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Have undisclosed foreign bank accounts? – What you should expect your tax preparer to ask you when you come in to get your taxes prepared next year.

CPA’s and other professional tax return preparers are bound to the IRS Code Of Professional Responsibility commonly called Circular 230 which if a tax preparer violates could lead to big penalties and sanctions for that tax preparer.

What penalties could tax preparers face?

A tax preparer who is in violation of these rules could be subject to the following:

Internal Revenue Code § 6694(a) provides that if any part of an understatement of a taxpayer’s liability is due to an “unrealistic position” taken on his return, any income tax return preparer who knew (or reasonably should have known) of this position is subject to a penalty of $250. If the understatement is due to a reckless or intentional disregard of rules or regulations the penalty is $1,000 per occurrence.

The tax preparer’s employer, firm or entity also is subject to the penalty if it knew, or reasonably should have known, of the conduct giving rise to the penalty.

While these may not seem like large amounts, if this penalty is assessed IRS employees are instructed to report the income tax return preparer to the IRS Office of Professional Responsibility (“OPR”). A tax preparer who is referred to the OPR, may be subject to suspension, disbarment, or censure. In addition, if the preparer has violated Circular No. 230, the IRS may impose a monetary penalty in an amount up to the gross income derived or to be derived from the conduct giving rise to the penalty.

Additionally, the IRS can go criminal on the tax preparer. Unscrupulous tax return preparers are generally prosecuted for violation of the Internal Revenue Code §7201, Attempt to Evade or Defeat Tax. This is a felony offense and carries a maximum potential penalty of up to five years in prison and a fine of up to $250,000. Internal Revenue Code §7206(1) and (2), Fraud and False Statements, also carries a maximum potential penalty of up to three years in prison and a fine up to $250,000.

What is one of the main obligations that a tax preparer must follow?

Circular No. 230 §10.22 Diligence as to accuracy which states that:

Each tax return preparer shall exercise due diligence:
a. In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
b. In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and
c. In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.

This does not mean that you as a tax preparer have to actually audit or examine the records of your client. Under Circular No 230 §10.34(d), a tax preparer may generally rely, in good faith and without verification, on information furnished by a client. However, good faith reliance contemplates that a practitioner will make reasonable inquiries when a client provides information that implies possible participation in overseas transactions/accounts subject to FBAR requirements.

But what if the client makes certain statements that sound suspicious?

A tax preparer may not ignore the implications of any information provided to or actually known him or her. If the information furnished by the client appears to be incorrect, inconsistent with other known facts, or incomplete, the tax preparer is required to make further inquiry. The practitioner is also required by Circular No 230 §10.34(c), to advise a client of any potential penalties likely to apply to a position taken on a return the tax preparer is preparing or on which she or he is advising.

So if it is determined that the client has foreign income that must be reported on his U.S. income tax return and the client refuses to report this income, a tax preparer to avoid penalties and sanctions by the IRS cannot assist a client in filing a false return or filing a tax return taking a position that cannot be reasonable is not supported by the tax law.

Questions for tax preparers to ask.

With the IRS having more resources and information to detect taxpayers with undisclosed foreign accounts, what changes should taxpayers expect when they next meet with their tax preparer?

1. Does the client have a foreign account?
2. If yes, is it the type of account that is covered by 31 U.S.C. Section 5314?
3. If applicable, has the client properly completed Form 1040, Schedule B, Interest and Ordinary Dividends, Part III, Line 7a?
4. Has the client annually reported the income from the account?
5. Has the client filed FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR)?
6. Has the client filed Form 8938, Statement of Specified Foreign Financial Assets, with his or her federal income tax return?
7. Has the IRS already contacted the client about the foreign account?

What should you do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or in 2012 OVDI, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

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