Category Archives: Taxation

Episode 1- Is There Any Tax Relief Available From Spousal Tax Debt

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW
Published October 1st, 2024

Topic: ”Is There Any Tax Relief Available From Spousal Tax Debt”

Attorney Coleman Jackson
Welcome to Legal Thoughts my name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Legal Assistants, Leiliane Godeiro, Ayesha Jain and Law Clerk, Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will be interviewing me on this very important topic impacting many couples in America :“Is There Any Tax Relief Available From Spousal Tax Debt. ”

We urge our audience to like and follow our podcast and invite all their neighbors, friends and acquaintances to please tune in to Legal Thoughts Podcasts on Apple Podcast, Google Podcast, Spotify or wherever you listen to podcasts. You may read all of our podcast blogs at www.cjacksonlaw.com.

Interviewer Mlaah Singh
Hi everyone, my name is Mlaah Singh and I am a Law Clerk at the tax, business law, contracts, disputes resolution and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas, 75206. Our English phone number is 214-599-0431 and our dedicated Spanish language line is 214-599-0432.

Good morning Attorney; In this very blog, I will be talking with you about an extremely important topic; that I think, every married couple in our Legal Thoughts Podcast audience need to know about. This blog deals with what are the liabilities and consequences of marrying someone or being married to someone who owes the IRS. Is there any relief from tax debt owed by ones spouse?

I look forward to interviewing you today. I intend to ask you questions today designed to help our listeners understand what tax consequences exist for folks who are either contemplating marrying someone, or those who ae already married to someone with huge outstanding IRS tax debt. Are these individuals held responsible for their spouse’s tax bills? This is a big deal, so, Attorney lets get started.

Interviewer Comments: Attorney Jackson, it is my understanding that there could be tax consequences when someone marry or are married to a spouse who have tax problems with the Internal Revenue Service.

Interviewer Question No 1:
Attorney Jackson, can you take some time to explain what tax obligations might exist for couples with outstanding tax problems related to their spouse’s financial activities either prior to marriage or during marriage? Our listeners need to (1) understand where they fall, and (2) how their spouse’s tax problems could create tax liability for them, and (3) what tax relief, if any, may be available to them if they find themselves married to someone with IRS tax problems?

Attorney Coleman Jackson
Good morning Mlaah and hi everybody in our audience today. I am going to take your three ‘questions in one’ as you have organized them:

First, when a taxpayer is contemplating marrying someone or is married to someone owing IRS tax debt; how they are impacted by each others tax debts are going to depend upon the state’s marriage and property laws of the state where they are domiciled. Where a taxpayer is domiciled is determined by a multiple of factors that essentially centers around where the taxpayer has a permanent legal home that the taxpayer intends to use for an indefinite period of time, and if absent, a home where the taxpayer intends to return. Taxpayers can only have one domicile at a time even if the taxpayer own or rent numerous homes around the country. Moreover, whether a couple is married is determined by state marriage laws which may be different from state to state. We don’t have federal marriage laws in the United States. For example, Texas recognizes informal marriages whereas most of the states in the U.S. does not. So, if the couple meet the legal requirements for an informal marriage and are domiciled in Texas, they could be considered married for federal tax purposes although they have not entered into a formal marriage. Texas recognizes informal marriages (common-law), formal marriages and a couple of other types of marriage arrangements, all of which are defined and governed by the Texas Family Code. So, our analysis and inquiry in answering your first question must begin with where is the couple domiciled and what are the applicable State’s marriage relationship laws in their state of domicile.

Therefore, the property codes of the applicable state where the couple is domiciled will impact how the couple will be impacted by the IRS tax debt of their respective spouse. In the United States, we have Separate Property Jurisdictions and Community Property Jurisdictions. There are about 9 community property states, 2 elective community property states and the rest of the states are Separate Property States. Texas is one of the 9 community property jurisdictions. Community Property Laws has a direct and material effect on federal tax liability as it applies to married couples.

This fact alone makes this a complex legal issue; and I am going to limit the rest of my response to the implications spouse IRS debt during marriage to taxpayers or couples residing in the state of Texas. Different rules might apply in other community property law states, elective community property states and certainly different rules apply to federal taxes in separate property states.

So, in staying with our Texas marriage and community property jurisdiction rules, let us move forward to your ‘second question in one’. Mlaah, as for your second question: How someone spouse’s federal tax problems could create personal tax liability?

That is an excellent question. I remind our audience that I am only going to address taxpayers residing in the community property jurisdiction of Texas. This is not because we don’t represent taxpayers from anywhere in the country or world for that matter in federal tax planning, estate and asset protection and international, federal and state and local tax controversies. I am limiting this podcast discussion to Texas because this area of tax law is too complex to cover all 50 states of the United States in a single podcast episode. I am attempting to keep something simple that is not simple. There is nothing simple about federal tax law as it intertwines with state family laws, estate laws and property laws. So let’s talk about Texas, where in general, with few exceptions, property acquired by a couple residing in Texas during marriage is equally owned by both spouses. That includes property, such as wages, income, salaries, earnings, and so forth which has serious federal tax implications.

■Texas Family Code, Title 1, Subtitle B, Chapter 3, Subchapter A, Section 3.001 defines a spouse’s separate property as:
–1- the property owned or claimed by the spouse before marriage;

–2- the property acquired by the spouse during marriage by gift, devise, or descent; and

–3- the recovery of personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.

■Texas Family Code, Title 1, Subtitle B, Chapter 3, Subchapter A, Section 3.002 defines community property as any property, other than separate property, acquired by either spouse during marriage.

■Texas Family Code, Title 1, Subtitle B, Chapter 3, Subchapter A, Section 3.003 states that property possessed by either spouse during or on dissolution of marriage is presumed to be community property. The degree of proof necessary to establish that the property is separate property is clear and convincing evidence.

So, what does all of this have do with federal tax law. Internal Revenue Code Section 61 says that generally, gross income means income from all sources from whatever source derived. Therefore, gross income includes wages, earnings, salaries, rents, dividends, and practically from any source you can think of. Gross income is an all inclusive notion; if you leave some increment of wealth out when reporting your gross income to the IRS; you, for sure could incur negligence penalties, fraud penalties and even risk prosecution for criminal tax fraud or evasion. The definition of gross income is very broad in federal tax law– it includes practically any increment in wealth. Further under federal tax law, community income is income from community property, which includes, salaries, wages, and other pay received for services performed by the taxpayer, the taxpayer’s spouse, or both during the marriage in a Community Property Jurisdiction, like Texas. Married individuals residing in community property jurisdictions, like Texas, do not have to file a joint tax return to be liable for one-half the tax owed on their spouse’s wages, income from business, rents, royalties, dividends, discharge from debts and the list of income included in gross-income goes on and on– increments of wealth is what we are talking about here. Married couples are liable for one-half of the community income; with very few exceptions, such as except for, when the couple are living apart during the tax year, or one spouse acted as if they were solely entitled to the community income, or when the spouse otherwise qualifies for some form of equitable tax relief. The main point I am making here is that in a community property jurisdiction, married couples are liable for one-half of the federal taxes on community income even though they do not file a joint spousal tax return. Word to the wise, you are liable for the one-half of your spouse’s income, even though you file a separate tax return.

Mlaah, these are some of the federal tax consequences for couples residing in a community property jurisdiction, like Texas. Texas is one of the 9 community property states. The other community property jurisdictions are Arizona, California, Idaho, Louisiana, Nevada and New Mexico. I remind our audience that property laws and marital laws are State specific in the United States. The federal tax laws do not define whether you are married or not married. These determinations are left to the several states. I am limiting my discussion in this particular podcast to the marital and community property laws in the state of Texas. Now let me turn to your final question, Mlaah: Question No 3 in one.

Question Number 3 in one: what tax relief, if any, may be available to a spouse if they find themselves married to someone with IRS tax problems?

The Internal Revenue Code provides essentially two types of tax relief to taxpayers who find themselves liable for their spouse’s federal tax debt. Again the practical application of relief available will depend upon whether the taxpayer is domiciled in a community property jurisdiction, like Texas, California or Idaho- for examples; or whether the couple is domiciled in a separate property jurisdiction, such as, Connecticut, New York, Virginia, Michigan for examples.

The Internal Revenue Code permits the Internal Revenue Service to provide broadly two forms of relief to taxpayer’s who might be caught up in tax problems resulting from their spouse’s financial activities:

■The first form of federal tax relief available is referred to in federal tax law as Injured Spouse Relief. Injured Spouse Relief applies when a couple files a joint federal tax return and their spouse owes prior federal tax debt, delinquent child support payments, delinquent student loans or various other types of debts subject to offset. The Injured spouse’s refund could be reduced or offset in its entirety by the prior federal tax debt owed by their spouse. Moreover, the injured spouse’s expected tax return could also be reduced by non-federal tax debt owed by their spouse, such as, back child support payments and delinquent student loan debt or any other debt obligations where Congress has authorized the IRS to offset against taxpayer’s refunds.

■Note the statute of limitations to file a well supported Injured Spouse Relief claim with the Internal Revenue Service is the same as for filing a refund claim generally; which is two-years from the date the overpayment was made or three-years from the due date of the return plus any extensions filed.

■The second form of tax relief available is referred to in federal tax law as Innocent Spouse Tax Relief. Innocent Spouse relief is an equitable relief from federal income tax liability available when a spouse meets certain eligibility thresholds codified in Internal Revenue Code Section 66. They are too complex for me to explain in this podcast presentation today.

■Innocent Spouse Relief is available for couples regardless whether they filed joint tax returns or not. However the Innocent Spouse tax relief rules are totally different depending upon whether the innocent spouse is domiciled in a separate property jurisdiction, like New York; or whether the innocent spouse is domiciled in a community property jurisdiction, like Texas. Situations where a spouse is relieved of federal tax liability can turn on whether the spouse had knowledge or notice of their spouse tax or whether they filed a joint tax return or, whether the spouse who is trying to avoid liability for community income can satisfy all of the eligibility criteria in Internal Revenue Code Sections 66(c) and 879(a).

