Monday, December 31, 2012

Under penalty of perjury!

Mathbabe (a mathematician, data scientist, and public policy blogger) wrote a blog post called I totally trust experts, actually in which she stated:

"I also hire an accountant and sign my tax forms without reading them."  

As a public finance economist specializing in tax policy, I know Mathbabe is far from alone in that practice, but in my opinion, an "expert" accountant is seriously remiss in professional responsibilities if s/he encourages you to sign your tax return without reading it.

Your tax pro should be taking special pains to let you know that signing a tax return is not like signing the ubiquitous terms of service to get access to some internet site.  I know there is a lot of confusing boilerplate (Cathy isn't the only mathematician who finds taxes annoying and tedious--see here another discussion about Berkeley math PhDs and taxes, and for a comic relief parody from another mathematician, see here), but part of a tax preparer's professional obligation is to help the client navigate through the gobbledigook and understand the critical essence of the information presented in the return before asking for a signature.

Signing a tax return is signing a statement that says--upfront, in the opening sentence--

"Under penalty of perjury, I  declare that I have examined this return and the accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete."

Who is the "I" in that sentence?  It is not your tax preparer.  It is YOU, the taxpayer.

You--not your accountant!--are the person ultimately accountable to the IRS for the accuracy of what is on your return. You are signing--under penalty of perjury--and submitting a document to a government agency with the power to pursue both civil and criminal charges against you, to seize assets, garnish wages, and generally create a great deal of hassle down the road.

Studies have shown that tax pros, even CPAs,  frequently make mistakes on tax returns. They may be experts in tax law, but they are not experts in knowing every twist and turn of your personal financial circumstances.  They admit as much when they sign the return.  Unlike you, the tax pro is not required to sign a sweeping statement that it is "true, correct, and complete."  The tax pro only signs that it is based on "all facts of which [the preparer] has any knowledge."  Reliance on a CPA is not going to be a defense against negligence penalties if you acknowledge that you did not even bother to read your return before signing it. Many Tax Court opinions make this clear.

As the supervising faculty member for a Volunteer Income Tax Assistance (VITA) site providing free tax help to low-income working families, I insist that my student volunteers walk their taxpayers line by line through the tax returns they prepare for them, confirming their understanding of the key statements and numbers on their tax returns and encouraging them to ask questions until they feel completely comfortable signing that statement on the return.

Our clients who have generally relied on paid preparers in the past say that no paid preparer has ever taken the trouble to do that before they came to us.  Most of the clients said their prior preparers just entered a bunch of numbers into the computer, printed out a bunch of documents they didn't understand, and told them "Here is the amount of your refund.  Sign here."  (Despite this cavalier attitude, such preparers often charge very high fees, even for very simple returns.)

Walking our clients line-by-line through the tax returns before asking them to sign is an essential part of our quality control process.   During the walk-through, some taxpayers recall important issues they might have forgotten to mention earlier as we walk them line-by-line through their returns or they catch misunderstandings our preparer might have gotten from the statements they had made during the interview.   The return walk-through also helps our clients to get a clearer handle on the big picture of their finances and the tax implications of the choices they have made and/or may be considering for the future, e.g., 401k enrollment, community college tuition, home ownership, self-employment, charitable giving.  (Interesting note though:  the poor give a larger share of their income to charity than the rich, despite the fact that there is minimal--frequently zero--tax benefit for charitable donations by low-income families.)

Another sad irony:  in many recent years, as my former classmate, National Taxpayer Advocate Nina Olson, has repeatedly pointed out, low-income working families have been far more likely to be audited than many folks with higher incomes.  And when they do get audited, they are at much higher risk of getting steamrolled by a process they do not understand.  The poor really can't afford to do what Mathbabe admits to doing!  Most of them can't afford the professional resources to dig themselves out of IRS trouble, so their best defense is (1) filing an accurate return and (2) understanding the information on their tax returns well enough to have the confidence to contest any audit claims made by the IRS.

But the tide is turning.  Thanks in part to Nina Olson's highlighting of the issue, the IRS is now increasingly redirecting its audit resources towards the higher income taxpayers.  So those folks are also well-advised to examine their returns carefully before signing.  Caveat taxpayer!

"Examining your return" does not literally have to mean reading every word of the obscure boilerplate on your return, but responsible tax preparers should be guiding all their clients (rich and poor) should take a thoughtful look at it, and make sure their clients understand the essence of the statements they are making to the IRS (and their state, if applicable) about the amounts and sources of income,  exclusions,  various types of deductions, tax credits, and why they are justified in claiming them.


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