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Paid Preparer Due Diligence Examination Process
Preparer contacts IRS Agent - DD examination letter (Part I)
Preparer contacts IRS Agent - DD Exam Case Review (Part 2)
Preparer contacts IRS agent - DD Exam Close-Out (Part 3)

Jack Walker: Ok, I’ve made a little space for you to work right over there... Is that OK?

IRS Agent Jensen: That's fine.

Jack Walker: So let me tell you. I'm a little nervous about this. So can we get started?

IRS Agent Jensen: Sure, No need to be nervous.

Why don’t we begin with you telling me about yourself and your business?

Jack Walker: OK, my business here is a one man show.

I started it 4 years ago after working for a preparer in another firm.

That’s where I got my hands-on training.

Now, I rely heavily on software and several newsletters that I subscribe to for tax law updates and training.

IRS Agent Jensen: I got you.

Can you tell me more about your software and walk me through what happens when a client comes in to have their return prepared?

Jack Walker: Well, I use BigMoney software. It’s an awesome product!

When a client comes to my office, I give them my intake sheet to fill out in the office or take home & bring it back later.

Here it is, check it out.

IRS Agent Jensen: OK... do you use this for both new and returning clients?

What documents do you routinely ask them to provide to help you determine what credits and filing status they’re eligible for?

Jack Walker: Everyone that comes to my office must fill out my intake sheet.

Based on that, I ask them questions about their situations and prepare the return But, it gets very busy here so sometimes I don’t ask if the client has all the documentation to verify what they’re telling me.

I just rely on my intake sheet and questions in the software.

I ask for Social Security cards, W-2’s/1099’s and 1098-T’s, but sometimes don’t get them.

IRS Agent Jensen: Alright.

What specific due diligence training have you received?

Jack Walker: Honestly, Mr. Jensen, I really don’t have time or money to take a lot of training courses to stay current on due diligence or tax law changes.

So, what the software covers, that’s what I use as my guide.

IRS Agent Jensen: I see.

What steps do you take when you think there are questionable issues involving a client return claiming credits or Head of Household as a filing status?

Especially if any information they give you appears to be incorrect, or incomplete or inconsistent.

Jack Walker: I have additional questions I ask in those situations.

IRS Agent Jensen: I see. May I keep this? Thank you How and where do you document any additional inquiries you make and the clients’ answers?

Jack Walker: Based on those questions on that list – I jot the answers on my legal pad and keep it with my copy of the final return.

IRS Agent Jensen: Okay, thank you. Let’s start looking at the cases.

We can walk through a couple together. Then I’ll continue on my own… I see here your client Mary Smith claimed her grandchildren for EITC. Did you document any questions you asked her?

And, if so, how did you record and keep her responses?

Jack Walker: Mr. Jensen, I’ve known Mary for 15 years, so I didn’t ask her questions.

She would not claim anything she’s not entitled to.

IRS Agent Jensen: I see, thank you.

Let’s look at Bill Green’s file.

He is 35 years old and claimed the American Opportunity Tax Credit.

Did you ask him if this was the first time he attended college and if he had a 1098-T?

I don’t see that information here.

Jack Walker: Well, I did ask for the 1098-T.

He brought it in and I looked at it briefly, but I didn’t make a copy.

I didn’t ask if he attended college before.

IRS Agent Jensen: Okay thanks.

I’ll review the rest of the cases on my own... And I’ll schedule another meeting with you to share my findings.