■I am not going to go any deeper than this because our Legal Thoughts Podcast audience with questions can send an inquiry from our law firm’s website www.cjacksonlaw.com or simply call (214) 599-0431,

Interviewer Mlaah Singh

Interviewer Question No 2:
What types of notices might individuals receive in the mail? How can one approach the IRS regarding late payments or extenuating circumstances?

Attorney Coleman Jackson
Mlaah, the types of notices that the taxpayer might receive are too numerous for me to discuss them all in this podcast. You make a very good point by asking when preferencing your question on “notices received by mail” because lots of scammers may attempt to trick taxpayers by sending purported notices from the IRS by email, text or other methods. The IRS communicates with taxpayers by mail; but never, by text or email.

So, when you receive mail or any correspondence purportedly from the IRS, you should call the IRS Local Office. If you have any suspicions as to whether the correspondence is from the IRS, you need to verify it directly with the IRS using a contact number for the IRS from an independent source other than the contact information listed in the correspondence. There are lots of scammers out there. We have received numerous inquiries from clients and prospective clients about correspondence that they have received purportedly from the IRS. Many times; particularly in recent years with all this lying and thievery of today, this correspondence was not from the IRS but from advertisers, marketers and other scammers. Word to the wise call the IRS directly or call a lawyer before you interact with any correspondence. You must take correspondence from the IRS very seriously. Do not ignore it. You must inquire and check it out because if the notice is from the IRS; you must preserve your rights in a timely manner. Rather than trying to list all the types of notices a taxpayer may receive from the IRS; I rather answer your question, Mlaah, this way. Your question is an excellent one!

Now let me address the other part of your question—”How can a taxpayer approach the IRS regarding late payments or extenuating circumstances?”

As for members of our audience who have IRS tax problems; seek legal representation immediately. Do not procrastinate because you will miss critical deadlines and the ability to satisfactorily solve the problem only gets worst if not properly tended to. Delinquent taxes and IRS tax problems are kind of like unattended physical illnesses. Both of these situations tend to get worst if unattended. Over years of law practice, I have seen taxpayers loose their businesses, their health and their families by ignoring their tax obligations. I have also noticed that many taxpayers do not know how to deal with the IRS without professional counsel. I am not saying this is the case for all taxpayers; but, it is not uncommon to see taxpayers who have made their tax situation worst by ignorance of tax law and the process or worst by neglect and ignorance of the process.

Final word to the wise: Correspondence from the IRS could come from the Civil Division and/or the Criminal Investigation Division. It is critical to know, right from the start, which division of the IRS is contacting you.

Interviewer Mlaah Singh

Interviewer Question No 3:
What is a joint return? How can spouses work together to file a joint return?

Attorney Coleman Jackson
Thanks Mlaah for these wonderful questions. What is a joint return? How can spouses work together to file a joint return?

■First Question, the term “joint return” simply means two individuals file a single or combined tax return with the Internal Revenue Service. Individuals who are married to each other can agree to file a joint tax return; so long as, they generally meet one of the following factual eligibility requirements based on the applicable law of the jurisdiction of their domicile:
–1. married and living together as husband and wife;
–2. common-law marriage recognized in the state where their common-law marriage began or where they currently is domiciled;
–3. separated in an interlocutory divorce under the laws where they are currently domiciled; or
–4. married but living separate under the law of the jurisdiction of their domicile but not under a final divorce decree or separation agreement.

■Second Question: how can spouses work together to file a joint tax return? This is a complex question depending upon the couple, their financial situation and lots and lots of other factors too numerous to list or perhaps even identify at the moment. Basically a couples tax decisions like anything else within a marital relationship are extremely personal and is difficult to speak in specifics. So generally, couples must be truthful, candid and open with one another and communicate and work together in unity. Individuals cannot file a joint tax return with the IRS unless they both agree to do so. Agreement requires cooperation and equality in the relationship. One spouse should not attempt to force their will on their spouse when choosing how to file taxes no more than in any other family decision. Family calls for unity.

■Finally, let me conclude, by saying, that sometimes it is not in the best interest of a family to file joint tax returns because both spouses will generally be jointly and severability liable for the full amount of the tax debt owed. Sometimes, couples should agree to file ‘married but filing separate’ for a multitude of excellent reasons. Members of our podcast audience with questions about whether they should file joint returns should discuss these filing options with a qualified professional tax counselor and advisor. Filing a joint tax return could have unintended consequences.

Interviewer Mlaah Singh
Attorney, thank you for sitting with me this morning in our podcast discussing IRS tax liability of couples, and potential IRS tax relief available to injured and innocent spouses. Hopefully our listeners now have a better understanding of interactions with the IRS and understanding how the law might apply to them if they find themselves liable for their spouse’s prior or current federal tax debt. Folks, stay tune for upcoming Legal Thoughts Podcasts on future internal tax, federal tax, state and local tax and beneficial ownership information reporting requirements due by January 1, 2025 by most small and medium-sized businesses in America! Hey, if you have a small or medium-sized business operating in Texas or anywhere in America; listen up– Attorney Jackson has written numerous blogs on this topic; our law firm has produced numerous podcast over the last 18 to 24 months sending out the alert to our Small and Medium-Sized Business Owners! Check out our discussions about the Corporate Transparency Act on our blog site, or on our podcast site or simply give Attorney Jackson a call.

Our audience can send us inquires at www.cjacksonlaw.com if they have questions or wish to comment on our podcasts in this series or any of our Legal Thoughts podcasts, blogs, or Law Watch Videos posted on our U-tube Channel. You can send an email directly to attorney at cj@cjacksonlaw.com and suggest other tax topics that you want us to discuss in future Legal Thoughts Podcast. We are open to your ideas for topics in tax and business law.
Our listeners who want to hear more podcasts like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers: 214-599-0431 | Spanish callers: 214-599-0432

Attorney Coleman Jackson
This is the end of “LEGAL THOUGHTS” for now

Thanks for listening everybody!

If you want to see or hear more taxation, business law, contracts dispute resolution and immigration LEGAL THOUGHTS from Coleman Jackson, P.C. Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Stay tuned! We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.

Until next time, take care!

The Nexus of Family Therapy, Counseling, and Estate Planning: Safeguarding Wealth and Wellbeing

Leave a reply

9/24/2024

Therapy Works Counseling Services, PLLC
4645 Avon Ln Suite 120A Frisco, TX 75033
4054 Mckinney Ave suite 300 Dallas, TX 75204
629 W Centerville Rd Suite 209 Garland, , TX 75042
1101 suite B Bedford Rd, Bedford, TX 76022
(972) 695 3421 hola@therapyworkscounseling.com

In today’s rapidly evolving world, family dynamics play a crucial role in shaping our mental health and financial stability. While family therapy and counseling primarily aim to resolve personal conflicts and enhance emotional wellbeing, they also intersect significantly with estate planning. Estate planning encompasses wealth acquisition, management, protection, and distribution, all of which require sound mental capacity. However, family disunity, mental illness, discord, and divorce emerge as formidable adversaries that can jeopardize both family wealth and wellbeing. This blog delves into the current crisis in America, exploring how these elements impact estate planning, tax planning, and family inheritance.

The Crisis in American Families

*Mental Health Challenges:*

Mental illness is a silent saboteur that weakens familial bonds and impairs decision-making capabilities. Conditions such as depression, anxiety, and substance abuse can reduce an individual’s ability to manage and protect their wealth effectively.

*Family Disunity and Discord:*

When families are divided by conflict or lack of communication, the collaborative effort needed for effective estate planning is disrupted. Sibling rivalries, parental favoritism, or unresolved past grievances can all contribute to an environment of distrust and disunity.

*Impact of Divorce:*

Divorce not only splits families but also fractures financial stability. Legal fees, asset division, and potential loss of income all reduce the overall financial health of the family unit.

Estate Planning: More Than Just Wealth Distribution

*Acquisition and Management:*

Effective estate planning begins with the acquisition and strategic management of assets. Families that engage in open and honest dialogues about financial goals tend to be more successful in accumulating wealth. This process necessitates a sound mental state and the ability to make robust financial decisions.

*Protection of Wealth:*

Preserving wealth requires a thorough understanding of tax planning and the establishment of trusts or other financial instruments. Family unity plays a critical role here. When families are united, they can collectively prioritize and implement strategies to safeguard their financial assets.

*Wealth Distribution:*

Distributing wealth according to a well-constructed estate plan ensures that assets are passed down efficiently. However, mental illness or family disunity can drastically impede this process. Misunderstandings and conflicts over inheritance can lead to prolonged legal disputes, reducing the value of the estate.

The Role of Family Therapy and Counseling

Family therapy and counseling serve as foundational supports to address the psychological and relational issues within a family that can disrupt estate planning efforts.

*Facilitates Communication:*

Therapy encourages open, honest dialogue, helping family members articulate their concerns and desires regarding financial matters.

*Resolving Conflicts:*

Counseling addresses underlying conflicts, helping to build a cohesive unit capable of making united decisions about wealth management and distribution.

*Mental Health Support:*

Therapy provides resources and coping mechanisms to individuals suffering from mental illnesses, ensuring they can partake in estate planning.

The Impact on Tax Planning and Inheritance

A well-structured estate plan can significantly reduce tax liabilities, but mental illness and family discord can nullify these benefits. Mismanagement, legal disputes, and unplanned distributions can lead to unnecessary tax burdens. Furthermore, unresolved mental and emotional issues can result in impulsive financial decisions that undermine an estate’s integrity.

The interplay of family therapy, counseling, and estate planning is crucial in safeguarding both financial assets and familial wellbeing. By addressing mental health issues, resolving conflicts, and fostering unity, families can better manage, protect, and distribute their wealth, ensuring stability for future generations. As America grapples with a mental health crisis and rising familial discord, integrating therapeutic support in estate planning becomes not just beneficial, but essential.

Ana Marcela Rodriguez, MS
Licensed Marriage and Family Therapist
founder/ CEO

972 695 3421

www.evaluacionesclinicas.com / www.evaluacionespsicologicastexas.com/ www.therapyworkscounseling.com

Are Personal Injury Settlements Taxable?

