The purpose of this article is to
familiarize you with the legal issues regarding tax preparation fees, including
federal law, new rules
covering ALL tax return preparers now in effect that
are detailed in Treasury Department Circular 230 -
Regulations Governing Practice before the Internal Revenue
Service and Publication 1345 - Handbook for Authorized IRS e-file Providers. Failure to comply with the rules detailed below
may result in your termination from the IRS e-File Program and
being permanently barred from preparing tax returns. In some
egregious cases the IRS may also pursue criminal prosecution.
We encourage you to thoroughly read Treasury Department
Circular
230 and Publication 1345.
Setting Your Fees
Your business may set it's own fees, however, it is illegal to charge a fee based on a percentage of the taxpayers refund. Additionally, your
fees must be consistent throughout the tax season.
In general a tax preparer may not charge an unconscionable fee in connection with any
matter before the Internal Revenue Service, including
for the preparation of a tax return or claim for a refund. Nor can a tax return preparer charge a
contingent fee for services rendered in
connection with any matter before the Internal Revenue Service, except as specifically allowed
in Circular 230.
Matter before the Internal Revenue Service includes tax planning and advice, preparing or filing or assisting in preparing or filing returns or
claims for refunds or credits, and all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees
relating to a taxpayer ’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such
presentations include, but are not limited to,
preparing and filing documents, corresponding and communicating with the Internal Revenue
Service, rendering written advice with respect to any
entity, transaction, plan or arrangement, and representing a client at
conferences, hearings, and meetings.
Contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes
saved, or that otherwise depends on the specific result attained.
Receipt of Taxpayer Refunds is Prohibited
Tax return preparers are prohibited by Federal
Law, the
IRS and the Tax Refund Processing Banks from receiving all or any part of a taxpayer's refund.
Too many times in the past, during the "fast
and furious" tax preparation season, illicit
tax return preparers have received the taxpayer's
refunds, and then skipped town with ALL of the
money. The law simply doesn't allow tax return
preparers to receive ANY of the money.
26 United
States Code § 6695(f)
Specifically, 26 U.S.C. § 6695(f) provides, in pertinent part:
“Any person who is a tax preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect of the taxes imposed by this title which issued to a taxpayer...
shall pay a penalty of $500 with respect to each such check.”
IRS Publication 1345 –
Handbook
for Authorized IRS e-file Providers of Individual
Income Tax Returns
Specifically, in Chapter 3 of Publication 1345 on
Page 14 the IRS states:
"Direct Deposit of Refunds
Taxpayers often elect the Direct Deposit
option because it is the fastest way of receiving
refunds. Providers must accept any Direct Deposit
election to any eligible financial
institution designated by the taxpayer.
Qualified accounts include savings, checking,
share draft or consumer asset accounts (for
example, IRA or money market accounts). Taxpayers
should not request a deposit of their refund to an
account that is not in their own name (such as
their tax preparer's own account). The
taxpayer may not designate refunds for Direct
Deposit to credit card accounts. Qualified
accounts are accounts held by financial
institutions within the United States and
established primarily for personal, family or
household purposes. Qualifying institutions may be
national banks, state banks (including the
District of Columbia and political sub-divisions
of the 50 states), savings and loan associations,
mutual savings banks and credit unions.
By completing Form 8888, Direct
Deposit of Refund to More Than One Account, the
taxpayer may split refunds between up to three qualified
accounts." {emphasis added}
To read Publication 1345 click
here.
Treasury Department Circular 230
Additionally, Treasury
Department Circular 230 § 10.31 states:
"§ 10.31 Negotiation of taxpayer checks.
(a) A practitioner may not endorse or
otherwise negotiate any check (including directing
or accepting payment by any means, electronic or
otherwise, into an account owned or controlled by
the practitioner or any firm or other entity with
whom the practitioner is associated) issued to a
client by the government in respect of a Federal
tax liability.
To read Treasury Department
Circular 230 click
here.
Tax Refund Processing Bank
Agreements
Virtually ALL Tax Refund Processing
Banks have clauses that prohibit tax return
preparers from providing "outside" or
"sideline" services substantially similar
to
the services the bank offers. As an example, below
is the wording from the Santa Barbara Tax Products
Group's Financial Services Agreement.
