Are the tax professionals or the IRS the greater threat?

Almost one year ago, I wrote a post acknowledging that we can’t trust the IRS, and questioning whether US citizens abroad can  trust the cross-border professionals. A month later, I followed up with another discussion describing the interaction between the taxpayer, IRS and the cross-border professionals. The IRS is “tightening the noose”  by forcing tax preparers to be licensed by the IRS. To be clear, this means that tax preparers now work at the pleasure of the IRS. A group to tax preparers has sued the IRS to prevent this licensing framework. This is adding to the cost of US tax preparers which is making the cost of retaining US citizenship to high.

US taxes are so complicated that over 90% of US taxpayers use a computer program or some kind of professional tax preparer. Those using a tax preparer have a choice of: lawyer, CPA, Enrolled Agent or just a tax preparer.

Coming into and staying in tax compliance is difficult for US citizens abroad. As I have suggested before, the IRS is making it very difficult for US citizens abroad to be tax compliant. From the perspective of a cross border professional, there are three considerations:

1. The Professional Future of the Cross-Border Professional – Their right to make a living depends on their getting along with the IRS.

2. The Economic “Well Being” of the Cross-Border Professional – Their ability to make a living depends on their being able to extract enough fees from clients (or is the IRS the real client?).

3. The facts specific to the client – What kind of job will/can they do for the client that is consistent with the interest of the cross-border professional? Code: There is only so much money the client can pay.

Check out the following description of a US citizen abroad trying to be tax compliant.

Those who are NOT Twitter literate will click here.

13 thoughts on “Are the tax professionals or the IRS the greater threat?

  1. expatami

    The cross-border professionals make more threats, have better scare tactics and demand more money, so they are the much greater threat. The IRS is simply their business partner.

    Reply
      1. Joe Expat in Canada

        I wonder if concerns about professional vulnerabilities on the part of the tax law professionals may be causing them to have to decide between speaking frankly with the client about what is in the client’s best interest – achieving the best result, and what protects their own interests – re Circular 230 http://en.wikipedia.org/wiki/Circular_230. The IRS is basically making it more difficult effectively if it says they must not assist an client in avoiding a penalty – in situations where the penalty can be waived or lessened at IRS discretion (ex. FBAR warning letter vs. penalty). At a certain point, are tax professionals making some choices based on their own interests, vs. that of the client? Particularly in the clear cases here where there is absolutely zero US tax liability, the client is fully tax compliant where they live, and the major issue at stake are the huge penalties which may be assessed on funds considered ‘foreign trusts’, mutual funds and other entirely legal savings commonly held by those living abroad. The BSA is bad, unjust and unethical law as it is being applied to us. Our local non-US accounts are registered where we live, and are not criminal – and the US knows that. The assets have already been, or will be (in cases of legally tax deferrals) taxed according to the laws where we live, and where the funds have been earned, created and are held. It is the conflict between US law and the laws where we live that is the problem. The US asserts that US law trumps our local law.

        The confiscatory penalties on ‘foreign’ accounts and trusts are unethical and unjust, (and possibly unconstitutional by US law). But, a tax lawyer who must answer to the IRS is constrained by Circular 230. I wonder how effectively they may be able to represent us or advise when what the IRS demands is subject to shades of interpretation. If one asks ‘why’ the advice is to choose a particular path and the only answer forthcoming is repeatedly a vague “the IRS hasn’t seen fit to provide guidance” – yet a specific action has obviously been chosen, is it because the practitioner is afraid to detail their reasons out loud and on the record? Especially mystifying when the advice changes – and the same vague answer is the only answer forthcoming. Presumably, behind the scenes, the practitioners are discussing the nuances and debating with each other. They speak with the IRS directly. Yet, the client is not made privy to these details – even if the lawyer is speaking to the IRS on their behalf and they are billed for it. Why is that?

      2. renounceuscitizenship Post author

        Joe Expat:

        You are “right on”. The simple fact is that the obligation of the accountants (at least those who are US based) is to the IRS. The IRS is in a position to levy substantial penalties on accountants who do NOT follow a code of conduct PRESCRIBED by the IRS. I offer a link to the following article from CalCPA.org (California accountants) as proof of the degree to which the accountants regard the IRS to be their masters. If they don’t obey the IRS they won’t have a future as an accountant.

        http://www.calcpa.org/Content/25399.aspx

        In addition, here is a bit of information on the 2007 Small Business Tax Act which effectively ensures that the interests of the accountant and IRS always take precedence over the taxpayer.

        http://www.ehow.com/list_6716190_irs-penalties-tax-preparers.html

        Interestingly in the CalCPA.org article that I cited above the author, making reference to this 2007 legislation states:

        “The initial May 2007 change required that a tax preparer have a reasonable belief that a nondisclosed tax position would more likely than not be sustained on the merits if challenged—a higher standard than the taxpayer’s substantial authority standard. For disclosed the positions, the tax preparer was required to have a reasonable basis for the position—essentially the same as for the taxpayer.

        The higher tax preparer standard for nondisclosed positions placed the tax preparer in basically untenable conflict with the taxpayer as the preparer might be required to disclose a tax position that the taxpayer would not otherwise have to disclose. Temporary rules in Notice 2008-13 permitted the preparer to make required disclosure for income tax positions to the taxpayer rather than in the tax return (see “A Closer Look”, California CPA, March/April 2008).

        Proposed regulations under Code Sec. 6694 released in June 2008 continued to permit the disclosure to the client, and not in the return, for income tax positions for which substantial authority existed but where the tax preparer did not believe the more likely than not threshold was met.