Leave a reply

9/17/2024

After suffering from an injury due to someone else’s negligence, winning a personal injury
settlement can feel like a huge relief. You no longer have to worry about medical bills, lost
wages, or other expenses incurred as part of your accident. However, it is important to be
careful how you use your settlement because some of it can be taxed, as a personal injury
lawyer can explain:

What Is Taxable
Part of the purpose of a personal injury settlement is to cover lost wages — that is, wages you
would have earned at your job had you been healthy and working instead of injured. When you
work, you pay taxes on what you earn. A personal injury settlement can recoup those lost
wages so that you still receive the same amount of income you would have if you had been
working. And, just like at your job, that income is taxable, even though it was part of a
settlement.

Medical bills may also need to be included as income, which then means they will be taxed.
This happens if expenses related to your injury were previously deducted the year before.
Additionally, some settlements may accrue interest which is also taxable. Other kinds of
settlements that are taxable include those awarded for emotional distress. If you win a
settlement for emotional distress and it is not directly tied to a physical injury, this will be taxed.
That also means that if you are awarded damages to punish the defendant for their negligence,
those too are taxed even if they were connected to a physical injury.

Finally, as our friends at Cohen & Cohen can share, some attorney’s fees may be taxable.
However, there are many variables that contribute to this, mainly how those fees are structured
and if they are already being deducted from the overall settlement. Your lawyer will let you know from the start how that portion of this process works.

What Is Not Taxable
The main portion of your personal injury expenses are not taxable, meaning medical expenses
(so long as they were not previously deducted), pain and suffering, and emotional distress (if
you can prove it is a direct result of your injury). You receive compensation for the injury itself
and it is not seen as taxable income because the government views these payments as
restitution for what was lost instead of just providing income. Medical expenses are seen in a
similar light; you are receiving the settlement to cover your costs and not gain income.

It might seem confusing, but if you are awarded worker’s compensation, that is not taxable. That is because worker’s comp is considered a benefit offered by your job — think of it just like
insurance; this is a payout rather than straight income from your place of employment.

What To Do After A Settlement
To win a personal injury case, you will need to work with an injury lawyer. Once they win your
case, you should then contact a tax attorney. They will be able to help you best manage your
settlement and help you prepare for any taxes coming your way after winning it. Work with an
attorney so that you can focus on healing rather than worrying about what you will owe in the
future. Contact a lawyer near you today for help.

Corporate Transparency Act: Steps to Meet Year-End BOIR Obligations Under the Corporate Transparency Act

Leave a reply

Corporate Transparency Act: Steps to Meet Year-End BOIR Obligations Under the Corporate Transparency Act

By: Coleman Jackson, Attorney

Date: August 8, 2024

Existing companies that have not yet filed their BOIR (Beneficial Ownership Information Report) with the Financial Crimes Enforcement Network (FinCEN) should take the following steps as soon as possible to prepare to comply with their obligations under the Corporate Transparency Act of 2021 by January 1, 2025. It is now August 8, 2024 and the Corporate Transparency Act is being enforced. Responsible entities must take steps to comply:

Step One. Locate and examine their organizational structuring documents to determine whether any exemptions apply or whether the CTA applies to their organization. This, only, could present challenging and complex legal questions; particular, for industries where teaming agreements, joint ventures, partnerships, trust and other complex business arrangements are at play.

Step Two. Locate and examine their organization’s ownership structure and those in substantial control of their organizations. Ownership percentages records will have to be examined not merely business organizational documents. As for substantial control, this is a complex legal term used by the statute establishing the BOIR obligations for most small and medium sized business entities in the United States. Board minutes must be reviewed. Remember each beneficial owner will have to file with FinCEN and obtaining FinCEN identification can be complex, especially, in complex legal structures. Even determining who or what entity must file the BOIR can be challenging and present ambiguities; although, actual filing a BOIR with FinCEN is not that complicated. Legal questions abound and those filing BOIRs must certify under the penalty of perjury that the BOIR is accurate and complete. It is a crime to aid and abet someone to file an inaccurate and/or false BOIR with FinCEN.

Step Three: Identify everyone within the organization who must file an BOIR and obtain all of the required beneficial owner information. Some preplanning may be required here. Organizational charts, personnel records, job roles and responsibilities all need to be reviewed and examined. In ambiguous situations, organizational charts, roles and responsibilities may need to be defined or redefined. All of this could require time and be time consuming and expensive. These challenges are even more reason why impacted entities with BOIR obligations cannot procrastinate and wait until the last minute to comply with the BOIR obligations. Remember impacted small and medium sized businesses established under state law structuring laws must file their initial BOIR with FinCEN by January 1, 2025.

Step Four: Perhaps Step Four should be Step One. Potential entities must consult with legal counsel to ascertain how the Corporate Transparency Act of 2021 impacts their business. This is a legal question and only lawyers are licensed to practice law in the United States. There is serious potential legal exposure for failing to timely comply with the CTA and/or getting it wrong.

Finally, the Corporate Transparency Act of 2021 is a federal law designed to ferret out money laundering, terrorist financing, tax fraud and other illicit financial crimes by use of entity structures. Some states are considering CTA like transparency laws, while yet other states have already passed similar transparency laws. For example, New York recently enacted the New York Transparency Act which becomes enforceable sometime in 2026 for impacted businesses licensed to do business in New York. Again your state may be considering similar laws cloned after the federal Corporate Transparency Act of 2021 Businesses must keep up to date on State Transparency laws where they do business.

In Summary: Sun light is good for the world economy and hardworking American workers who play by the rules should expect the rule of law to apply to everyone equally whether they are individuals or legal fictions or entities created under the law. Corporate America must be required to act transparent in all of their dealings and relationships.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

Episode Four- Managing IRS Due Diligence Investigations and Strategies for Compliance and Risk Mitigation

Leave a reply

LEGAL THOUGHTS – Managing IRS Due Diligence Investigations and Strategies for Compliance and Risk Mitigation

COLEMAN JACKSON, ATTORNEY & LEGAL COUNSEL | Transcription of Legal Thoughts

Posted on July 29, 2024

Topic: Tax Return Preparer Due Diligence

Attorney Introduction:

■Welcome to Legal Thoughts my name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, contracts, litigation and immigration law firm based in Dallas, Texas.

■In addition to myself, we have Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.

■On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will conclude her interview of me today in our final episode of our Legal Thoughts podcast series on “Tax Return Preparer Due Diligence and Preparer Penalties. ” This is episode four in this series of Legal Thoughts podcasts. We urge our audience to follow our podcast and invite all their neighbors, friends and acquaintances to please tune in to this series of Legal Thoughts Podcasts on Apple Podcast, Google Podcast, Spotify or wherever you listen to podcasts.

–The four episodes in our Tax Return Preparer Due Diligence and Penalty Case Series are as follows:

1. Attorney’s Key Take Aways

2. Navigating Due Diligence Requirements by Paid Tax Return Preparers

3. Failure to Comply – Potential Consequences for Paid Tax Return Preparers and the Taxpayers, and

4. Managing IRS Due Diligence Investigations and Strategies for Compliance and Risk Mitigation

Interviewer Introduction:

Hi everyone, my name is Mlaah Singh and I am a Law Clerk at the tax, business structuring, contracts, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas, 75206. Our English phone number is 214-599-0431 and our dedicated Spanish language line is 214-599-0432.

■Good afternoon Attorney; thank you for allowing me to interview you once again for Episode 4 of our Paid Tax Return Preparer Due Diligence Requirements and this apparent uptick in IRS examinations and investigations of Paid Tax Return Preparers. Today, we are going to close out this series with our final episode in the series where hopefully our Legal Thoughts audience will gain a clear understanding perhaps best practices in managing the IRS due diligence expectations and responsibilities that we have been discussing in Episodes One, Two and Three in this Paid Preparer Due Diligence Requirements podcast series.

Interviewer Comments: Mr. Jackson, before we begin, it may be helpful to understand the following.

Question Number One: How exactly does the IRS conduct due diligence investigations, and what triggers these investigations? What initial steps should a tax return preparer take if they are notified of an IRS due diligence investigation?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 1

: Good afternoon Mlaah. First, I want to welcome our Legal Thoughts Podcast audience to our 4th and final episode in our Paid Preparer Due Diligence Requirements podcast series.

As for your first question: How exactly does the IRS conduct due diligence investigations, and what triggers these investigations? I can only answer this question from the perspective of representing tax return preparers or taxpayers who might have been a subject of an IRS Paid Preparer Due Diligence examination. Generally speaking over the years, Congress has required or imposed more-and-more tax positions where paid preparers must determine a taxpayer’s eligibility to claim the tax position. We have discussed these particular tax positions in our prior episodes in the podcast series. Internal Revenue Code Section 6695(a) imposes a duty on paid return preparers to determine a taxpayer’s eligibility to claim head of household filing status, the child tax credit, the additional child tax credit, other dependent credit and the American Opportunity Credit.

From discussions with IRS examiners from time to time while representing actual paid tax return preparers I have gleaned that the initial trigger to exam any particular return or paid preparer is likely triggered when an IRS computer flags the suspected return for further review. It sounds like then an actual IRS examiner will then physically examine the tax return and see whether applicable tax laws have been violated including Internal Revenue Code Section 6695(a). This investigation could lead to the IRS notifying the paid tax return preparer that they intend to do a Paid Preparer Due Diligence Examination under Code Section 6695(a). Also the IRS may notify the taxpayer that they are proposing an adjustment of their effected tax return. This is the typical pattern that we typically see when a paid preparer or a taxpayer comes into our office on an initial consultation. They usually come with this trigger letter in hand. Sometimes they come into our office after they have unsuccessfully attempted to resolve the matter without legal representation. Either way, it appears that the triggers for the exam are as I have mentioned: (2) the computer flags the return for further human review, (2) the human review leads to further investigation, and (3) further investigation leads to the paid preparer being identified for a paid preparer due diligence exam and their customers (or taxpayers) returns also being examined and possibly adjusted.

Other these general observations and triggers gleaned from talking to IRS examiners on actual client cases, I don’t have any inside information as to how the IRS targets or select paid preparers for examination. These due diligence requirements deal with tax position that could or perhaps are perceived to be ripe for tax cheating or perhaps even simple errors in computing the credits. And head of household status could possibly be a confusing area for many taxpayers and their customers. The IRS tend to target tax areas where there are tax compliance issues or confusion in the public.

