By Don McDougall

With Circular 230, tax preparers were made responsible for decisions that were not theirs and are now acting as much as anything else as the first line of enforcement. EPACT certification creates a major issue for CPAs, as many do not have enough experience with the process to protect themselves and their firms. EPACT has provisions to prevent fraud that are embedded in the regulations. Under Circular 230, it becomes the CPA’s responsibility to confirm that the requirements have been met. In order to protect your firm and yourself, please read on.

WARNING! EPACT is not just like Cost Segregation. EPACT generates a tax deduction; Cost Segregation accelerates the depreciation of an asset by giving it a shorter life. If you have been told they are just versions of the same accounting issue, you need to beware.

Who can do your reports? – More importantly, who can sign your reports? The reports MUST be completed by a licensed firm or individual. This means both the field verification and the energy calculations must be done by licensed people.

The reports themselves must be signed by a licensed firm (engineering or contactor) and should contain copies of the licenses for the individuals who did the work. Consider an example of a company that has CPAs on staff. Exxon-Mobile has CPAs on staff, but Exxon cannot do your tax returns. Likewise, a CPA firm or consulting firm cannot sign your EPACT certification. The reports may completed by firms that are not licensed engineering firms, but must be signed by the licensed engineer who actually did the work. The firm that subcontracted them or hired them cannot sign the report. In addition, that engineer carries 100% of the liability for any errors. Like the example above, you can have a friend who is a CPA that works at Exxon to do your taxes, but he cannot do it on Exxon letterhead.

There are also issues of liability and coverage in the event of an audit. If the firm is not licensed as an engineering firm, not only can they not sign the work, they also cannot defend it to the IRS. This frequently leaves you, their tax-preparing CPA, holding the liability bag. Who signs the reports matters to you even more than it matters to the IRS (because there will be consequences for YOU, not the IRS).

In addition, ALL of the field work and the calculations must be completed by licensed individuals. A common mistake many Cost Segregation firms make is using their non-licensed staff to complete the field inspections to save money. This is clearly not allowed under the guidelines: all work must be completed by licensed individuals.

Another caveat in the certification process: the firm performing the EPACT Certification may not be related to any part of the transaction. For example, a lighting contractor may not certify his/her own work. Contingency fees that rely on the conclusions of the certification to set the cost of the study are also to be avoided.

Summary – The 179D Certification must be signed by a licensed engineering firm, or a licensed individual. Reports not completed by a licensed engineering firm put you (the Tax Preparer) at risk. The firm completing the certification also cannot be involved in the installation or design of the properties that are being certified.

Follow these simple guidelines and you will protect your licensure as well as your firm.

Don McDougall is a National Director with Engineered Tax Services. He is responsible for operations on the West Cost with some national efforts as well. Don is an innovator in the fields of valuation and tax-based engineering. He has proudly contributed and pioneered many of the commonly-integrated services and components used in the industry. He has been providing cost segregation services since before cost segregation existed, having worked heavily in the field of investment tax credits (the depreciation services that pre-date cost segregation).

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