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Preparer Penalties Assessed to Cost Segregation Consultant

The office of Chief Counsel of the IRS recently released Memorandum 201805001 pertaining to Preparer Penalties related to Section 6701 – Aiding and Abetting in the Understatement of a Tax Liability. This related to a firm that went way overboard on their allocations of accelerated property. Many of our clients contacted our representatives immediately to get a better understanding of what was going on. Some erroneously thought the Memorandum suggested that Cost Segregation was no longer allowed – clearly this is not the case!

Here is my take – I applaud the IRS for taking this action and I sincerely hope they continue to review and challenge the work of substandard Cost Segregation consultants.

Reputable, qualified firms have had to deal with an onslaught of substandard competition represented by people with little to no training. Their only competitive edge has been low prices and inflated Estimates of Benefit (EOB). With many taxpayers focusing only on fee and promised benefits, it remains a major challenge for those of us who choose to take the “high road” in terms of presenting realistic projections backed up with solid studies conducted by qualified professionals. Unfortunately, too many taxpayers have been duped into engaging with substandard firms and luckily for these firms, their studies have rarely been scrutinized – until now.

I find it troubling to learn from our business development team that we sometimes lose bids due to our EOBs being less aggressive than that of a competitor. Although less scrupulous consultants may be comfortable inflating EOBs to win a contract, my colleagues and I cannot endorse such a practice. It is unethical and wrong especially when we know those results are unattainable and not defensible and therefore constitute a liability for our clients. We have reviewed many reports prepared by low-cost consultants that assign appallingly high percentages to 5-year assets. It’s not surprising that the IRS assessed major penalties, as they found that “categorizing certain structural components as 5-year property to be the most egregious misrepresentations concerning the classification of property for tax purposes.” Those were the words of the IRS, not mine.

In our industry, the low cost provider rarely if ever, represents the best value but until recently, the conventional wisdom was that Cost Segregation Studies “don’t get looked at (by the IRS) as it is just an asset depreciation timing difference.” This cavalier attitude on the part of many taxpayers and consultants may soon have some consequences, especially if the IRS ramps up their scrutiny of Cost Segregation studies. The reality is that it does not cost that much more to have a quality study performed by professionals with appropriate credentials. Proper vetting of a Cost Segregation consultant’s credentials should be an essential element of evaluation as opposed to selecting a consultant based on bargain basement fees and inflated EOBs.

Finding a qualified consultant might be easier than you think. One of the driving forces behind the formation of the American Society of Cost Segregation Professionals (www.ascsp.org) was to establish a code of ethics and technical standards for its members to ensure that the taxpayer could rely on obtaining a quality study consistent with what the IRS would be expecting to see in accordance with the IRS Audit Techniques Guide for Cost Segregation. ASCSP provides a high standard of qualifications, and Certified members must have a minimum of seven years direct Cost Segregation experience and also pass a rigorous 8-hour exam.

With the recent changes enacted by the Tax Cuts and Jobs Act permitting taxpayers to take bonus depreciation on acquired, used property, we suspect there will be a major increase in demand for Cost Segregation Studies. Being able to take 100% bonus depreciation on certain qualified land improvements and on assets classified as Section 1245 property is great news. Given the magnitude of the benefit, coupled with the potential risk associated with disallowances of certain assets and/or penalties due to sub-standard work however, one might want to consider the qualifications of the Cost Segregation consultant as the primary criteria.

While it remains to be seen if the consultant referenced in the Memorandum or others will be subjected to further penalties, I think it is safe to say that future consequences would not be surprising.

Since we are in midst of tax season, I really need get back to work so I will close with just two more words…. Caveat Emptor.