Accountants may also be retained to "prepare" federal, state and/or local tax returns for individuals or businesses (i.e., partnerships, S Corporations, C Corporations, etc.) (collectively the "Taxpayer"). You might ask what does an accountant do as the "preparer" of my income tax return? What are my responsibilities in connection with the tax return? Does the preparing CPA verify the information I provide? Does the preparing CPA retain documentation supporting assertions in my tax return? This section examines these questions, among others, to help you better understand what your accountant does as the "preparer" of your tax returns, and what your obligations are as the Taxpayer.
What the CPA "does do" in preparing an income tax return is evaluate and recommend tax positions, and complete the necessary documents for filing with the appropriate taxing authorities.
As part of the tax preparations process, the CPA identifies the questions that must be answered to complete the tax return and/or determines whether a particular tax position is appropriate. The CPA establishes relevant background facts necessary to answer these questions by communicating with the Taxpayer and/or reviewing documents the Taxpayer produces. The CPA may also search for and evaluate authority (such as federal or state statutes, opinions issued by tax authorities, or judicial opinions) to help the CPA arrive at a conclusion. The accountant then prepares each return in compliance with the Statements on Standards for Tax Services issues by the American Institute of Certified Public Accountants.
In determining whether a certain tax position is warranted, the Statement on Standards for Tax Services requires the CPA to exercise professional judgment to determine whether there is a "realistic possibility" that a particular tax position will be sustained administratively or judicially on the merits. The "realistic probability" standard is often quantified as a 33% chance or more of being sustained, although there is no definitive rule in this regard.
However, unless the accountant concludes that the tax position is "more likely than not" going to be sustained, he will likely require that the tax position be disclosed as part of the return before signing as the preparer. The Small Business and Work Opportunity Tax Act of 2007, imposes penalties on paid preparers of certain tax returns where an undisclosed tax position is asserted on a return for which the preparer cannot reasonably say in good faith that the position is more likely than not going to be sustained. The more likely than not standard is frequently quantified as a 50% chance or more of being sustained.
Sometimes the determination of whether a particular position meets the "realistic possibility" or "more likely than not" standard is not clear. For example, in exercising professional judgment, the accountant may conclude that competing tax positions both have a realistic possibility of being sustained. This situation may exist, for example, when a tax rule is ambiguous and no authority has resolved the ambiguity. In this circumstance, the CPA may discuss the competing positions with the Taxpayer, including the likelihood that each position might cause the Taxpayer's tax return to be examined or result in a penalty. But, while the preparing CPA may provide advice or recommendations concerning a particular tax position, it is the Taxpayer's ultimate responsibility to decide whether to assert the position on the income tax return.
Understanding a CPA's role as the "preparer" of your income tax returns also requires understanding what services the CPA does not perform. What the CPA "does not" do in preparing income tax returns is audit, examine or verify the accuracy or completeness of information the Taxpayer provides, although when necessary the CPA may ask for clarification.
What this means is that the CPA will not ignore the implications of the information provided. If information appears incorrect, incomplete or inconsistent on its face or on the basis of other known facts, the CPA may bring them to the Taxpayer's attention and ask for clarification. If necessary, the CPA may discuss or assist the Taxpayer to correct inaccurate or incomplete information. This, however, should not be confused with any procedures designed to detect errors, defalcations or other irregularities. The preparing CPA does not conduct any procedures designed to detect such problems.
The preparing CPA makes a reasonable effort to obtain from the Taxpayer information necessary to provide appropriate answers to questions on a tax return before signing as the preparer. But, it is ultimately the Taxpayer's obligation to provide accurate, complete and timely information necessary to complete the tax return. For example, the CPA may ask questions or provide worksheets to guide the Taxpayer in gathering necessary information, but the CPA will not assist in gathering the information, and will rely on the information the Taxpayer provides.
The CPA also does not retain documents or data necessary to prove the accuracy and completeness of the returns to a taxing authority. Such documentation may become necessary if the Taxpayer's return is selected for review by a taxing authority. The CPA cannot, and generally will not, consider whether such a review is likely to occur, except when there is a realistic possibility that two competing tax positions may be sustained.
As discussed above, the CPA may evaluate and make recommendations concerning the applicability of a particular tax position. The CPA may also provide other advice related to preparing the tax return. However, sometimes events may occur which affect the CPA's previously provided advice. If there is such a change in advice, and the advice is associated with a plan or procedure for which the CPA is assisting the Taxpayer in implementing, the CPA will inform the Taxpayer of his or her change in position. But, if an event occurs that causes the CPA to change his advice and the Taxpayer is no longer implementing plans or procedures associated with that advice, the CPA has no obligation to communicate with the Taxpayer concerning the change in advice unless he or she has otherwise agreed to do so. This means that a preparing CPA's advice at one time or during one taxable year may not be applicable at another time or during another taxable year.
The Taxpayer bears ultimate responsibility for the final tax return filed, including any income, deductions, or credits claimed, as well as any other representations asserted. The return is the Taxpayer's, not the CPA's, because the transactions and information upon which the tax return is based are the Taxpayer's, not the CPA's.
In a business, it is the company who owns the assets, makes sales, and incurs expenses. Therefore, management is responsible for properly recording transactions in the books of accounts, safeguarding assets and for the substantial accuracy of the company's financial records.
In the case of an individual, it is the individual who recognizes income, invests money, and incurs expenses in purchasing a home, raising a child, or paying for an education. It is the individual's responsibility to monitor and document these transactions completely and accurately.
Because it is the Taxpayer who monitors and documents their transactions, it is the Taxpayer's responsibility to ensure that the information provided to the preparing CPA is complete and accurate. The Taxpayer effectively enables the CPA to complete the return and evaluate the applicability of available tax positions by providing all necessary information to complete the return. The preparing CPA relies on the Taxpayer's oral and written representations. The preparing CPA does not audit or verify the Taxpayer's representations.
The preparing CPA cannot predict whether the Taxpayer's return will become the subject of review by taxing authorities. However, if the Taxpayer's return does become the subject of a review the Taxpayer will need to produce the necessary information to prove the accuracy and completeness of the tax return. While the accountant will be available to advocate the Taxpayer's position, it is the Taxpayer's responsibility to retain documentation and other data necessary for this purpose.