        The penalty for a violation of the penalty provision was increased from $250 to $1,000 or, if greater, 50 percent of the income derived with respect to the return (or amended return). Also, the penalty for a willful understatement of tax or reckless conduct under the revised provision increased from $1,000 to $5,000 or, if greater, 50 percent of the income derived with respect to the return (or amended return).

        The more likely than not confidence threshold requirement for nondisclosed positions, and reasonable basis for disclosed positions, have been the required standard in California for both preparers and taxpayers since 2002, The penalty is $1,000 for violation of the tax position standard and $5,000 for willful or reckless conduct.

        After several attempts to enact remedial legislation, Congress finally revised the preparer penalty standard in the Emergency Economic Stabilization Act (EESA) to remove the preparer-taxpayer conflict.”

        Leaving aside the technicalities of all this, it is very clear that the accountants owe a primary duty to the IRS in terms of what to put on the tax return. Do you want to get your advice from somebody who is in bed with the IRS?

        I would add that the Shulmans initiative to license all tax preparers makes them further beholden to the IRS which further decreases the chances of getting objective advice.

        Then add to all of this the “Whistle Blower initiative” which rewards accountants (and others) for ratting people out and it doesn’t take a genius to see that there is a big problem here.

        For the record, I AM ADVOCATING COMPLIANCE WITH TH LAW, but what is happening here is that the accountants are forced to go along with whatever the IRS thinks the law is. CONgross and not the IRS makes the laws.

        I welcome and encourage comments from the cross-border professionals on these points.

        Question: Where does a poor taxpayer go to get unbiased advice, on how to deal with IRS, where the advisor his not in bed with the IRS?

  2. royaberg

    There is no question: inexperienced, unqualified, unregistered tax professionals are a much greater threat. Those individuals can cause 10 times the problems they attempt to solve

    Reply
    1. Joe Expat in Canada

      With all due respect:

      Enough direct experience has been amassed by participants here by now, to know firsthand how some of the compliance attempts have gone in several cases – with experts, and with cutrate preparers.

      Even those with the requisite ‘expert’ qualifications and experience still make errors – and we’re not just talking the storefront tax preparer chains. Mistakes made in the specialty firms are corrected only at a huge cost to the client. Clients paying significant sums for expertise and quality should not be put in the position of identifying and flagging obvious errors – and then paying for communications with the firm in order to arrange for undisputed corrections – (at fee rates of hundreds per hour). Every contact is billable. At the top rates charged by these firms, returns and forms should be absolutely free of preparer error. I believe Jack Townsend said that in the case of US compliance efforts, they should be ‘exquisitely’ free from error. Unfortunately that is not always the case – even after handling and review by several individuals – each of whom bills for their part.

      At a certain point, it may become obvious to the client that the person they are dealing with is not familiar with their specific facts and circumstances, and that the pressure of processing numerous clients at peak busy times to meet immovable deadlines is causing errors and inconsistencies from haste. Leaving a pickle out of a hamburger during assembly is forgivable. Mistakes on US reporting forms or tax returns can result in life altering consequences that only compound the misery.

      Being an expert should also include taking professional responsibility for inevitable errors, and proactively correcting them at no added cost to the client. Being a true ‘professional’ includes a personal and occupational responsibility not to cause harm to the client – even through inadvertent errors or omissions.

      Participants here have experienced the reality that both the cut-rate firms AND the experts make errors that we can ill afford when so much is at stake.

      Reply
  3. Thatisme

    These are very good questions… as an American Abroad I keep moving from one to the other like an jauled animal…

    Reply
  4. Carol CPA

    These comments leave me disappointed in my fellow professionals. When the “news’ of the OVDI and consequent difficulties became known over a year ago, there were groups of professionals, in our case, accountants, who consulted with each other, shared experiences, and determined the safest and best alternatives for our clients’ various situations. AND we continue to do so. And yes, some other accountants think I’m crazy for not raising my rates and fees in this situation. It appears word of us types doesn’t always get out there.

    Reply
    1. expatami

      To be fair, my remark is not aimed at any specific tax professional and I don’t have any experience working with any. My remark and vote is rather the result of reading comments, blogs, news articles and advertisements which commonly advise one to seek professional help at a cost much higher than what I’d be willing to pay for no taxes due. Having a smaller income, I haven’t run into any issues with the IRS and have so far avoided tax preparer fees as much as possible. As such, I tend to view all the threats that I read as being a smart business marketing strategy. But, this doesn’t mean that any CPA didn’t act professionally while trying to find the balance between the needs of the client and the demands of the IRS. The tax professional is simply a greater threat to me because they would cost much more than what the IRS demands.

      Reply
      1. renounceuscitizenship Post author

        Agreed. Competent and ethical cross-border tax professionals do exist. Given, The point of this post and of many of the comments is that they are beholden to the IRS. During the summer of 2011 the cross-border professionals, the mainstream media and the IRS sang to the following tune:

        You MUST enter OVDI. Don’t you even consider filing those delinquint tax returns and FBARs without going into OVDI.

        The law required people to file the FBARs FINCEN in Detroit. But, the IRS and the cross-border professionals were terrorizing people into OVDI instead. The directive to go into OVDI was a directive was that telling people to NOT do what the law said (file the tax returns and the FBARs) but go into OVDI. This was incredibly immoral conduct. The time has come for there to be a discussion about this.

        Here is an earlier post I wrote on this problem:

        https://renounceuscitizenship.wordpress.com/2012/01/09/taxpayer-advocate-vs-the-irs-its-a-question-of-trust/

  5. Pia Lepistö

    Some of them really can’t trust.In Helsinki Finland there are many of people use to call a tax advice or accountant for them to understand more a lot of paying tax.Well bad experience that we are encountering those stuff.

    Reply

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