Taxable Talk

The IRS today released IR-2010-82 noting the disbarment of CPA Tim Kaskey for, “finding, among other things, that Kaskey failed to exercise due diligence in preparing tax returns for a corporation and its husband and wife shareholders.”

Here’s the key paragraph from the announcement:

When Kaskey failed to respond, or appear, at the administrative proceeding, the ALJ deemed the allegations against Kaskey admitted and entered a default judgment for disbarment. Kaskey appealed. On review, the Treasury Appellate Authority agreed that disbarment was proper. Kaskey defended against the due diligence allegations by arguing that his clients had misrepresented their income to him. The Appellate Authority observed that there was “a great deal of evidence reflecting the lack of due diligence by [Kaskey] in the preparation of these returns…[and that] “it was inconceivable that [the individual taxpayers] could pay their living expenses based on the income reported on their returns.”

The announcement also has Karen Hawkins, the Director of the Office of Professional Responsibility (of the IRS), stating,

Practitioners who think OPR isn’t serious about due diligence should take heed. Practitioners may not ignore the implications of information already known, and must make reasonable inquiries if the information furnished by a client appears to be incorrect, inconsistent, or incomplete.

There are a number of issues raised by this decision (based on the announcement). Am I expected to truly audit the financials of a business when I am barred by California law from performing audits? Peter Pappas asks,

Is this case a precedent for requiring tax preparers to audit their clients books and records before they prepare and sign their tax returns? For example, if the client gives you inaccurate gross income and expense figures and you rely on those figures to prepare the return, are you automatically assumed to be in violation of Circular 230 and, therefore, disbarrable?

Adding to this is the rumored soon-to-be-announced proposal that would require all purveyors of continuing education to register with the IRS in advance (a registration processed estimated to take between four and six months) and that all syllabi would have to be pre-approved by the IRS. That certainly lends credence to the idea that the IRS wants to control tax professionals, and perhaps make tax professionals part of the enforcement wing of the IRS rather than advocates on behalf of our clients.

Well, the actual decision is quite different from the summary. Mr. Kaskey lost the case for some rather mundane reasons:

1. Mr. Kaskey “…[H]ad willfully failed to file Federal income tax returns as required by 26 U.S.C. §§ 6011, 6012, and 6072 for the years 2001, 2002, 2003, 2004, and 2005….”
2. Mr. Kaskey continued to not file his own tax returns for 2006 and 2007.
3. Mr. Kaskey prepared numerous returns for others while not preparing his own returns.
4. Officers’ compensation on the tax return in question did not match the compensation noted on the financial statements of the tax return.
5. “[T]he corporate books clearly identified personal items…which were being paid by [the corporation] with no loans or distributions being shown on the returns of [the corporation]….”
6. “[I]t was inconceivable that [the taxpayers] could pay their living expenses based on the income reported on their returns.”

A tax professional who doesn’t file tax returns can lose his or her license. Indeed, when an Enrolled Agent is up for his license, the IRS will verify that he has filed all of his tax returns (individual, corporate, and payroll) before issuing a license. While Ms. Hawkins is trumpeting the last factor of the decision as the key factor, that just isn’t the case. The reality appears to be that Mr. Kaskey wasn’t very diligent in several areas, especially in filing his own tax returns.