The filing season is continuing its successful start, with just a small amount of carryover from last year. Third-party marketing of the Employee Retention Credit is causing concern, with the IRS reaching out to employers to be cautious in claiming a credit that they may not be eligible for, and to practitioners, reminding them of their Circular 230 due diligence responsibilities.
Stephen Mankowski, tax chair of NCCPAP, the National Conference of CPA Practitioners, shared a number of other important points of the season so far:
- There are over 8 million refunds averaging $1,900 each meaning refunds are running about 10% lower than last year. This trend is expected to continue due to there being no more stimulus payments, Recovery Rebate Credits, Child Tax Credits, and above-the-line charitable contributions.
- The IRS hired over 5,000 new phone assistants, which is helping the level of service. They are still looking to hire more people to serve in diverse communities, including interpreters at assistance centers.
- The latest change is to allow amended returns to have direct deposits from 2021 through the current year.
- Earned Income Tax Credits and Additional Child Tax Credits were already released with deposits set for February 28 unless there are issues with the return. The Where's My Refund tool will show current updates.
- More IRS forms, publications, and instructions are being translated into foreign languages.
- The Tax Forums are going to five cities this year. The IRS has been trying to attract a younger demographic and has established a committee to focus on attracting younger preparers.
ERC abuses and Circular 230
The IRS is warning employers to be wary of third parties who are advising them to claim the Employee Retention Credit when they may not qualify. Their concern is that some third parties are taking improper positions related to taxpayer eligibility and computation of the credit, often charging large upfront or contingency fees.
"These companies are very aggressive at promoting themselves," said Mankowski. "In some cases they will lower their fee if the businessman pays them upfront. For example, they tell them that they qualify for a $100,000 credit. They will lower their normal fee from 15% to 10% if they are paid upfront. They will amend the Form 941, but the taxpayer — and their CPA – has to amend the corporate and/or the personal return to reflect the Form 941."
Section 10.34 of Circular 230 describes a tax professional's duties and obligations while practicing before the IRS and authorizes specific sanction for violations of those duties and obligations. Forms 14157 and 14157-A are to report tax preparer fraud or misconduct and/or to file a complaint against a tax return preparer or tax preparation business.
"Regarding ERC, the practitioner community is asking for guidance from the Office of Professional Responsibility," Mankowski said. "The goal is to work on compliance on a pre-filing basis rather than during filing. If a question arises as to the extent of due diligence on the part of the preparer with regard to ERC, it is unclear how the IRS will check to make sure the affected returns were properly amended."
Practitioner awareness of fraud schemes
Fraud schemes are getting more complicated, but many are simplistic in nature and mitigated by due diligence and common sense, Mankowski noted. "Overall, many of the schemes are creative, but can be easily debunked. The biggest concern with the IRS is the intent of the taxpayer," he said.
The Office of Fraud Enforcement was established in March 2020 and reports to the Small Business/Self-Employed Division's deputy commissioner for collection & operations support. The office promotes compliance by strengthening the IRS response to fraud and mitigating emerging threats. OFE tries to be proactive through internal and external leads.
"They are currently dealing with many aspects of venture capital, government agencies, and international impacts, using data science to increase efficiency," said Mankowski. "OFE is continuing to grow, and is hiring to enhance its effectiveness. The office consists of the national fraud counsel, an emerging threats mitigation team, and fraud enforcement advisors."