As for your second question: What initial steps should a tax return preparer take if they are notified of an IRS due diligence investigation?

The paid return preparer should take the mater serious and gather the necessary files referenced in the IRS Due Diligence Letter;
The paid return preparer should seek the representation of a tax professional who can advocate and counsel you.

These two steps are critical from what I have seen in this practice area. Tax Preparers who are sloppy and unprepared can experience some serious penalties under Internal Revenue Code Section 6695(g) for violating due diligence requirements. Remember what I have said in previous episodes in this series: Paid tax preparers must demonstrate that they (a) know the facts about the taxpayer, (b) they must demonstrate that they computed the credits accurately based on those facts, (c) they must complete Form 8867, and (d) they must be create, maintain and produce contemporaneous records for three years. Multiple inflation adjusted penalties can be assessed on a single taxpayer’s return.

INTERVIEWER: Mlaah Singh, Tax Law Clerk

Interviewer Comment: I appreciate you distinguishing that your response to this question is based on your interactions with the matter as a lawyer. Therefore, it is important to hear about the potential faults of taxpayers and tax preparers within your experience. Thank you for giving a detailed explanation on the proceedings of tax due diligence investigations.

Question Number Two: Can you describe the types of information and documentation the IRS typically requests during a due diligence investigation, and how can preparers ensure they are adequately prepared?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 2

Okay; let me go through some of the types of information that I have seen the IRS Due Diligence Examiner ask for during these Paid Preparer Due Diligence Examinations:

1.They usually will request to see a list of taxpayer files. But remember, a due diligence examination can be initiated by the IRS examiner visiting the Paid Return Preparer’s Office unannounced. In which case they could simply ask the preparer to allow them to review their tax return files for a selected examination period.

2.As for how a paid return preparer could be sure they are adequately prepared; well, paid tax return preparers should know the federal tax laws applicable to their clients, comply with those laws and document their compliance in contemporaneous client files.

IRS examiners typically are looking for evidence and contemporaneous documentation that shows—
the return preparer know the facts concerning their clients at the time the tax return was filed with the IRS,
evidence that the return preparer created worksheets and documents evidencing how they computed the credits based on facts maintained in their files that they obtained from the taxpayer or third parties,
the tax return preparer completed Form 8867 and maintained that form in the taxpayers files,
Over all they are going to be looking at the quality of the files and the completeness of the files. Sloppy and incomplete files are very likely to lead to paid preparer due diligence penalties or controversies with the IRS examiner.

Finally, as I have mentioned in prior episodes in this paid preparer due diligence series, I have often seen the IRS examiner also examine Schedule C positions during due diligence examinations. With regards to Schedule C, the examiner usually want to know whether the paid return preparer obtained and maintained contemporaneous evidence of gross receipts and business deductions taken on the return by Self-Employed taxpayers filing their business activities using Schedule C attached to their Form 1040.

INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment: Thank you for that detailed explanation. I hope listeners understand exactly what is expected of them when beginning this process. The greatest importance lies in obtaining contemporaneous factual knowledge and documentation on the taxpayers eligibility, keeping all this contemporaneous documentation in an organized business records manner, and finally, being prepared for IRS due diligence compliance investigations, if and when the IRS examiner comes knocking!

Question Number Three: What strategies can tax return preparers implement to proactively mitigate the risk of triggering an IRS due diligence investigation?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 3

Well I can think of three strategies that paid tax preparers can proactively take to ensure their compliance with their due diligence obligations Under Internal Revenue Code Section 6695. Three step[ approach:

Step Number One: The paid tax return preparer should annually attend a comprehensive Individual Tax Return Update by a quality continual education provider to make sure they are current on their federal tax knowledge. And depending upon their tax practice, the paid preparer may also want to consider taking annual CPE on partnership taxation, corporate taxation and other areas of high incident in their individual practices.

Step Number Two: The paid tax return preparer should implement good prepare and implement good client intake policies, procedures and practices to make sure they obtain all relevant facts about their client’s eligibility to claim these tax positions that would likely trigger a flag for IRS investigators that could initiate a Paid Due Diligence Examination, Keep in mind that the preparer needs gather contemporaneous evidence of the taxpayer’s eligibility to take credits like the child tax credit, additional child tax credit, other dependent credit, earned income credit and head of household filing status. Tax preparers need to have actual knowledge of their clients eligibility to take these tax positions. So step two is a critical strategic step, and another critical strategy step is step three

Step Number Three: The paid tax preparer should establish and implement good record and file retention policies so that if the IRS examiner does exam them, they can readily show the agents that they have complied with Internal Revenue Code Section 6695 due diligence requirements.

Mlaah this is an excellent question. I have mentioned three of the most important strategic steps that I can think of right now that the paid preparer could consider. Bottom line: paid preparers must know the applicable tax law relevant to their tax practices, they must have actual contemporaneous knowledge of their customer’s eligibility to take these tax positions, and they must create and keep contemporaneous documentation of their client’s eligibility to take the tax positions for a minimum of three years after filing the return.

INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment: It seems as though it is mostly important to keep for paid tax return preparers to keep current on federal tax law updates and make sure they contemporaneously gather the knowledge and records to support all the advice they give taxpayers and maintain good business records on every single taxpayer.

Question Number Four: How can paid tax return preparers effectively communicate and cooperate with the IRS during an investigation to achieve the best possible outcome?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 3

■Thanks for this question. How can paid tax return preparers effectively communicate and cooperate with the IRS during an investigation to achieve the best possible outcome?

■Effective Communication requires the ability to listen. So the paid preparer read very carefully correspondence that the IRS may send them concerning opening an Internal Revenue Code Section 6695, Paid Preparer Due Diligence Examination;

■Effective Communication requires the ability to carry on a conversation. Remember conversations are two way. So the preparer should make sure that they understand what the IRS is saying to them. If there are language barriers, for example, if the taxpayer’s native language is other than English, they should request that a competent language translator be present in meetings with IRS examiners. I have even seen where cultural differences have hampered paid preparers understanding and ability to communicate and understand IRS examiners who have limited language and cultural sensitivities. The United States is a multicultural nation and sometimes; I have seen in paid preparer due diligence examinations, instances where multicultural differences and nuisances have hindered effective communications when that fact is ignored or misunderstood. Patience and tolerance are required for effective communications.

■Effective communication requires treating one another with dignity and respect. So the preparer should act professionally and treat the IRS examiner with dignity and respect. They are doing their job and they should not be treated with hostility and avoidance. The preparer should be fully candid and cooperative throughout the process, and

■Effective communication requires knowledge. Knowledge does not only derive from academic or educational learning but from life experiences as well. Therefore the paid preparer should hire a lawyer with experience in representing tax preparer’s in Internal Revenue Code Section 6695 investigations. This could greatly improve the effectiveness of communications between the paid preparer and the IRS due diligence examiner. This is because without experience in going through a paid preparer due diligence examination, the paid preparer may not appreciate the complexity and dangers, and the paid preparer may not fully understand the possible financial penalties and damage that could result, and finally, the paid preparer may not fully appreciate the damage that can occur to their reputation, their tax practice and the potential impacts on their customers who are likely to be audited by the IRS whenever the paid preparer is under IRS scrutiny for violations of Internal Revenue Code Section 6695, Paid Preparer Due Diligence Requirements and Penalties.

INTERVIEWER WRAP-UP: MlaahSingh, Tax Law Clerk

Attorney, thank you for sitting with me today in our second podcast on this very important topic: “Tax Return Preparer Due Diligence Requirements & IRS Paid Preparer Penalty Cases” I surely hope our audience will benefit from this Legal Thoughts series on tax preparer due diligence requirements and due diligence penalty cases. Attorney in this Episode you have clearly explained how regular, hardworking, innocent taxpayers can also suffer grave financial lost when they erroneously claim credits or take tax positions for which they are not entitled. Thanks Attorney for navigating us through this! Folks, stay tune for upcoming Legal Thoughts Podcasts dealing with international tax issues, federal tax issues, state and local tax issues, contracts litigation, business structuring, wills, trusts and estate legal matters and immigration law matters. We typically produce and publish Legal Thoughts every two weeks. So subscribe and follow our Legal Thoughts Podcast on Spotify, Apple Podcast, or Google Podcast. Hey check out our talks on the Corporate Transparency Act’s Beneficial Ownership Information Reporting Requirements that set to effect over 42 million small and medium sized business all over the United States. We have produced several podcast on this important business law topic.

■
Our listeners who want to hear more podcasts like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

■English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100

ATTORNEY’S CLOSING REMARKS:

This is the end of “LEGAL THOUGHTS” for now

■By the way, another important topic our law firm has been talking about since last year is this one: All our small business owners must listen to our earlier podcasts on the Corporate Transparency Act’s Beneficial Ownership Information Reporting Requirements because the Initial BOI reports are due on or before January 1, 2025 for most small and medium sized businesses structured under any State Business Structuring Laws. Such as, Limited Liability Companies, Corporations and so forth. These initial BOI reports are required to be filed with the Financial Crimes Enforcement Network by January 1, 2025. Small Business Owners and those who substantially control them must educate themselves and comply with the CTA because the penalties are up to $500 per day and up to 2 years in federal prison upon conviction for willful failure to comply with this new federal law.

Until next time, take care.

If you want to see or hear more taxation, business structuring and contracts litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C. Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Stay tuned! We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration. Until next time, take care

Episode Three- Failure to Comply -Potential Consequences for Paid Tax Return Preparers and their Customers

Leave a reply

LEGAL THOUGHTS – Failure to Comply-Potential Consequences for Paid Tax Return Preparers and their Customers

COLEMAN JACKSON, ATTORNEY & LEGAL COUNSEL | Transcription of Legal Thoughts

Posted on July 17, 2024

Topic: Tax Return Preparer Due Diligence

Welcome to Legal Thoughts my name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, contracts, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will continue interviewing me in a new Legal Thoughts podcast series that we have entitled : “Tax Return Preparer Due Diligence and Preparer Penalties. ” This is episode three in this series of Legal Thoughts podcasts. We urge our audience to follow our podcast and invite all their neighbors, friends and acquaintances to please tune in to this series of Legal Thoughts Podcasts on Apple Podcast, Google Podcast, Spotify or wherever you listen to podcasts.

