Schedule C prepared by another tax preparer

I don't get this thread. It's addressed in the 6694 regs.

(e) Verification of information furnished by taxpayer or other party -

(1) In general. For purposes of sections 6694(a) and (b) (including demonstrating that a position complied with relevant standards under section 6694(a) and demonstrating reasonable cause and good faith under § 1.6694-2(e)), the tax return preparer generally may rely in good faith without verification upon information furnished by the taxpayer. A tax return preparer also may rely in good faith and without verification upon information and advice furnished by another advisor, another tax return preparer or other party (including another advisor or tax return preparer at the tax return preparer's firm). The tax return preparer is not required to audit, examine or review books and records, business operations, documents, or other evidence to verify independently information provided by the taxpayer, advisor, other tax return preparer, or other party. The tax return preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some provisions of the Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintain specific documents) before a deduction or credit may be claimed. The tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit.

Document the reliance on the other firm's work product in the transmittal to the client.

I refuse to use a Schedule C prepared by another practitioner. I have NO IDEA what went into the preparation and I am the one that attests to the correctness of the form, not the other preparer. Using that form would be irresponsible and foolish.

Attest? I've never heard if a tax return as an attestation engagement. I can't imagine that all your returns are peer reviewed.

If a client gives us information that does not appear to be incorrect, we can use it to prepare the return.

Would anyone's answer be different if the OP had asked what they should do if a client returned a completed organizer and no other information? If so, why?

This.

It's (almost) the same thing, and I am in agreement with other posts that say you can use it. One of the posts even included "the law" about it - (which I have trouble reading, but it looks good to me).

One thing I would want to look over is a list of assets. Like "what if the prior preparer put $10,000 in supplies that should have been depreciated" type questions.

I would also be curious to the context as well before I did it, for the record.

But it's basically being used as a list of categorized expenses, which is all you need. It can be a QB P&L report, an Excel spreadsheet, or written on a cocktail napkin.

Except, as others have posted, there are the sniff tests for things like meals, travel, "utilities", rounded numbers, 100% car use, reasonable amounts, exclusive biz use of home, EIC involvement etc. These require more questions.

Anything much beyond that is like an independent audit - and most of us are not in that business. If we were, the tax return would cost $5000+.

To those that don't agree - are you demanding bank statements? If so, I would argue that even that is not enough based on this logic. Let's say a handyman buys a drill and it's clearly on the bank statement. How can you verify that he uses this drill for his income production and not personally? You would have to follow him around to verify all of his expenses.

Who gives a flying F--K if I used attest incorrectly? The bottom line is a Schedule C provided by an unknown practitioner and some of you want to take that as gospel. That's lazy and a crock of S--T.

If you are signing the 1040, you are responsible for everything in that 1040, including the Schedule C. Treas Reg §301.7701-15(b)(1)

Yes, based on the information provided BY THE CLIENT. If we think it is incorrect, that is one thing. If we have no reason to doubt accuracy, we are not required to audit or prove that it is correct.

Would I question why another firm prepared the Schedule C? Certainly, while simultaneously thinking client is an idiot. Would I ask to be able to substantiate it? Depends how well I know their Schedule C activity. But, it is not any riskier than a client that just gives you a summary statement of financial activity for the year, which we all accept as long as it also appears REASONABLE.

Interesting that some who think that this is OK but that accepting an undifferentiated total for overhead expense would be wrong.

Something about speaking with forked tongue ?

I refuse to use a Schedule C prepared by another practitioner. I have NO IDEA what went into the preparation and I am the one that attests to the correctness of the form, not the other preparer. Using that form would be irresponsible and foolish.

So would you also refuse a Schedule C organizer page completed by the client? That’s how I view this. I would look at it with the same professional skepticism. I would ask my client what he provided to the other CPA and if he feels the results are appropriate. If it all sounds reasonable I’m using it. I’m not going to waste my time or generate extra fees to audit or review a schedule C when it’s not necessary.

Interesting that some who think that this is OK but that accepting an undifferentiated total for overhead expense would be wrong.

Something about speaking with forked tongue ?

