In-the-trenches tax preparers should welcome IRS’ December 8 town meeting concerning real-time matching of 1099s and W-2 to e-filed returns. The idea is that, if IRS detects a non-reporting, the preparer and taxpayer get immediate notice and a chance to amend. As matters stand, it may be a year or eighteen months before the error is found, triggering interest and penalties.

I know some preparers have objected that this system will allow IRS to match W-2 and 1099s, prepare an individual’s return and mail it to him/her/them for signature, thus cutting out the preparers, paid and unpaid. Is this the thin end of the wedge? I can’t tell. Just sayin’, this year the decree went out from Douglas Augustus that all preparers must be registered; this is the first registration, when Douglas was Commissioner of Internal Revenue and Timothy was Secretary of the Treasury.  Of  course, all the world was to be taxed long before this.

But I just blogged Kurt C. Olsen, 2011 T.C. Sum. Op. 131, filed 11/23/11. Briefly, Olsen updated his tax software in order to report income from a K-1 his wife got, neither his wife nor he ever having seen a K-1 before. He hit the wrong key and, though he accurately reported the payor, didn’t report the income on their Schedule E or transfer that income to their joint 1040. When IRS asserted substantial underreporting long afterwards, Special Trial Judge Armen let Kurt off the hook for the five-and-ten penalty because he clearly acted in good faith. Of course, Kurt still owes tax and interest.

How much time, effort, energy and agita could have been avoided, had Kurt got a next-day e-mail that read something like this: “Hey, dude, where’s the $X your wife got from Y? You got a 1099 but didn’t show it on your 1040”. Time to correct (and presumably avoid penalty), minimal interest, no need to waste scarce Tax Court resources–the benefits could be substantial.

What do you guys think?