Ignorance is bliss! This common phrase has a practical application in many areas of life. However, when the IRS is considering a tax professional's conduct, ignorance is not bliss. In fact, "Ignorance of the law is no excuse" might be a more apt phrase. Tax court case after tax court case emphasizes that a taxpayer and their preparer must conduct themselves with due care.
By and large, the accounting profession is respected and held in esteem by the public for one primary reason — CPAs tend to possess integrity. They desire to do the right thing and thrive on law and order. There are likely more instances where a tax practitioner failed to comply with tax laws due to ignorance, rather than intent.
As mentioned, however, ignorance of the law is no excuse. Should a tax professional be aware their knowledge is lacking in a particular area, they should exercise due care and make efforts to become better educated on the topic. There are a myriad of ways to go about establishing tax law understanding — consulting colleagues who have expertise in the area, attending CPE webinars on the topic, Google searches (shh!) and educational journals are all exceptional avenues.
However, there are a few other avenues that are less widely known but may be beneficial to tax preparers.
The Internal Revenue Manual
The Internal Revenue Manual is the Internal Revenue Service's compilation of policies, procedures and guidelines applicable to IRS staff. However, it can help practitioners as well. Consider that the IRM is a document instructing an agent on proper conduct. If the tax practitioner is aware of the IRM's requirements for agents' conduct, the tax practitioner can ensure the agent abides by the requirements and politely address any deviations with the agent. This can provide more optimal outcomes for clients as a sort of check-and-balance system.
For example, if the IRS believes it is unlikely that an outstanding tax bill will be fully paid by the client, the agent can accept an offer in compromise. This is common knowledge. However, in negotiations, the IRM states the agent must work toward the best interests of both parties — government and taxpayer. There have been instances where an agent informed the taxpayer and accounting representative that such actions were not in the best interest of the government and proceeded with a plan advocating for the government. The representing accountant reminded the agent of the IRM's policy to act in the best interest of both parties, and the matter was fixed.
Given the IRM's depth and breadth, it is very easy for an agent to inadvertently omit a behavior that the IRS expects, but these agents are just like us. It's inadvertent. They also desire to function within their prescribed conduct, but the volume of requirements (just like CPAs with tax law) may mean something is accidentally missed. Wouldn't we want help if we unknowingly proceeded incorrectly? Careful presentation of the error to the agent not only assists them in staying on course, but it builds rapport (most are grateful for the assistance) and can protect your clients.
Taxpayer Bill of Rights
Along the same vein of the IRM, the Taxpayer Bill of Bights can educate taxpayers on their rights when interacting with the IRS.
This knowledge will not help a tax practitioner prepare a return adequately. However, should the taxpayer be in an audit position as a result of inadequate tax preparation, it is a small comfort to know the taxpayer must be treated in a prescribed manner. For example, a tax practitioner's knowledge that a taxpayer should be spoken to in an easily understandable manner can assist during an audit. If the agent is not clear in expectations or required documents, the tax practitioner can direct the agent to the taxpayer's right of clear communication. This enables issues to be resolved promptly, rather than perpetuate and make the audit a more time-consuming process.
Audit technique guides
A surprise birthday party might be fun. Entering an audit with a taxpayer and wondering what "surprise" information the auditor will present … not so much. What did the auditor see that the accountant overlooked when preparing the return? What information should have been included that was erroneously omitted?
These nervous feelings can be diminished if tax practitioners consult the audit technique guides published on the IRS website. These guides provide insight into industry jargon, reporting requirements, higher noncompliance areas specific to the given industry and industry-specific calculations (think explanations of percentage of completion method, etc.).
There are ATGs relating to the construction industry, the entertainment industry, the ministry, passive activity losses calculations and even new vehicle dealerships, to name a few. The breadth of topics covered is incredible.
Furthermore, these guides are quite well-written. The ATGs explain the information in an easy-to-follow manner because they are directed at agents who, despite a general tax knowledge, might lack expertise in the given area. Hey, this sounds like us sometimes! We may have general tax law knowledge but lack a detailed understanding of the complexities of a certain topic … say rehabilitation credits anyone? Yep, there is an ATG for that! It walks agents through how to calculate the 24-month measuring periods, how to determine what costs can or cannot be included, what "substantially rehabilitated" means, and other items specific to the credit.
Tax practitioners who consult an ATG while preparing the return already have a heads-up on how to properly account for the topic, what questions auditors may ask, and what documentation they may seek. This changes from a reactive response to a proactive approach that demonstrates due care by properly accounting for the client's issue and obtaining the appropriate documentation on the front end (return preparation).
Practice units
The Large Business and International Division produces practice units. As with the other materials, these are internally created for IRS staff to develop an understanding of particular topics. Whereas the ATGs are Word-type documents, the practice units are PowerPoints. They cover topics from calculating partner's outside basis, LIFO records, 263A computations, allocation of personal use of aircraft, to foreign earned income exclusion.
These PowerPoints are very similar to the ATGs. They discuss a particular topic in detail, providing calculations and step-by-step instructions, before advancing to possible "issues." These "issues" provide insight to the IRS staff on areas that have a higher likelihood of noncompliance and how the agent can discern such noncompliance.
As with ATGs, if a practitioner uses the practice unit while preparing the return, they can ensure they accounted for the item appropriately and that any potential trouble areas the IRS looks for were adequately and competently addressed.
Treasury regulations
Did you cringe? Yeah, most of us do. The accountant's enthusiasm for tax law is unfathomable to most other members of society. However, even the most energetic accountant can lose some steam when reading tax law.
Congress passes tax laws, and they are codified in the Internal Revenue Code. In most cases, the law is brief and does not provide great insight. Treasury regulations (as included in the Code of Federal Regulations) are written by the IRS, which is part of the U.S. Department of the Treasury.
Many times, practitioners mock the IRS's efforts and ambiguity. However, several Treasury regulations issue a bold challenge to that assumption. They are rife with examples and detailed explanations, and can frequently add clarity to ambiguous tax law. If there is a code section that lacks adequate detail, try Googling the code section followed by Treasury regulations (or CFR) and peruse those. These may provide more insight than anticipated.
Overall, these resources are off the beaten path that most practitioners pursue. However, in many cases, it is as if a practitioner is handed the IRS's playbook! This knowledge is invaluable, not just during audits, but to prevent audits, to do returns right the first time by complying with tax law.
After all, ignorance of the law is no excuse.
