November 4, 2015
Harriet Jacobs, CPA, MST
Jacobs Tax & Consulting, LLC
Key Highlight: IRS Proposes Penalties Against Wrong Preparer
This is a true story.
Please let us know of any similar cases of PTINs being used by someone other than the person to whom the number is assigned.
Someone else – Accidentally? Fraudulently? – used a preparers PTIN on returns which didn’t comply with the IRC §6695(g) EITC Due Diligence requirements and the IRS invited the preparer to pay that person’s (the someone else) $8,500 penalty for the 17 returns in question, at $500 penalty per return.
Letter 1125 and Form 5816 (Report of Tax Return Preparer Penalty Case) was sent to the innocent preparer! He/she also received a 4 page Explanation of Proposed IRC §6695(g) Paid Preparer Penalties, plus Publications 5 (Your Appeal Rights and How to Prepare a Protest If You Don’t Agree) and 594 (The IRS Collection Process).
Possible Disclosure Violation by IRS?
Interestingly, the IRS also sent the innocent preparer a list of the 17 taxpayers in question –including their full Social Security numbers. This may have been an inadvertent violation of the rules in the Internal Revenue Code and the Internal Revenue Manual which protect taxpayer information from disclosure to third parties by the IRS. Presumably, the list was received, because the Wage & Investment Refundable Credits Administration case worker believed that the innocent person was the preparer who filed the tax returns for these 17 taxpayers. Why did she believe he/she was the preparer? Because the innocent preparer’s PTIN was on the returns. Here we go around in circles.
No Verification by IRS that the innocent PTIN Holder Prepared the Suspect Returns
The warning letter was received when the preparer who used the innocent preparers PTIN filed an earlier return in February 2015. Innocent preparer was able to track down the Director, Refundable Credits, Policy & Program Management, who put him/her in touch with a Senior Program Analyst, Refundable Credit Administration, EITC & Refundable Credits Policy & Administration. (Don’t you love the titles?) The analyst told him/her in February that the IRS only looks at the PTIN shown on the return, and assumes that the person assigned that PTIN is, indeed, the preparer on the suspect return. THEY NEVER CHECKED THEIR SOURCES TO DETERMINE IF THE INNOCENT PREPARERS PTIN WAS BEING USED ON SOMEONE ELSE’S RETURN. This might change, however, because it was pointed out to the Director that they have the ability to track the actual return preparer and requested that he add it to the procedures his group follows. He appeared to agree. Interestingly, the case worker left a telephone message after receiving the written protest, saying that she had identified the person who had misused the PTIN. The IRS would never have proposed a preparer penalty against the innocent preparer had they performed this due diligence procedure during the initial stages of their investigation.
Protect Your Appeal Rights
The members of the ICPAS Practice & Procedures committee always stress that you should protect your client’s right to an appeal with a timely filed protest. Letter 1125 explained that he/she had appeal rights. Even though it was discussed with the IRS over the telephone and they promised to straighten out the matter, a timely filed, written protest was sent. Why? Because he/she wasn’t about to bet $8,500 out of pocket that the IRS would fix the situation properly. The protest protected his/her appeal rights – just in case. In this instance, he/she did not receive any written resolution until after the appeal rights would have expired, but he/she still had the right to an appeal because the protest was filed, timely.
Request for New PTIN
Both the analyst and the case worker suggested that the innocent preparer request a new PTIN. There doesn’t actually seem to be a method for doing this. They each said to use Form 14157, Complaint: Tax Return Preparer. This is the form which is used to complainabout a preparer. It was finally decided that he/she should fill out the form as thecomplainant regarding an unknown preparer, since there was no information regarding the person who used the PTIN and explained the situation in the notes section of the form. We’ll see how this works and if a new PTIN is issued, especially in light of the case worker’s phone message which said they had placed him/her on “our list of known PTIN abuse.”
The analyst described this as a form of ID theft. Clearly, there’s nothing that could have been done to avoid it, but, the IRS has a responsibility to use the information which it already has available to make sure that it doesn’t assess penalties against preparers who are the victims of this form of ID theft. If this happens to you, however, contact the office involved by telephone, but also preserve your appeal rights by filing a written protest timely.
Please let us know of other cases of PTIN abuse so that we can determine if this is a wide spread problem or just an isolated incident.
Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.