"UNIVERSITY NATIONAL BANK
FINANCIAL SERVICES AGREEMENT
BY SUBMITTING APPLICATIONS FOR
REFUND TRANSFERS ("RTS"), YOU AGREE TO
THE FOLLOWING TERMS AND CONDITIONS.
3.11 Compliance with Laws;
Customer Consents. Participant shall comply with
all applicable federal and state laws, rules and
regulations (including, without limitation,
applicable state licensing, registration and
disclosure requirements) relating to the
preparation and transmission of income tax returns
and Participant’s participation in the Program
and performance under this Agreement.
5.2 Termination. This Agreement
may be terminated by Provider immediately upon
notice to Participant if Provider reasonably
suspects that Participant has breached any of the
representations made, has materially defaulted in
the performance of any of Participant’s
obligations hereunder, or if BANK’s regulatory
agency requires the Program or the Agreement to be
terminated.
8.1 Exclusivity. Participant
agrees not to submit Applications for any RTs that
Provider makes available, or any products
substantially similar thereto, on behalf of any
Customer to any entity other than Provider
while participating in the Program without express
permission from Provider. Any breach of this
Section 8.1 will result in Participant’s
immediate suspension or termination from the
Program." {emphasis added}
Improper Use of Form 8888 - Allocation of Refund
As you know, Form 8888 - Allocation of Refund is available for taxpayers to direct the IRS to deposit their refund into multiple bank accounts or
to purchase U.S. Series I Savings Bonds. As
stated above and in Publication 1345 Form 8888 CANNOT be used
to split the refund between you and the taxpayer
as the IRS specifically prohibits this.
Form 1040 Line 74a states "Amount of line 73 you want refunded to
you. If Form 8888 is attached, check here". Additionally, the instructions
for Form 8888 state "Purpose of Form - Use Form 8888 if:
You want us to directly deposit your refund (or part of it) to one or more accounts
at a bank or other financial institution..."
The words you and your in the above paragraph refer to the taxpayer, NOT the tax preparer. It is illegal for tax preparers to intercept or
directly receive from the IRS any part of a taxpayer's refund. Taxpayers may direct the IRS to direct deposit their entire refund into one or
more of their bank account(s). The account(s) must be
owned by the taxpayer, NOT the tax preparer.
Do not attempt to circumvent the rules by having the taxpayer
file Form 8888 directing the IRS to deposit a part of their tax refund into their
bank account and your tax preparation fees into your bank account.
Taxpayers may also direct the IRS to
deposit their refund into an account in their name at a tax refund processing
bank. To do so you don't use Form 8888, you simply
apply for a bank product in the usual fashion.
Getting Caught
Nobody thinks they'll ever get caught.
But if you violate the above rules you WILL get
caught. How? Some
taxpayers will complain to the IRS that they
didn't get their entire refund. This usually
occurs later on when they've long since forgotten
that you deducted your fees. When the IRS
investigates they'll discover that the taxpayer's
refund was paid to you and then to them from your
bank account. The IRS will also eventually detect this when their computers see
multiple entire or partial deposits from different taxpayers going to the same RTN and
DAN (your's). IRS Crackdown
This season the IRS is cracking down on all
kinds of tax fraud.
Taxpayers can now use the new Form
14157 - Complaint: Tax Return Preparer to report a
complaint about his or her tax return preparer and/or tax preparation
business. Note that the Nature of Complaint section (13.a.) has check
boxes for:
This may, and probably will, result in your termination by the
IRS from the IRS e-file program and being permanently barred from
preparing tax returns.
State Laws
The states of Arkansas (AR), Illinois (IL), Maine (ME), Maryland (MD), and New York (NY), have
regulations to prevent preparers from charging extra fees to taxpayers opting to use a bank product to receive payment of their tax refund. For more details
click
here. Other states may pass similar laws so be
sure to check with your state prior to the start
of tax season. Consult
with an Attorney
The above information is provided as a
general overview of the rules. Should you have any
questions, or require additional information, you
should consult with your attorney as we do not
give legal advice. |