The intended five episodes in our Tax Return Preparer Penalty Case Series are as follows:

Attorney’s Key Take Aways
Navigating Due Diligence Requirements by Paid Tax Return Preparers
Failure to Comply – Potential Consequences for Paid Tax Return Preparers and the Taxpayers
Managing IRS Due Diligence Investigations
Strategies for Compliance and Risk Mitigation

Interviewer Introduction:

Good afternoon Attorney; thank you for allowing me to interview you once again for Episode 3 of our Paid Tax Return Preparer Diligence Requirements and this apparent uptick in IRS examinations and investigations of Paid Tax Return Preparers. Today, I hope to ask a couple of questions designed to navigate our way through these tax preparation procedures or requirements and potential consequences for tax preparers and their customers (the taxpayers).

Interviewer Question No 1: What are the potential penalties and consequences for paid tax return preparers who fail to comply with IRS due diligence requirements?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 1

Comment: Good morning Mlaah.

Attorney’s Answer: Your question gets right to the heart of the matter— how much is it going to cost a paid tax return preparer if they get this wrong.

Let me start by restating your question; which is an excellent one: “What are the potential penalties and consequences for paid tax return preparers who fail to comply with IRS due diligence requirements?”

First of all, the Internal Revenue Code at Section 7701(a)(36) defines the term “paid tax preparer” as any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by 26 United States Code. So lets first make it clear who we are talking about here. We are not talking about self-filers or taxpayers preparing their own returns with one of the tax software programs widely on the market today.
With that out of the way. Paid tax preparers are subject to essentially three types of penalties:
1. Internal Revenue Code Section 6695(a) imposes several due diligence requirements on paid preparers with respect to the determination of the taxpayer’s eligibility to take certain federal tax positions, such as, the Earned Income Tax Credit, Head of Household Filing Status, Child Tax Credit and a couple of other tax positions I discussed in detailed in Episode 1 and 2 of this Series of Podcast. Paid preparer is subject to an inflation-adjusted penalty in the amount of $635 for 2024 for each violation; which means that their could be multiple $635 penalties assessed on a single tax return. The penalty was $600 for 2023 and $560 for 2022. So the potential penalties and consequences could be 10,000 and even 100,000 of thousands of dollars. It is not uncommon to see return preparers being assessed these gigantic due diligence penalties.
2. In addition, Internal Revenue Code Sections 6694(a) and (b) permits the Internal Revenue Service to assess penalties against paid preparers for the understatement of a tax liability due to unreasonable tax positions. These penalties are based on a percentage of the understatement and can run as high as 75% of the understatement of tax liability.

I am limiting this discussion to the civil penalties; but, I want to remind everyone that the Internal Revenue Code is also a criminal tax statute where intentional violation of the Internal Revenue Code could lead paid return preparer and customer being investigated by the Criminal Investigation Division of the IRS for potential criminal prosecution.

INTERVIEWER: Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Interviewer Comments: Thank you for outlining the potential penalties and consequences for paid tax preparers who fail to comply with IRS due diligence requirements. It’s clear these implications are significant and can escalate quickly, especially with the inflation-adjusted penalties you mentioned.

Interviewer Question No 2: Can you explain how a paid tax return preparer’s failure to comply with due diligence requirements might impact their clients? What would happen if even a clients hired tax return preparer does something incorrectly?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 2

Oh, I kind of touched on the implications briefly in passing just now with potential criminal tax investigation by CI. The taxpayer could obviously get caught up in CI’s investigating paid preparers. Taxpayers must do their due diligence when choosing their paid tax preparer because taxpayers are responsible for the accuracy of their annual tax returns or refund claims.

As for implications on the taxpayer when their paid preparer runs afoul of the paid preparer due diligence requirements—

When a paid preparer is being examined in a Paid Preparer Due Diligence Exam, most, if not all of the returns prepared during the exam period will likely be audited for accuracy and entitlement to claim the tax positions. So the taxpayer is likely to be audited. The Taxpayer is likely to incur a tax adjustment if the IRS examiner finds errors; therefore the taxpayer may have to pay more taxes, penalties and interest due to actions of their paid preparer.
Erroneous tax positions could lead a taxpayer from being banned from claiming certain credits in the future, even though, they may otherwise qualify for the tax position in the future. For example, Internal Revenue Code Section 32(k)(1) (A) has two disallowance periods:
1. Taxpayers who claimed these earned income tax credit is banned from claiming the EITC for two subsequent tax periods if the IRS examiner determines that the taxpayer’s EITC claim is due to reckless or intentional disregard of the federal income tax laws; and
2. Taxpayers who claimed the earned income tax credit is banned form claiming the EITC for ten subsequent tax periods if the IRS examiner determines that the taxpayer’s EITC claim is due to fraud.

Note that very similar bans apply when taxpayers erroneously claims the Child Tax Credit, Additional Child Tax Credit and the Other Dependent Credits. Word to the wise: Paid tax return preparers must strictly comply with the eligibility and computational rules governing all of the tax positions on Form 8867, Paid Preparer’s Due Diligence Checklist because not only are they subject to huge preparer penalties as I discussed in the previous question but the taxpayer could be banned from taking perfectly legitimate tax positions but for the errors or omissions of their paid preparer. There may be other consequences to the taxpayer as well, such as, credit damage, tax liens, lost of job due to IRS Collections.

INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Interviewer Comment: Moreover, the prospect of being barred from claiming certain credits for extended periods due to preparer errors highlights the long-term consequences that taxpayers may face. This not only impacts immediate financial obligations but also limits future tax benefits that the taxpayer may otherwise be entitled to.

Interviewer Question No 3: What specific actions or omissions by paid tax return preparers are most likely to result in penalties for non-compliance? What are common mistakes made by taxpayers?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 3

Let me take your second question first. Taxpayer’s make mistakes when they fail to wisely select their paid tax preparer. Often time that unwise selection decision is followed by failing to review their return before its filed with the IRS. The third big mistake I have seen them make over the years is either go right back to the paid return preparer upon receipt of the IRS proposed adjustment notice or quite often ignoring the IRS letter all together which is generally disastrous because IRS letter typically have certain deadlines to take actions to challenge the liability.

Let me now turn to your first question: What specific actions or omissions by paid tax return preparers are most likely to result in penalties for non-compliance? Let me keep this general; I am not going to discuss any specific cases:

Failure to obtain and preserve contemporaneous documentation.
Failure to make proper inquiry in situations where a seasoned well-informed paid preparer would have sought additional facts.
Failure to know the facts with regards to business taxpayers. Schedule C examinations of self-employed taxpayers is a huge part of paid preparer due diligence examinations and often times paid preparers has failed to ascertain the facts with respect to income and deduction items on the return.
Failure to keep organized business records. The Internal Revenue Code requires that paid preparers keep a copy of Form 8867, Paid Preparer Due Diligence Checklist and the contemporaneous records for each taxpayer for three years.
Failure to properly compute the credits based on the facts. Sometimes it appears paid preparers make lots of assumptions about how well they personally know the taxpayer without actually obtaining objective facts.

These are a few basic actions or omissions that I can think of right now that I have seen in Paid Preparer Due Diligence Examinations. Paid preparers have to (1) obtain the facts at the time they are preparing the return, (2) accurately complete Form 8867, (3) accurately compute the credits, and (4) maintain Form 8867 and the contemporaneous records for three years

INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Interviewer Comment: Thank you, Mr. Jackson. These guidelines not only uphold professional standards but also safeguard taxpayers’ interests by ensuring accurate reporting. By emphasizing the importance of obtaining and verifying factual information during preparation, paid preparers play a pivotal role in maintaining the integrity of tax filings and minimizing the risk of penalties due to non-compliance.

Interviewer Question No 4: What steps can paid tax return preparers take to ensure they are meeting all due diligence requirements and avoid potential penalties?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 4

Paid preparers have to (1) obtain the facts at the time they are preparing the return, (2) accurately complete Form 8867, (3) accurately compute the credits, and (4) maintain Form 8867 and the contemporaneous records for three years
Finally, Paid preparer’s must annually complete federal tax courses from a credible continuing education provider to ensure they are up to date on federal tax law. Most CPE providers offer a comprehensive Form 1040 course with annual updates. Likewise CPE providers provide courses on Partnership taxation, corporate taxation, trust and estate taxation and many more tax topics. Bottom line, paid tax preparers must keep themselves knowledgeable to competently prepare their customers tax returns each year.
And if they receive that knock on their door.. The IRS Examiner seeking to perform a Paid Preparer Due Diligence Investigation- they should seek help because the consequences for them and their customers are extremely high.

INTERVIEWER WRAP-UP: MlaahSingh, Tax Law Clerk

Our listeners who want to hear more podcasts like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100

ATTORNEY’S CLOSING REMARKS:

This is the end of “LEGAL THOUGHTS” for now

By the way, another important topic our law firm has been talking about since last year is this one: All our small business owners must listen to our earlier podcasts on the Corporate Transparency Act’s Beneficial Ownership Information Reporting Requirements because the Initial BOI reports are due on or before January 1, 2025 for most small and medium sized businesses structured under any State Business Structuring Laws. Such as, Limited Liability Companies, Corporations and so forth. These initial BOI reports are required to be filed with the Financial Crimes Enforcement Network by January 1, 2025. Small Business Owners and those who substantially control them must educate themselves and comply with the CTA because the penalties are up to $500 per day and up to 2 years in federal prison upon conviction for willful failure to comply with this new federal law.

Until next time, take care.

Episode Two- Navigating Due Diligence for Tax Preparers

Leave a reply

LEGAL THOUGHTS – Navigating Due Diligence for Tax Preparers

COLEMAN JACKSON, ATTORNEY & LEGAL COUNSEL | Transcription of Legal Thoughts Posted on June 24, 2024

Topic: Tax Return Preparer Due Diligence

Attorney Introduction:

■My name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, contracts, litigation and immigration law firm based in Dallas, Texas.

