?
While I totally support preparer penalties, we as objective, ethical tax representatives know a violation when we see it. I’ve read many, many articles on “dirty” preparers and it sickens me, as it damages the profession. But they are obvious, and fail the smell test.
However, I hope, but I’m not hopeful, that the IRS can respect the consistent application of preparer penalties pursuant to IRC 6694, and not cross the line from a punitive tool for bad practitioners, to a “sword” used to retaliate against quality practitioners who zealously represent their clients, with passion and without prejudice. And this is why I believe Form 8275 is such an important document. If used properly, disclosing uncertain but well thought out tax positions can protect prepares from such a “sword.”