IRS Official Says Due Diligence Rules Could Ensnare More Practitioners

By Diane Freda

There are only six cases out of 300 in the Office of Professional Responsibility related to violations by tax-exempt practitioners, Internal Revenue Service OPR Director Karen Hawkins said Feb. 4, but the due diligence requirements of Circular 230 may lead more practitioners, including tax-exempt ones, into closer contact with her office.

Section 10.22 of the Treasury circular requires that practitioners exercise due diligence when preparing or assisting in the preparation of filings for submission to the IRS, and that they determine the correctness of the representations they make, both to the IRS and to clients, Hawkins told a meeting of regional exempt practitioners in Baltimore.

This due diligence section also allows a practitioner to rely on the work product of others as long as those individuals have been properly selected and trained and their work has been properly overseen. This will become more important once the IRS has registered close to a million tax preparers, Hawkins said.

The tax preparer registration program requires that preparers who sign returns supervise the work of employees in their firms who prepare “all or substantially all” of a tax return. However, Hawkins said that Section 10.22 could also come into play with pieces of submissions to the IRS, including attachments and exhibits.

“We see instances where people are supposed to be supervising others who do not properly supervise them. In those instances we will pursue the supervising attorney for that lack of due diligence,” she said.

‘Cookie-Cutter Narratives'

Hawkins also ticked off some of the specific violations referred to her office involving tax exempts.

One of the most frequent relates to “cookie-cutter narratives,” in which a practitioner submits multiple requests for exemption on Form 1023—for different organizations that are being formed—using virtually the same language.

The biggest violations for tax-exempt organizations would most likely not affect the practitioners she addressed, she said, and those involve outright shams being perpetrated on Indian tribes and labor unions.

The complete text of this article can be found in the BNA Daily Tax Report, February 8, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.