■In addition to myself, we have Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.

■On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will continue interviewing me in a new Legal Thoughts podcast series that we have entitled : “Tax Return Preparer Due Diligence and Preparer Penalties. ” This is episode two in this series of Legal Thoughts podcasts. We urge our audience to follow our podcast and invite all their neighbors, friends and acquaintances to please tune in to this series of Legal Thoughts Podcasts on Apple Podcast, Google Podcast, Spotify or wherever you listen to podcasts.

–The intended five episodes in our Tax Return Preparer Penalty Case Series are as follows:
1. Attorney’s Key Take Aways

Navigating Due Diligence Requirements by Paid Tax Return Preparers
Failure to Comply – Potential Consequences for Paid Tax Return Preparers
Managing IRS Due Diligence Investigations
Strategies for Compliance and Risk Mitigation

Interviewer Introduction:

■Good afternoon Attorney; thank you for allowing me to interview you once again for Episode 2 of our Paid Tax Return Preparer Diligence Requirements and this apparent uptick in IRS examinations and investigations of Paid Tax Return Preparers. Today, I hope to ask a couple of questions designed to navigate our way through these tax preparation procedures or requirements and potential consequences for tax preparers and their customers.

Mr. Jackson, considering the information we have shared in Episode One in this series of Legal Thoughts Podcasts a few weeks ago, our audience has been alerted to the IRS due diligence requirements related to The Child Tax Credit, Additional Child Tax Credit, American Opportunity Credit, Head of Household Filing Status, and the Earned Income Tax Credit tax positions. I believe it would be beneficial for our audience to hear a step-by-step process regarding how exactly to comply with these due diligence requirements. So I intend to navigate our trip through this by posing a few questions to you today. My questions; I hope, will help our Legal Thoughts Podcast audience in understanding this complex maze of federal tax requirements better.

Question Number One:

So, Mr. Jackson, if a taxpayer has one or more children, or one or more dependents, what tax credits would this individual qualify for? And what steps should paid tax return preparers take in compliance with –

No. 1: The Child Tax Credit;

No. 2: The Additional Child Tax Credit; and

No. 3: The Earned Income Tax Credit ?

Attorney please navigate our audience through each one of these tax positions one by one.

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 1

Excellent Question Mlaah and I like the navigating approach you have introduced here. The very first step paid tax return preparer’s need to take is to make sure they are very familiar with Schedule 8812 and the Instructions to Schedule 8812. The Instructions to Schedule 8812 is used to determine whether a taxpayer qualifies for the child tax credit, other dependent credit, additional child tax credit and the earned income tax credit. The Instructions to Schedule 8812 has worksheets and tables to compute each one of these credits. The Instructions for Schedule 8812 should be completed annually and kept in the paid tax preparer’s records. So Mlaah, let’s navigate our way through the Instructions for Schedule 8812. Note the rules and computations associated with these tax positions may change from year to year. For example the amounts I am using for post of this podcast discussion is for 2023 tax returns; these amounts and eligibility requirements could be different for 2024 and subsequent tax periods. So any actual amounts and limitations are for illustration purposes only. Our audience should seek competent tax advisors for any specific matters pertaining to their particular situation or circumstances.

General Instructions:

The requirements that I am now about to list applies to all of the tax positions that we are going to be discussing in a few minutes for 2023:

A.The taxpayer must have a Tax Identification Number by the due date of their annual federal tax return. If you or your spouse, if filing jointly does not have a Social Security Number or ITIN issued on or before the due date of your annual return, you cannot claim the Child Tax Credit, Other Dependent Credit, Additional Child Tax Credit on either your original return or an amended annual tax return.

B.Each of your qualifying children must have a Social Security Number that is valid for employment and the child’s SSN must be issued before the due date of your annual tax return, including extensions.

C.Taxpayer’s who erroneously claimed the CTC, ACTC or ODC where the IRS determined that the error was due to reckless or intentional disregard of the tax laws governing eligibility, will be prohibited from claiming any of these tax positions for two years even if the taxpayer is otherwise eligible to claim the tax position. If the IRS determine that a taxpayer fraudulently claimed one of these credits, the taxpayer is not allowed to claim the CTC, ACTC or ODC for ten years. Civil penalties could also be assessed against the taxpayer. If computation errors occurred in the past while claiming CTC, ACTC or ODC its very likely that the taxpayer must file Form 8862 when claiming these credits in subsequent years.

D.Qualifying Children claimed as dependents must be under 17 years of age at the end of the annual tax year, say end of 2023; and the child must qualify as your dependent. An adopted child is treated the same as a your own child for the purposes of claiming the CTC, ACTC or ODC.

E.Note that if the child is 17 at the end of the year or older, the taxpayer may still be able to claim the Other Dependent Credit.

F.Limitations applies to the CTC and ODC. First, if the amount on Line 18 of your 1040 series tax return is less than the CTC and ODC , you might not qualify for the tax positions, and second, if the taxpayer’s modified adjusted gross income (AGI) is more than $400,00 for joint filers or $200,000 for other types of tax filers, the taxpayer does not qualify for the CTC and ODC. Look at the computation amounts on Line 3 of Schedule 8812. The computation worksheets must be completed accurately.

The Instructions for Schedule 8812 gives detailed guidance to the paid tax return preparer with respect to every last one of these general instructions. So I repeat what I said from the beginning; the tax return preparer should become very familiar with Form 8812, its instructions and the worksheets for each tax position.

Let’s now navigate to the Specific Instructions in Schedule 8812 for the CTC (ODC), ACTC and EITC tax positions.

First Specific Instructions applicable to the Child Tax Credit & Other Dependent Credit-

Follow the step by step guide and use the worksheets in the Schedule 8812 Instructions to complete the appropriate lines on the series 1040 tax return. These instructions are the paid tax return preparer’s best friend in determining eligibility and the correct amount of the CTC and ODC.

Note that the Tax Cuts and Jobs Act of 2017 changed the rules and refund amounts back in 2017.

In the tax year ending December 31, 2023, the CTC amount was $2,000 per qualifying child; and $500 nonrefundable credit was allowed in 2023 for qualifying dependents. Note you cannot double dip; that means you cannot check the child tax credit box and the credit for other dependent for the same person. Remember even negligent or none intentional violations of the CTC and ODC can result in your customer being banned from claiming CTC and ODC for two years. Be very careful when checking eligibility and exercise care when computing the amount of the CTC and ODC.

The maximum refund for 2023 was $1,400 per qualifying child .

The CTC and ODC is claimed on Form 1040. Insert the correct number of dependents on column 4 on Form 1040 and follow the instructions on the form. Do the exact same thing in column 4 on Form 1040 for OTC and put the results on Line 6. Remember don’t double dip.

Always compute the credit limitations by using Worksheet A and Worksheet B when instructed by the Instruction to Schedule 8812.

Second Specific Instructions applicable to the Additional Child Tax Credit-

Follow the step by step instructions to Schedule 8812 for the ACTC Part II-A.

Refundable part of the credit is worth up to $1,600 per qualifying child in 2023. These amounts can change from year-to-year. I am using 2023 for illustration purposes as to how these tax credits and positions. We are using them merely navigate through the process of determining eligibility and computational amounts for the credits.

Credit decreases as your gross income increases (for single income earners past $200,000 AGI; and for joint filer income earners past $400,000 AGI the CTC and ODC reduces to zero)

None of these tax credits are allowed if the taxpayer has filed Form 2555 (foreign earned income)

The ACTC is claimed on Form 1040, Schedule 8812 (Credits for qualifying children and other dependents). This schedule should be attached to the taxpayer’s tax return filed with the IRS. The paid tax return preparer should maintain a copy of Schedule 8812 instructions and worksheets in its normal business records.

My general take away in terms of navigating the eligibility and computational aspects of the CTC, ODC and ACTC is that the Schedule 8812, instructions and worksheets should be understood, used and maintained by paid tax return preparers when advising taxpayers to tax these tax positions. Schedule 8812 is a navigational tool. It’s a map. It’s a guidebook.

■Third Specific Instructions that applies to the Earned Income Credit

■Obtain a copy of IRS Publication 596 which contains an EIC Eligibility Checklist that provides a step-by-step navigational tool for determining a taxpayers eligibility and computation guidance for claiming the EIC. Follow the instructions in Form 1040 for the EIC and Schedule 8812 instructions and Worksheet Earned Income Chart– Line 18a

■The EIC Checklist contains everything a return preparer should need to comply with the Due Diligence Requirements with respect to this particular tax position. The checklist is updated each year in Publication 596. Paid Tax Return Preparers should keep a copy of the completed checklist in their normal business records.

■The Earned Income Credit is claimed on Form 1040 or Form 1040-SR (US Tax Return for Seniors). If the taxpayer has a qualifying child Schedule EIC must be completed and filed with the IRS as well.

INTERVIEWER: Mlaah Singh, Tax Law Clerk

Interviewer Comment:

■Thank you for explaining these complex tax matters so clearly Mr. Jackson. I hope your navigating through Form 8812, its instructions and worksheets have increased our Legal Thoughts Podcast’s audience understanding concerning the due diligence requirements expectations of paid tax return preparers when preparing annual tax returns where families are claiming the Child Tax Credit, Other Dependent Credit, Additional Child Tax Credit and Earned Income Credit. It seems like errors by paid tax return preparers regarding eligibility and computation of these credits can really damage taxpayers who can really need these refunds to support their families.

■If I understood you correctly Mr. Jackson, merely accidentally taking the CTC, ODC and ACTC could result in the taxpayer becoming ineligible to claim the credit again for two years even if they are otherwise eligible for the credit. And you said if the IRS determines their was fraud in taking the CTC or ODC the taxpayer could be banned from claiming the Child Tax Credit, Other Dependent Credit and Additional Child Tax Credit for ten years. That is a very long-long time for a deserving family to be banned from receiving tax refunds that they would be otherwise eligible claim. Your repeated emphasis on Schedule 8812, its instructions and worksheets is absolutely warranted! These are potentially dire consequences for hardworking taxpayers and their families caused by mistakes of Paid Tax Return Preparers.

