By John Stambaugh
There has been a substantial shift in the tax planning and preparation business. It happened on June 20 and it has to do with penalties and your tax return. You probably didn't notice it. The media didn't cover it. But it will affect you, perhaps profoundly.
What happened was the new IRS rules that govern tax professional conduct, know as Circular 230, went into effect. To understand how the new rules affect you we need to discuss why you use a professional tax preparer.
Anyone who owns and operates a business of almost any size probably has a tax professional prepare his or her tax return. But have you ever wondered why you do this? You probably justify the fee you pay to your tax professional based on one or both of these two reasons: (1) your tax professional lowers your tax bill by more than their fee and (2) your tax professional provides some level of comfort you have complied with the tax law.
You know you have the right to pay only the taxes required of you. In a 1935 landmark case Judge Learned Hand put it this way, "Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."
You also know there are penalties built into the tax law for failing to prepare your tax return in accordance with the tax law. But what you may not be aware of is the tax law has long recognized taxpayers should have some protection from penalties if they relied in good faith on the advice of a knowledgeable tax preparer.
The new version of Circular 230 interprets the current income tax law dealing with taxpayer penalties to say, in effect, if your tax professional gives you written advice that cannot provide the highest level of assurance the advice complies with the tax law, then you are not shielded from penalties associated with that advice. Make no mistake; this is an interpretation of earth-shattering effect.
When I discuss the possibilities of penalties most people just roll their eyes. But the tax law is Byzantine in complexity. Many legitimate business transactions are complex and cut across the tax law in ways never envisioned by those who wrote the tax law.
One of the effects that will sway the ground tax professionals walk on as a result of the new version of Circular 230 and in turn change your relationship with your professional tax preparer has to do with professional liability. It works this way -- if you as the client are exposed to penalties and ultimately pay penalties based on my advice, you may decide to sue me to recover the cost of your penalties.
Accordingly, if my written advice can expose me to the potential additional risk of paying penalties imposed on you because of my advice then I will have some tough choices to make. Many tax professionals will opt to cover their additional financial risks by raising their fees. If I incur more risk then I must be compensated for that.
But more and more you will see tax professionals becoming a vanishing breed. What you will be left with are those tax preparers who see tax preparation a merely an adjunct to help them in their main businesses of financial planning or selling life insurance. They will not provide you written tax advice.
The likely consequence of the new version of Circular 230 as recently enacted by the IRS will be only the very wealthy few will be able to afford "to arrange his affairs that his taxes shall be as low as possible." The tax system will be perceived to be even more unfair and "voluntary" tax compliance will decline. Government coffers will grow empty and even more authoritarian tax regimes and laws will be enacted.
Stambaugh is a local certified public accountant with more than 18 years experience in business tax planning and tax preparation and a master's degree. He can be reached at 234-2438.
By John Stambaugh
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