One thing that I notice that a lot of plain vanilla tax preparers do is promise “audit defense” or to “represent you” in a tax audit. However, they are not so clear on what that means, and do not tell you that their “guarantee” is limited to what they may legally do. The Internal Revenue Service has something called “representation rights”. Attorneys and CPAs have unlimited representation rights. In my neighborhood, there are a lot of tax preparers, but few, if any, of the other tax preparers in my neighborhood have unlimited representation rights. Others have “limited representation rights” this year. The Internal Revenue Service refers to these people as “unenrolled preparers”. As a result, when an unenrolled preparer promises to defend you in an audit, they can only promise to defend you in an audit to the extent that the law allows. If things get serious, they cannot help you.
The fact of the matter is that even if they had unlimited representation rights, it is questionable how helpful they would be in an audit anyway. A true audit defense requires a certain amount of advocacy, and a certain amount of fluency with the law. When an Internal Revenue Service agent is combing through your tax return, a lot of things stop being black and white, and turn gray.
I suspect that a lot of people who go to unenrolled preparers do not keep records of their various expenses and deductions as I have recommended in my blog on the subject. At an audit, the conversation quickly becomes one of what is reasonable when the documentation is obviously deficient. For example, some businesses and property owners may not have kept receipts for various expenses, but those expenses are certainly more than zero. The fighting issue at an audit becomes what is reasonable when a taxpayer has failed to maintain proper records. Arguing about what is reasonable is something that we trial lawyers do all the time. We do it in every imaginable context. What is more, we argue about it with people in authority.
To your average unenrolled tax preparer, an Internal Revenue Service Agent is a very scary person. To an attorney, the agent is simply another decision maker that we have to persuade. An Internal Revenue Service agent is no scarier than a Judge, Prosecutor, Trustee or Hearing Officer. Advocacy before an Internal Revenue Service agent does have its own interesting nuances though. In the early stages, this agent is both the adversary and the decision maker, kind of a combination of judge and prosecutor. There is no one else representing the Internal Revenue Service, but the person who is making the decision about what, if anything, to do to the taxpayer. This is not so terribly different from arguing to an insurance company attorney who, on the one hand, is charged with giving your client as little as possible, and on the other hand you are trying to convince to give a proper amount. Knowing when to play nice and knowing when to play hardball is an art. It is an art which very few unenrolled preparers would have any experience with. We have similar issues with bankruptcy trustees, with immigration interviewers and with any number of people inside and outside of the Internal Revenue Service and Department of Revenue
The other problem with unenrolled preparers doing audit defense is that at audit time the issues involve the Internal Revenue Code, and not conventions for how to deal with issues. When an unenrolled tax preparer has an issue on a return, they go to the help center in the tax software which gives a nice generalized answer. It is written in plain English, and is subject to normal understanding. When a tax return gets audited, out comes the Internal Revenue Code and the Internal Revenue Service Publications. The discussion is now in Legalese. When I have a tax question, I rarely go to the help center in my tax software. I go to IRS.gov and into the Internal Revenue Service’s own resources. In that way, when I do a return, I am looking at the same interpretative literature that they are.
Here is a simple example of what happens at an audit. I am putting the link to the Internal Revenue Service publication that defines “dependent” here. On the one hand, who is and is not a “dependant” would seem to be a relatively simple matter. As you can see from the attached publication, it is not. As such, what might have begun as a simple question from your tax preparer – “Do you have any dependants?” – becomes a very complicated issue once the Internal Revenue Service challenges it. What is more, it is possible to have a dependant, and yet not be able to file head of household, and it is possible to have a child as your dependant, but still not be able to claim that child for the earned income credit. I invite you to take a look at the publication that I have linked and ask yourself if you really believe that a person with no special training in law or accounting is in a position to go toe to toe with a highly trained Internal Revenue Service Agent over the definitions in this publication. Then realize that the Internal Revenue Service puts out these publications to “simplify” and explain the issues. While these Internal Revenue Service publications are a very good authority and are certainly instructive as to how the Internal Revenue Service itself perceives these issues, the publications can be trumped by the Internal Revenue Code. It is specifically because even these most basic issues can become very complicated very quickly that the Internal Revenue Service limits the representation rights of unenrolled preparers, and is planning to impose further restrictions on unenrolled preparers next year.
Right now there are no special training or education requirements for tax preparers. The Internal Revenue Service tried to impose an education requirement but that was struck down in court. The Internal Revenue Service will be changing the rules next year, so that not all tax preparers will automatically have limited representation rights. Starting next year, some will have none at all. As such, the first question to ask any tax preparer who is promising to defend you in an audit, is “Will you be able to defend me if I get audited next year?” Putting that issue aside, a person with limited representation rights is not only restricted to a tax return that they prepared and signed, but even within the Internal Revenue Service, they are limited in what they can do. For example, a person with limited representation rights cannot handle any manner of an administrative appeal within the Internal Revenue Service, nor can they handle any collection matter.
As a result, an unenrolled and thus untrained tax preparer is more likely to leave you with a problem after the original audit. However, an unenrolled tax preparer cannot represent you after that point. As a result, just when the audit process is at its most difficult, an unenrolled tax preparer will leave you. Things are a mess, and it is much more difficult to clean up a mess than to do it right in the first place. What is more, whoever you are hiring is starting from the beginning, and has to put in considerable time reviewing and going over everything just to be up to speed on what has happened in your case. Finally, the person you hire to clean up the mess is not the person you went to when things were easy. No matter what, it is going to be expensive.
As for myself, lawyers are pretty much prohibited from using the word “guarantee” so I will not use it. I also will not make an open ended promise of “audit defense” or of “representation” as I have no limits on what I can do. Not only can I represent you before any portion of the Internal Revenue Service, or of the Department of Revenue, but I can also go outside the Internal Revenue Service and even take a case to court. That is an open ended guarantee I would rather not make. I will say that I have never charged a client whose taxes I prepared to handle any matter that arose, even matters that I had nothing to do with. I could not imagine charging a client for anything an unenrolled tax preparer can do. Frankly, it is beneath me. I can also say that I have represented tax clients of mine on the collections side, without charging an additional fee. That is something that an unenrolled tax preparer cannot do at any price. However, I can also say that those collection matters were resolved without much blood, sweat or tears. For the things that unenrolled tax preparers cannot do, I will only promise to use my best judgment and act good faith. Where I feel it is appropriate, I will not charge. However, even in those areas where I do think it is appropriate to levy a fee, I can say that that fee would be a whole lot less than what I would charge a non-tax client of mine who is walking in and is asking me to clean up somebody else’s mess. Not only do I not owe this person any particular duty of loyalty in setting the fee, but I have to repeat all of the work that the previous tax preparer did and review all of the documents associated with the case from scratch. At least for my own tax clients, I would already know all of the details of the case and would not need to charge anybody for the time that I would need to learn them.