Question Number Two:

■So, my next question; with all these potentially serious outcomes resulting from paid preparers who don’t know the tax laws or fail to follow these due diligence rules; well my next question is this: How about claiming the Head of Household filing status? I remember that this was one of the Paid Tax Return Preparer Due Diligence Requirements you mentioned in Episode One of our Legal Thoughts Podcast a few weeks ago.

■Attorney Jackson, when is a taxpayer eligible to claim Head of Household filing status and what are the potential consequences for getting it wrong?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 2

■Excellent Mlaah! Very astute observations. Yes you heard me correctly. Taxpayers can be banned from taking the Child Tax Credit, Additional Child Tax Credit and Other Dependent Credit for two years if the IRS finds that they erroneously claimed these credits in the past. In the event of a finding of fraud, the taxpayer is indeed potentially banned for ten years from taking any of these tax positions. Now I hope its becoming clear to our podcast audience that the IRS Paid Preparer Due Diligence Requirements and Penalties on paid preparers protects the integrity of the federal tax system by protecting innocent taxpayers who are harmed by tax return preparers who either don’t know the tax law or intentionally violate the law. Over the years we have seen numerous taxpayers who were harmed by unsubstantiated tax positions due to their tax return preparer. So in this sense, the perceived uptick in IRS Investigations of Paid Tax Return Preparers is a good development.

■Let’s address the first part of your question regarding head of household eligibility. Who is eligible to claim head of household filing status?

■A taxpayer qualifies for the head of household status if they meet all of these requirements:

1.The taxpayer is unmarried or considered unmarried (married persons who are separated and residing in a separate household) on the last day of the tax year; and

2.The taxpayer paid more than half of the expenses to maintain a household for the tax year; and

3.With the exception of a full time student and parent, a qualifying person, which can be practically any familial relatives, residing in the household for more than half of the tax year. Temporary absences, such as, those by students do not stop them from being a “qualifying person” for head of household status filing purposes.

■Non-resident aliens do not qualify for head of household, but a non-resident alien may elect to be treated as a resident alien for tax purposes. A resident alien can qualify for head of household filing status if they file the proper election form to be taxed as a resident alien.

■Head of Household is election is made on Form 1040 US Individual Income Tax Return.

■How to a taxpayer prove that they paid more than half the household expenses? A taxpayer must be able to prove through additional documentation that they paid more than half of the household expenses (rent, groceries, repairs, maintenance and like items that benefit the occupants of the household as a whole. Personal items and effects are not qualified items in determining household expenses for Head of Household purposes.

■Best practices in documenting and accumulating evidence of household expenses are for the paid tax return preparer to complete Form 886—HOH which identifies and organizes the Supporting Documents to Prove Head of Household Filing Status. This form may be requested by IRS examiners during a Paid Tax Return Preparer Penalty Investigation. It could also be requested from the affected taxpayer during an IRS examination. This form is an excellent checklist for head of household filing status determinations and documentation. It helps organize and document the HOH tax position.

■Let’s now navigate to the second part of your question: What are the potential consequences for erroneously claiming head of household filing status?

■First: the consequences for the paid tax return preparer is potential assessment of a preparer due diligence penalty in the amount of about $560 as I discussed in Episode One of this series of podcast a few weeks ago. The paid tax return preparer will need to maintain contemporaneous documentation of the HOH tax position and present it to the IRS Agent upon request during a Paid Tax Return Preparer Due Diligence Investigation.

■Second: the consequences for the taxpayer could result in an IRS examination or audit of the taxpayers tax returns for the last three years. If the IRS determines that the a taxpayer is not eligible to elect head of household filing status, the taxpayer can be made to pay back the amount along with civil penalties and interest. Again this could result in audit examinations that goes back for multiple open tax years. The IRS can look back three years and make tax adjustments to previously erroneously filed tax returns. Taxpayers are liable for tax positions taken on their tax returns regardless of erroneous advice provided by their tax return preparer. Word to the wise: Taxpayers must select their tax return preparers after careful consideration of their credentials, training and experience in federal tax preparation.

INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Thank you, Mr. Jackson. That certainly cleared it up for me. Taxpayers and Paid Tax Return Preparers need to know about these dangers and the consequences for getting this wrong. You have pointed all this out in very clear and understandable language for our Legal Thoughts Podcast audience in this Episode No 2 and in Episode No. 1 published several weeks ago. Any taxpayer making a mistake when claiming the CTC, ODC, ACTC and Head of Household filing status can be in for a rude awakening with very serious tax consequences along with their paid tax return preparer.

Any of our listeners are confused about any of this, please checkout the IRS.gov website where you can research these matters for yourself for free.

If you have questions that you desire our law firm to address in future podcasts; as always, send your inquires and suggestions to us. You can call (214) 599-0431, email: cj@cjacksonlaw.com or visit us online at www.cjacksonlaw.com for more information about this topic or you can read any of our blogs addressing various international tax, federal tax, state and local tax topics; contracts litigation; and various hot immigration topics as well.

Question Number Three:

So, Mr. Jackson, I have one last question that deals with the American Opportunity Tax Credit. Many of our Legal Thoughts Podcast audience are likely university students from Southern Methodist University and other local, state and national universities around the country. The American Opportunity Tax Credit was brought up in Episode One of this series of podcasts a few weeks ago and I think everyone should know more about it.

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 3

Mlaah a taxpayer who pays qualified education expenses during the tax year may elect to claim an American Opportunity Credit for an eligible student.

The AOC is designed to help with the cost of higher education by reducing the taxpayers tax liability dollar for dollar on their tax return for qualified education expenses incurred during the tax year as a part of a degree, certificate or similar education program. The student must carry, at least, half of the normal full-time student course load. And the course of study program must lead to a degree, certificate or similar academic achievement.

The AOC is worth $2,500 per year for qualified education expenses. The AOC is available to a student, a taxpayer, or the taxpayer spouse or dependent.

The AOC is allowed only for the first four years of a postsecondary education. That means that the AOC is typically not allowed for graduate work or attendance at a professional school, such as a law school or a medical school.

The AOC is phased out for taxpayers with annual Modified Adjusted Gross Income between $80,000 and $90,000 ($160,000 and $180,000 for a joint filer). The phase out is based on a multiplier. I will not go into the mechanics of the phase out math here.

The AOC has refundable and nonrefundable rules that the tax return preparer must be aware and comply with when advising taxpayers in claiming the AOC tax position on their return.

The AOC is claimed by completion of Form 8863 which is attached to the completed tax return filed with the IRS. The eligible students Social Security Number must be included on this form. The student must have received tuition statement from their school by Jan 31 of the following tax year.

Taxpayers who erroneously claim the AOC can be banned for two years after the most recent tax year for which they recklessly or negligently claimed the AOC. Furthermore, in the event the IRS finds that the taxpayer fraudulently claimed the AOC, the band can be for ten years. The penalty for paid tax return preparers is about $560 for each instance of erroneously advising the taxpayer to claim the AOC.

INTERVIEWER WRAP-UP: MlaahSingh, Tax Law Clerk

■English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100

ATTORNEY’S CLOSING REMARKS:

This is the end of “LEGAL THOUGHTS” for now

■Thank you all for giving us your ear today as we started our new Legal Thoughts Podcast Series dealing with the Paid Tax Return Preparer Due Diligence Requirements for Determining Eligibility for Certain Tax Benefits. This was our second Episode in this series of podcast where we navigate through various tax positions, such as the CTC, ACTC, ODC, EIC and the Head of Household Filing Status Election. We are basically talking about issues that can benefit our audience; especially, paid tax return preparers in our audience that frequently come up in IRS Paid Tax Preparer Penalty Cases. Stay tune for future episodes in this series.

Until next time, take care.

Episode One- Attorney’s Observations When Dealing with IRS Representatives

Leave a reply

LEGAL THOUGHTS – Attorney’s Observations When Dealing with IRS Representatives

COLEMAN JACKSON, ATTORNEY & LEGAL COUNSEL | Transcription of Legal Thoughts Posted on June 10, 2024

Topic: Attorney’s Key Take Aways Preparer Due Diligence

Attorney Introduction:

My name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas. In addition to myself, we have a Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will be interviewing me in a brand new Legal Thoughts podcast series that we have entitled : “Tax Return Preparer Due Diligence and Preparer Penalties. ” We urge our audience to follow our podcast and invite all their neighbors, friends and acquaintances to please tune in to this series of Legal Thoughts Podcasts on Apple Podcast, Google Podcast, Spotify or wherever you listen to podcasts. The four episodes in our Tax Return Preparer Penalty Case Series are as follows:

Attorney’s Observations from Dealing with an Uptick in Return Preparer Penalty Cases
Navigating Due Diligence for Tax Preparers
Managing IRS Due Diligence Investigations
Strategies for Compliance and Risk Mitigation

Interviewer Introduction:

Good afternoon Attorney; thank you for allowing me to interview you regarding what appears to be an uptick in IRS examinations and investigations of Paid Tax Return Preparers.

Mr. Jackson, thank you for joining me to discuss this matter. Over your career within tax law for over 35+ years, you must have quite an understanding of what it is like to work with IRS representatives on international and federal tax matters, as well as your representation of taxpayers with matters before the Financial Crimes Enforcement Network. In fact we have an ongoing series of Legal Thoughts Podcast on the Corporate Transparency Act’s Beneficial Ownership Information Reporting Requirements estimated to impact over 42 million small and medium sized businesses all over the country.

Perhaps this new series of podcast dealing with IRS’s Due Diligence Examinations is just as important and is likely to address impacts on paid tax return preparers and their customers due to IRS Paid Preparer Due Diligence Investigations. So, I believe our Legal Thoughts Podcast’s listeners absolutely must hear your perspective on this apparent uptick in Paid Tax Return Preparer Due Diligence Investigations. My first question is this one:

Question Number One: What are some of your key takeaways gleaned while representing tax return preparers in IRS exams regarding paid tax return preparer due diligence requirements?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 1

Thanks Mlaah for this question. I will not talk about any specifics here; in general I will share my general observations with respect to IRS Paid Preparer Due Diligence Investigations. Some key takeaways are as follows:

My first take away: there appears to be an uptick in IRS examinations of paid tax return preparers since 2023 under Internal Revenue Code Section 6695(a) which imposes the duty for preparers to annually determine a taxpayer’s eligibility to take the following tax positions on their individual federal tax returns:

Head of Household Status

Child Tax Credit

Additional Child Tax Credit

The American Opportunity Credit, and

The Earned Income Tax Credit

My second take away is that it appears that this uptick is impacting low and medium income taxpayers to a greater extent because they are more likely to take these types of tax positions since most of these tax credits have income caps. That means, high income earners do not qualify for these types of tax credits.

