Use of Generic Questionnaires – Barbara D. Willingham, EA

Posted on July 24, 2015 · Posted in Practice Management

When I first read the United States Tax Court case of Scott M. Eriksen, Et Al (Petitioners) v. Commissioner of Internal Revenue (Respondent), I wasn’t much interested in it. It appeared to be just another case where taxpayers were either claiming deductions they did not actually incur or for which they did not have proper documentation. But then I came to the section discussing the return preparer, and the more I read, the more I realized – this could happen to any one of us. Now the case had my attention.

The focus of this article is on the preparer, who I will refer to as Mr. K, and not on the taxpayers. The following information is a brief summary from the case transcript.

Mr. K graduated from college in 1965 with a Bachelor of Science degree and a major in accounting and tax. He eventually became an Enrolled Agent. He began preparing tax returns in college, so his career spanned about 50 years. Mr. K specialized, to an extent, in preparing tax returns for law enforcement personnel. He prepared upwards of 3,000 tax returns for the year in question, with approximately 300 to 400 of those for law enforcement personnel. He devised a generic questionnaire that he used to prepare those returns. The questionnaire referenced deductions allegedly available to law enforcement personnel, including expenses for ammunition, equipment, boots, and mileage driven to and from court or the gun range. While the set of questions made Mr. K’s practice efficient, it lent itself to inaccuracies with its one-size-fits-all approach. The questionnaire targeted cash outlays but failed to determine the deductibility of those items for Federal income tax purposes. For example, the survey did not question whether expenses incurred were ordinary, necessary, or otherwise reimbursable by the employer. He often claimed deductions without receipts or supporting documentation. He never questioned clients about employers’ reimbursement policies, nor did he investigate the same on his own. Mr. K had minimal (if any) contact with many of his clients.

Let’s stop right there. The rest of the case is really irrelevant at this point. While there are more facts to this story which eventually led to a dismal end of Mr. K’s 50-year career, I would like to discuss his use of generic questionnaires. We’ve all seen them. You can buy them from tax supply vendors, software companies like CFS, or you can make up your own. They are great tools when used properly, and I stress – when used properly. In the heat of tax season, it is very easy to rush through a return without giving it the proper attention we should. The client sends in the questionnaire and we transfer the numbers to our tax software. Voila, we are done! The questionnaires save us a whole lot of time trying to remember all of the specific occupational deductions for each client. Ah, if only it were that simple. Mr. K’s downfall was in the fact that he did not question the amounts his clients put on the worksheets, nor did he educate his clients on issues such as what is ordinary and necessary or reimbursable. He also did not seem to care if they had documentation to support the deductions. As we read further into the case, we also discover that he often used prior year deduction amounts for current year tax returns. You know this one, don’t you – the client says, “same as last year.” In other words, Mr. K did not practice due diligence. So what could or should he have done differently?

I see at least two things that Mr. K should have done differently, and that we all should be doing:

First and foremost, we should be having a conversation with our clients prior to and during the preparation of every tax return. Mr. K had only minimal or no contact with many of his clients. If you don’t have a discussion with them, how can you educate them on what constitutes “ordinary and necessary” and “proper documentation”? If you don’t educate them, they will write down anything, because all of their friends are telling them what they can deduct or what their preparer “let them” deduct.

If you do use questionnaires, and who doesn’t these days, why not add some wording to them as a caution to the taxpayer. One very popular tax software that has questionnaires includes the following statement right at the top: “The purpose of this worksheet is to help you organize your tax deductible business expenses. In order for any expense to be deductible, it must be considered an ‘ordinary and necessary’ expense. Do not include expenses for which you have been reimbursed, expect to be reimbursed, or are reimbursable.” This verbiage on the questionnaire puts the client on notice, and if they don’t understand the meaning they have a responsibility to ask you, the preparer. My company posts its worksheets on our website. We took the time years ago to insert information throughout our worksheets in an effort to educate the client about certain deductions. We feel most clients really appreciate the information.

Remember at the beginning of this article I said that this could happen to any of us? Well, don’t let it happen to you. Practice safe tax.