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Busy season due diligence comes down to what you don’t know

Shutterstock_753092236I’m a self-professed rule follower. Except for maybe driving five miles over the speed limit on the highway, I sweat to even think about bending the rules. Most CPAs I know feel the same way. We stick to our professional rulebook, focusing on doing our due diligence and complying with each regulation like it’s our personal law. However, it’s not always easy to be a rule follower when you’re in the thick of busy season.

In my opinion, due diligence is all about using common sense, but there are additional due diligence rules — some old and some new — that are important for CPAs to remember during busy season.

Educate clients about proper record keeping.

You spend a lot of time requesting information from your clients, who then spend a lot of time gathering that information. This can become a time-consuming process. Educating clients on what information is needed to complete their returns properly can speed up the process. Be sure to provide clients with guidelines on items like charitable contributions, travel and business meals. This helps you make sure you haven’t overlooked anything. Just remind your clients to leave the shoebox full of yellowed receipts at home!

The tax organizer — is it enough?

An organizer is a great tool to get your clients ready for busy season, but they aren’t a due diligence magic bullet. IRS regulations are clear: a preparer may not simply rely on the organizer to satisfy the due diligence knowledge requirement. And although Circular 230 says that you may “rely in good faith and without verification on information furnished by the client,” that doesn’t mean you shouldn’t ask them questions. Evaluate and document their answers and compare them to the facts at hand. If you’re not satisfied with your clients’ answers or still think something’s amiss, you’ll need to dig a little deeper.

Reasonable inquiries are necessary.

Pay attention to the red flags. You can generally take your clients at their word on many things except when what they say seems to be incorrect, inconsistent or incomplete. This is where that additional documentation requirement comes into play.

For example, your client indicates his mileage is 100 percent business, and you know he doesn’t have another car in his household — something isn’t adding up. He’s likely using that vehicle for personal uses at least some of the time. Or perhaps a client tells you she used her vacation home less than 14 days in 2018 when you know she spent the entire summer there. Ask for documentation that proves your clients’ claims to cover your bases.  

SSTS No. 3, Certain Procedural Aspects of Preparing Returns has complete guidelines on this topic.

New due diligence requirements exist for certain credits/filing status.

Form 8867, Paid Preparer’s Due Diligence Checklist, isn’t new, but it has had some changes for the 2018 tax year. Tax reform expanded the checklist to include questions for both the head of household filing status and the credit for other dependents. The new legislation also increased the income limit for the child tax credit, meaning more clients will be able to take advantage of this credit and more practitioners will, in turn, be subject to the due diligence requirements of Sec. 6695(g) and the potential penalties for noncompliance.

In November, the IRS released Regs. Sec. 1.6695-2, which provides conditions that must be met to satisfy Form 8867’s requirements. Read more about the expanded Form 8867 requirements and review the AICPA Tax Section’s 2018 paid preparer’s due diligence checklist to help you comply.

What should you keep in your files?

You probably have a firm-wide policy about what type of client tax return documents to retain, and it’s not likely you’ll be hanging onto every piece of your clients’ supporting documentation. However, to comply with the requirements of Sec. 6695(g), you still have to keep detailed records. There’s no all-encompassing list that tells you which documents you need to keep, but the instructions to Form 8867 provide some examples.

Keeping up with due diligence requirements isn’t the most fun part of being a CPA, and let’s face it — it’s tough. However, with a little extra effort, you can stay compliant with the rules. The AICPA Tax Section maintains a library of due diligence resources and information. Use it to keep yourself in the know during the next few weeks of busy season – and beyond.

April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants

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