The Tax Man Cometh

‘Tis the season for everyone to gather their documents and undergo the arduous process of reconciling with the IRS for the last year. If you’re like me, you probably rely on the advice and assistance of a professional tax preparer to help you with the task.

But a recent North Carolina Court of Appeals decision demonstrates the caution that must be taken when dealing with tax preparers. In Head v. Gould Killian CPA Grp., P.A., the plaintiff sued her tax preparers after discovering that they had failed to file four years’ worth of tax returns on her behalf. Ouch. Although the plaintiff prevailed in the Court of Appeals and was allowed to press her claim for professional negligence against the tax preparer, her lawsuit was not without bumps in the road, as the trial court had granted summary judgment against her based on the North Carolina statutes of limitations and repose.

How can you work more seamlessly with your tax preparer and avoid problems like those encountered by the plaintiff in Head? Both the Head decision and recent decisions of the U.S. Tax Court provide some good commonsense tips.

(1)  Vet Your Tax Preparer’s Qualifications.  One of the reasons people often use a tax preparer is because their tax return is likely to be complicated, and they need someone with specialized knowledge and expertise to navigate through the complex web of regulations on their behalf.  Before handing you money and documents to a person advertising himself as a tax preparer, be sure to vet that s/he has the qualifications and experience necessary to provide the complicated services you need.

If your tax preparer turns out to be unqualified, you could be held liable for negligence in the preparation of your return.  For example, in Jacobs v. Comm’r, T.C. Summary Opinion 2015-3, Docket No. 21078-11S (U.S.T.C. 2015), the Tax Court found that the taxpayer was responsible for negligent preparation of his return when the preparer he hired turned out to be an interior designer turned truck driver who had recently hung out a shingle as an unlicensed tax preparer.

Failure to properly vet your tax preparer can also come back to haunt you in other ways.  For example, many of your tax documents will contain your social security number, account numbers for banks and retirement accounts, and other sensitive personal and financial information.  Unlicensed tax preparation is a good way for an identity thief to get your information so that they can file false tax returns on your behalf and engage in other criminal activity.  See, e.g., Stacy v. HRB Tax Group, Inc., No. 11-2012 (6th Cir. 2013) (unpublished decision).  Don’t give them that opportunity.  Research your tax preparer’s qualifications, and get personal or business references from former clients before paying for services and providing sensitive documents.

(2) Get Your Preparer’s Agreement On The Scope Of The Services.  The plaintiff in Head did not have a written agreement in place with her tax preparer. However, in the first tax year she worked with that preparer, the preparer met with her to discuss her tax return and then filed it by mail for her. Based on that experience, plaintiff assumed that the preparer would also file the returns for her in subsequent years. The preparer, on the other hand, assumed that he would simply mail plaintiff a copy of her completed returns, and that she would file them herself. This misunderstanding could have been avoided by a clear agreement, preferably in writing, that defined the scope of the preparer’s services and included filing the return either electronically or via mail.

If your tax preparer does not enter into written agreements for the scope of service, then never assume that the tax preparer is providing full and complete service that includes filing.  Revisit the question after the returns are prepared, and make sure to follow up later (preferably via e-mail or in writing) to get a written verification from the tax preparer that his office did, indeed, file your returns.

(3) Provide Your Tax Preparer With All Of Your Documents. A common problem that arises in tax courts is when the taxpayer failed to furnish a copy of an important form to the tax preparer – particularly forms that reflect income to the taxpayer, such as a Form 1099 or documents reflecting alimony payments or other post-divorce disposition of assets. For example, in a summary opinion of the U.S. tax court from 2010, the fact that a taxpayer explained her alimony payments to her tax preparer instead of providing him with the correct documentation resulted in the IRS holding the taxpayer liable for the negligence in accounting for the alimony, rather than the preparer. See Kelly v. Comm’r of Int. Rev., T.C. Summary Opinion 2010-4 (U.S.T.C. 1/13/2010).

In sum, don’t rely on simply telling your tax preparer about payments or income affecting your taxes. Instead, take the time to gather and provide all of the documents reflecting the transactions at issue. If your tax preparer asks questions and you end up answering orally, always follow up by trying to find or get a copy of documents that might back up the answer you gave, and pass the documents along to your tax preparer before filing.

(4) Review Your Returns With Your Tax Preparer And Ask Lots Of Questions. Another way in which taxpayers can get into trouble is failing to take the time to properly review the return and ask questions of the tax preparer.  If the IRS later determines that the error on your return was so blatant and obvious that you should have been able to spot it upon review, the fact that you used a tax preparer will be no defense to the underpayment and penalties. See Metra Chem. Corp. v. Comm’r, 88 T.C. 654, 662-63 (1987).

When you receive a draft of your prepared return, be sure to review it thoroughly before giving it back to the preparer for filing.  Ask questions and follow up on numbers that appear to be “off.”  Keep in mind that tax season is the busiest time of year for tax preparers, as well as the most profitable.  Your tax preparer is probably preparing scores of other peoples’ returns as well, and mistakes become more likely the closer you get to April 15 and the busier the tax preparer becomes.