My third take away is that it appears that immigrant families are more impacted by this uptick in preparer examinations than other American households. The reason for this can be difficult to pinpoint for sure, but it looks like it could be due to the following- Immigrants may have a tendency to use paid preparers who do not have traditional licensures, such as, certified public accountants, enrolled agents or attorney credentials. Generally the preparers and their customers are from the same country or speak the same native language. Typically these preparers charge less for return preparation than Certified Public Accountants or Enrolled Agents. These preparers may be perceived as having less education and therefore Artificial Intelligence could kick out the returns for human examination (but note that if this occurs; it is probably not intentional targeting of immigrant tax returns). From my observation, the practical effect creates this result.

Artificial intelligence algorithms could carry the bias and blindness of those who create them thereby kicking out a higher degree of tax returns that does not conform to some standard pattern. For example, African languages, Latin Languages, family traditions where children does not have their father’s surname. Immigrants can reside in multigenerational households that consist or grand-parents, parents, children and even nieces and nephews on very little household income. AI algorithms might simply kick these returns out as abnormal household patterns. IRS examiners who lack foreign language skills and social awareness of cultural traditions other than western traditional expressions or practices might be quite alarmed when they review these algorithm flagged abnormalities. This could lead to heightened review after algorithms flags a bunch of the tax preparer’s returns for human review.

All of these factors and more could explain why there is a higher incidence of immigrant taxpayers being impacted by paid preparer due diligence examinations by the IRS in recent years. Again, this is the practical effect; but it does not necessarily mean immigrant tax returns are targeted. Nor does it mean that low income taxpayers are being intentionally targeted by the IRS for audit examination either. It is simply the practical effect and, again, this perceived uptick in paid preparer exams could be driven by computer algorithms that have no conscience, no soul and no humanity. They just see a life or family pattern that does not fit perceived norms.

My fourth takeaway is that Internal Revenue Code Section 6695(g) allows the IRS to impose a very high penalty if a paid tax return preparer fails to meet four precise due diligence requirements. The penalty for tax periods ending in 2023 was $560 for each violation. The practical implication of these penalties is that paid tax return preparers can come in with high proposed tax penalties in the tens of thousands to hundreds of thousands of dollars depending usually upon the number of returns they do and how many penalties they have been assessed.

Mlaah, we can talk more about the four due diligence requirements imposed on paid tax return preparers in a later podcast in this series or right now. I will let you direct our path through this series by the questions you ask. What do you think our Legal Thoughts Podcast audience should know now. Keep in mind, we don’t have to tell them everything they need to know about this topic all at once.

INTERVIEWER: Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Thank you for your insightful answer Mr. Jackson, it seems as though there are many requirements and qualifications to satisfy in order to avoid sizable penalties. As you mentioned, it is important for our listeners who represent low and medium sized businesses or identify as an Immigrant to pay close attention to what is expected of them for respective annual federal tax return preparation and reporting.

Question Number Two: So, my next question is, how do paid tax return preparers ensure they comprehend the intricate eligibility criteria for tax credits such as the Earned Income Credit, Child Tax Credit, Additional Child Tax Credit, and Head of Household filing status?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 2

Excellent Mlaah! Very astute question.

First: Paid Tax Return Preparers must know the four tax positions where these due diligence requirements are applicable:

Taxpayer’s eligibility to claim head of household tax filing status;
Taxpayer’s eligibility to claim the American Opportunity Tax Credit;
Taxpayer’s eligibility to claim the Child Tax Credit; and
Taxpayer’s eligibility to claim the Earned Income Credit

Second: Paid Tax Return Preparers must know the four due diligence requirements for determining whether a taxpayer is eligible for these tax benefits:

Due diligence requirement number 1 requires that the tax return preparer complete an eligibility checklist or have alternative eligibility records based on information provided by the taxpayer or information reasonably known by the preparer. Practical Note: from myexperience in representing tax return preparers in IRS Tax Return Preparer Cases– it is absolutely best practice to document these eligibility on Form 8867, Paid Preparer’s Due Diligence Checklist. Also it is critical that this checklist be attached to the taxpayer’s return and a copy maintained in the files of the return preparer with all documentation used to establish the taxpayer’s eligibility to take the tax position.
Due diligence requirement number 2 requires that the tax return preparer completion of Form 8867 be based on information provided by the taxpayer or based on information otherwise reasonably known by the return preparer. Under this second due diligence requirement the tax return preparer must accurately compute the credit amount and must maintain a copy of the computation worksheets. Again from representing return preparers over the years in these matters; it is critical that the return preparer keep contemporaneous files on all this. IRS Due Diligence Examinations can be a surprise knock on the tax return preparer’s business door.
Due diligence requirement number 3 requires that the tax return preparer do some contemporaneous reasonable inquiries whenever the tax return preparer either knows, or have a reason to know that any of the information used by them in preparation of the taxpayer’s return looks inconsistent, incorrect or incomplete or otherwise raise the eyebrows of a reasonable and well informed tax return preparer knowledgeable in tax law. This is an objective standard, meaning what would a “reasonable well informed tax professional” think about the information supplied to the tax return preparer. Practice Note: the tax return preparer must make contemporaneous notes of any inquiry they make to establish eligibility of the tax position and they can expect to have to produce these contemporaneous notes in the event they receive a knock on their door from an IRS Agent seeking to conduct a Paid Preparer Due Diligence Examination. Word to the wise— the knowledge and inquiry must be documented, it is insufficient that the tax return preparer has knowledge of taxpayer’s in their head, for example family members, church members or other people the return preparer knows or thinks they know.
Due Diligence Requirement Number 4 requires that the paid tax return preparer to retain a copy of all of the eligibility materials used in establishing eligibility for the tax positions on the return for three years after the June 30th following the date the return or claim for refund was given to the taxpayer. Practice Note: This material should be kept in normal business records for at least three or four years from when the tax return is filed with the IRS.

Let me just say this– from experience in representing tax return preparer’s, another common area that comes under review is tax returns where the tax return contains a Schedule C. Often times we have seen the IRS examiner query the return preparer regarding tax positions taken on Schedule C using the same knowledge, need to inquire rules and documentation standards as those used for the CTC, AOTC, EIC, and Head of Household Filing Status. Word for the wise: Know your schedule C filers and document their business tax positions contemporaneously. Keep a copy of this contemporaneous documentation in your business files. A return preparer cannot simply take a customer’s word for business receipts and deductions. They must make reasonable inquiries and keep evidence of it in their books and records.

INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Thank you for breaking down your answer in such a way. In summation, Mr. Jackson has pointed out that in order for Due Diligence to be satisfied, a taxpayer must first conduct an eligibility checklist or at least have alternative eligibility records. Next in summary, the attorney has said that a taxpayer must complete Form 8867. Then, a taxpayer must address any inconsistencies that they discover while performing their tax return preparation duties. And finally, in summary the attorney has warned about the need for the paid tax return preparer to create contemporary records and maintain those records in their normal course of business. So moving forward, my next question is,

Question Number Three: What are the frequent challenges that tax return preparers encounter when navigating the due diligence requirements for common tax positions?

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 2

Tax return preparers navigating Paid Preparer Due Diligence Eligibility Requirements are confronted with challenges such as:

They must maintain current knowledge of all relevant tax laws and changes. So they will have to incur the cost of going to continuing tax education courses to make sure that they a knowledgeable about the tax positions that they might confront during tax season;

They must know their clients. For example, I know some Certified Public Accountants who refuse to accept any client that they don’t know through credible referrals. This may present the challenge of growing a vibrant tax preparation practice. They must complete due diligence checklists and do reasonable inquiries. All of this could be time consuming and expensive. Maybe their clients do not want to pay a reasonable fee for tax preparation work because they think it is easy or simple.

These are a few of the challenges that I have heard about when talking to tax return preparers. There are likely many more challenges presented to preparer’s who must comply with due diligence eligibility requirements.

Perhaps in our next podcast in this series, we can talk about specific types of challenges experienced by tax return preparers facing penalties for failure to be diligent in determining eligibility for EITC, AOTC, CTC/ACTC and HOH. We can do that in a future podcast episode in this Preparer Due Diligence Requirements Series if you like. We are going to have to go for now because I have to get to an appointment.

INTERVIEWER WRAP-UP: MlaahSingh, Tax Law Clerk

Attorney, thank you for sitting with me today in our 1st podcast on this very important topic: “Tax Return Preparer Due Diligence Requirements” I surely hope our audience will benefit from this Legal Thoughts series on tax preparer due diligence requirements and due diligence penalty cases. Folks, stay tuned to upcoming Legal Thoughts Podcasts on this important federal tax topic!

Our audience can send us inquiries at www.cjacksonlaw.com if they have questions or wish to comment on our podcasts in this series or any of our Legal Thoughts podcasts, blogs, or Law Watch Videos posted on our YouTube Channel. You can send an email directly to attorney at cj@cjacksonlaw.com and suggest other tax topics that you want us to discuss in future Legal Thoughts Podcast. We are open to your ideas for topics in tax and business law.

English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100

ATTORNEY’S CLOSING REMARKS:

Thank you all for giving us your ear today as we started our new Legal Thoughts Podcast Series dealing with the Paid Tax Return Preparer Due Diligence Requirements for Determining Eligibility for Certain Tax Benefits. This was our first Episode in this series of podcast. We are basically talking about issues that can benefit our audience; especially, paid tax return preparers in our audience that frequently come up in IRS Paid Tax Preparer Penalty Cases. Stay tune for future episodes in this series.

Until next time, take care.

If you want to see or hear more taxation, business structuring and contracts litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C. Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Stay tuned! We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration. Until next time, take care.