To be clear, most or all of us didn't say that you can just blindly do it, we said that you can do it if the entries pass the "sniff tests."

Undifferentiated "overhead" expenses may not pass the sniff test. Per circ 230, you have to ask more questions.

Example 1 to why this would be OK:

A client provides data in an organizer (or on a schedule C) as follows:

"5058 in business miles, 3987 commuting miles, and 14,797 total miles, 'I have written evidence' is checked."

As a tax preparer, as long as the numbers appear reasonable given the activity, you do not need to attest to this being accurate.

Example 1 as to why undifferentiated expenses may not be OK:

A client writes in his P&L that his car expenses were $3152.

The tax preparer cannot just write in that amount. The preparer must inform the client that a log must be kept and an allocation of business to personal miles must be used.

Example 2 as to why this is OK:

A client writes in a worksheet (or on form 8829) that he used 200 square feet of his 1040 square feet home 100% exclusively for business purposes and paid $2119 in electric utility expenses.

Example 2 as to why undifferentiated expenses may not be OK:

A client writes in a P&L that his utility expenses were $2119 but there are no rent expenses or other indications that the client rents a business space. This requires that the tax preparer ask the client if these utility expenses were all of his personal electric or even TV bills.

In summary, when a client writes "overhead expenses" for most of his expenses, I don't know if I need to be asking more questions about them. They may or may not fall into the "example 2s", and that's why I'm not OK with it.

Related question:

Do you just use the depreciation schedule prepared by the former tax preparer of a new client? Or do you ask for information of all the depreciable assets from the new client to reconstruct the depreciation schedule?

I dunno. We seem to have a situation where firm has been preparing partnership return for years, but not new client's individual. New client buys out managing partner in 2018 and gets final k-1 and part year Schedule C, no? Keeps firm familiar with business for 2019 and comes to you. (obviously a big mistake?)

I've learned in the last year or 2, I verify asset accounts for S Corp/Partnership returns more than most. The firm I began with instructed me to make adjustments to books, include reconciliations in workpapers, etc, so I've always tied out the balance sheet rather than just going with what the client provides. I assumed everyone did this, but my current partner doesn't - he uses the balance sheet figures provided by the client (and bills more than I do fwiw ).

I thought everyone was doing what I was doing, but quick polling of TPT revealed my procedure is in the minority.

But I've not changed my ways - I figure I'm providing my clients a service in keeping their books in line, and I think most of them appreciate it, so long as I'm not billing them more than fair rate for the service.

I mention all that to give context when I say if a client provides me a Schedule C or a spreadsheet or whatever, I just run with it, so long as something doesn't stand out as questionable.

I've learned in the last year or 2, I verify asset accounts for S Corp/Partnership returns more than most. The firm I began with instructed me to make adjustments to books, include reconciliations in workpapers, etc, so I've always tied out the balance sheet rather than just going with what the client provides. I assumed everyone did this, but my current partner doesn't - he uses the balance sheet figures provided by the client (and bills more than I do fwiw ).

I thought everyone was doing what I was doing, but quick polling of TPT revealed my procedure is in the minority.

But I've not changed my ways - I figure I'm providing my clients a service in keeping their books in line, and I think most of them appreciate it, so long as I'm not billing them more than fair rate for the service.

I mention all that to give context when I say if a client provides me a Schedule C or a spreadsheet or whatever, I just run with it, so long as something doesn't stand out as questionable.

You do what you do and that is fine and I am not questioning your professional judgement. I am a little curious though. If I understand, you do some due diligence on 1065 and 1120s but none on Schedule C - seems inconsistent.

If someone provides me a Quickbooks file I will do due diligence on the balance sheet on the Schedule C business, and generally speaking I am balance-sheet centric on my review of the 1065/1120S, but I do a quick overview of the P&L, and look at accounts that don't pass the sniff test - meals/travel/auto/payroll....

I'd do the same with a Schedule C that didn't seem reasonable. So 'none' isn't the right word.

I also always use Schedule L, even when not required - I hate getting a prior year return from a CPA who doesn't. Just a personal preference, that I used to believe was standard operating procedure.