Forbes Magazine
Hello, TurboTax
Friday January 11, 12:05 pm ET
By Janet Novack
Does your accountant work for you or the IRS?


It used to be you could always count on a handful of people to look out for your interests, like your doctor, your clergyman and your accountant. Now you might be wary of that last one.

As of Jan. 1 tax preparers can get hit with Internal Revenue Service fines (of $1,000 or more) and career-damaging disciplinary actions if they sign returns that take especially iffy tax-savings positions--specifically, those that don't have at least a 51% chance of winning in court. Under the old standard, tax pros could safely recommend positions (on routine issues, not tax shelters) that had a "realistic possibility" of success--meaning, what the heck, if there's some reasonable basis, go for it. But amateur tax preparers--namely, people doing their own returns--can still avoid penalties if they have a credible basis for their position, so they can get by with less research or take iffier positions.

"It creates a chasm between the taxpayer and the preparer," says Thomas P. Ochsenschlager, vice president for taxation at the American Institute of Certified Public Accountants. "Historically, the tax preparer has been an advocate for the taxpayer. This makes him an arm of the IRS," he adds. New York CPA David A. Lifson, a partner at Hays & Co., says IRS field staffers are smugly telling practitioners, "You guys work for us now."

Lifson expects to charge some clients thousands of dollars extra this tax season for time he'll spend researching and writing memos needed to protect his rear end, not theirs. As president of the New York State Society of CPAs, he's heard of hundreds of cases where New York clients will likely be billed an extra $5,000 to $20,000 to research such issues. Taxpayers whose returns include frequently litigated items are most likely to see an impact. Is a venture (say, horse breeding) a real business or a hobby, for which losses aren't deductible? Should workers be paid as employees or independent contractors? Is a corporation's owner taking a proper mix of salary and profit? Is a loan to a relative a gift?

The new law still allows a tax preparer to sign a return taking a less than 51% certain position if it includes a form flagging it for the IRS. Uh, no thanks. And at the end of the year the IRS issued "interim guidance," creating a loophole for now, allowing a preparer to omit the flag if he warns the taxpayer that he stands less than a 50% chance of winning in court and documents that warning.

Meanwhile, accountants are lobbying Congress to reduce their penalty standard to be the same as for taxpayers. Be careful: The pols could decide to raise the standard for taxpayers instead.