Does your accountant work for the IRS?

A new act could mean trouble for small business owners and their accountants.

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(FORTUNE Small Business) -- Who's an entrepreneur's best friend during tax season? If "accountant" is your answer, you may need to reconsider.

Thanks to the Small Business and Work Opportunity Tax Act of 2007, accountants are being asked to put the IRS's interests above those of their small-business clients. According to the new rules, those who prepare returns containing an understatement of tax due - which the preparer "knew or reasonably should have known" - will be subject to penalties amounting to "the greater of $1,000 or 50% of the income" the preparer received for that particular federal return.

The act also expands the definition of tax-return preparer to cover those handling any federal return, including those for estate, gift, excise, and employment tax.

Critics claim the act has the potential to injure the close personal relationships many small businesses maintain with their accountants. Another downside: Smaller businesses may need to prepare more documentation than previously required. In turn, accountants may be less apt to take clients at their word.

"The IRS is intimidating an accountant into being the government's auditor," says Paul Hense, an accountant in Grand Rapids and former chairman of the National Small Business Association.

In some extreme cases, accountants may ask for far less data, hoping they will be less liable the less they know, which would put more of the legal burden on entrepreneurs.

Previously "both had the same level of risk," explains Jay Rosloniec, a tax attorney with Mika Meyers Beckett & Jones in Grand Rapids. "Now the CPA has to be much more cautious."  To top of page

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