Orange County Tax Preparer Penalties

Orange County Tax Preparer Penalty Attorneys

Defend Your Professional License Against Aggressive Tax Enforcement

In recent years, both the Internal Revenue Service and the California Franchise Tax Board have stepped up enforcement and examination efforts aimed at tax return preparers, including audits and penalty assessments. Penalties under Internal Revenue Code § 6694(a) for an ‘unreasonable position’ or under § 6694(b) for willful or reckless conduct can go well beyond modest fines, including significant monetary sanctions and professional liability for preparers. Under IRS rules, certain penalties can be avoided if a preparer demonstrates that the understatement resulted from reasonable cause and that they acted in good faith, considering all the facts and circumstances. Tax preparers face the loss of their PTIN, permanent professional debarment, and potential criminal referrals.

Our Orange County tax law firm provides aggressive legal representation for tax attorneys, CPAs, Enrolled Agents, and uncertified preparers facing federal or state investigations. We focus on mitigating exposure and preserving the right to practice law or accounting in the state of California.

Federal Penalties Applicable to Tax Return Preparers

The IRS uses several sections of the Internal Revenue Code (IRC) to penalize tax preparers. The IRS often assesses penalty exposure through its preparer compliance programs, which review samples of a preparer’s filed returns to detect patterns of noncompliance or procedural errors.

Section 6694(a): Unreasonable Positions

A penalty may apply if a preparer files a return that contains an understatement of liability due to an “unreasonable position.” Under IRC § 6694(a), a penalty can apply when an understatement results from a position that lacks ‘substantial authority’ if undisclosed, or where even a disclosed position lacks at least a reasonable basis under IRS standards.

Section 6694(b): Willful or Reckless Conduct

Under IRC § 6694(b), if the IRS determines that an understatement resulted from willful or reckless conduct, penalties are larger, generally the greater of $5,000 or 75 % of the income derived from preparing the return. For each return involving willful or reckless conduct under IRC §6694(b), the preparer may be penalized the greater of $5,000 or 75% of the income derived from preparing that return.

Section 6695: Procedural Non-Compliance

The federal government also enforces strict procedural requirements. Under IRC Section 6695, penalties may be assessed for various failures, including not furnishing a copy of the return to the taxpayer, failing to sign a return or provide a proper identification number, not exercising due diligence when determining eligibility for refundable credits such as the Earned Income Credit, Child Tax Credit, American Opportunity Tax Credit, and Head of Household filing status, or failing to retain a copy of a return or client list. These penalties are subject to annual adjustments, with specific amounts and caps that vary each year, so the exact exposure depends on the current IRS guidance. 

California State Penalties

California applies similar preparer penalty principles, but under its own statutes. Revenue and Taxation Code § 19166 imposes penalties for understatement of tax liability by a preparer with amounts and standards unique to state law, and unregistered preparers may face additional penalties administered by the Franchise Tax Board. The FTB and the California Tax Education Council (CTEC) closely monitor tax preparers. The state can impose penalties similar to those found in IRC Section 6694 under the California Revenue and Taxation Code Section 19166.

An IRS preparer penalty case may involve the Office of Professional Responsibility (OPR), which enforces standards under Treasury Circular 230 for attorneys, CPAs, enrolled agents, and others authorized to practice before the IRS.

The Threat of IRS Injunctions

Under IRC §7407, the U.S. government may file a civil action in federal district court seeking an injunction to prohibit a tax preparer from engaging in specified conduct, or from preparing tax returns altogether. This type of court order can forever bar an individual from preparing federal tax returns for others. The Department of Justice may seek an injunction if it believes a preparer has done any of the following:

  • Misrepresented his or her eligibility to practice before the IRS
  • Engaged in conduct subject to penalties under Sections 6694 or 6695
  • Guaranteed the payment of any tax refund or the allowance of any tax credit
  • Engaged in any fraudulent or deceptive conduct that substantially interferes with the proper administration of Internal Revenue laws

Strategic intervention is vital at the audit stage. The primary goal of our defense strategy is to prevent the case from being referred to the DOJ for an injunction action.

Strategies for Defending Preparers Against Allegations

Tax professional defense requires meticulous review of the underlying tax law and the individual’s internal processes. Depending on the specific case, we employ several defense theories to challenge assertions made by federal and state agencies.

Proving Good Faith and Reasonable Cause

Many penalties can be abated when tax professionals can demonstrate that there was reasonable cause for an understatement and that they acted in good faith. We document the research performed at the time the return was filed to show that the professional relied on credible information provided by the client, or on established legal precedents.

Addressing Circular 230 Violations

Treasury Department Circular 230 sets the standards for practice before the IRS. When a professional is accused of lacking due diligence, we perform an internal audit of files to demonstrate compliance with these federal standards.

Clarifying “Substantial Authority”

One of the most effective ways to defend against unreasonable position allegations is to prove substantial authority. This may involve diving into Internal Revenue Code sections and other statutory provisions; Treasury regulations (final, temporary, and proposed); court cases and legal precedents; and Revenue rulings and procedures. If we can show that the weight of these authorities supports your position, the penalty should not apply.

Challenging the Definition of “Preparer”

In certain cases, the individual facing penalties may not meet the legal definition of a “signing preparer” or a “non-signing preparer” for specific portions of the return in question. Our experienced legal team can analyze the division of labor within your firm to ensure penalties are not improperly assigned to junior associates or administrative staff.

Criminal Referrals and Specialized Investigations

Most tax professional cases begin as civil audits, but they can escalate to high-stakes criminal investigations if the government believes it has detected a pattern of fraud. The IRS Criminal Investigation (CI) division has an Abusive Return Preparer Enforcement program, specifically designed to identify and prosecute preparers who orchestrate the filing of false returns.

Identifying a Shift to a Criminal Inquiry

Although the transition from a civil audit to a criminal investigation may be subtle, it carries significant legal implications. IRS revenue agents look for “badges of fraud,” specific indicators of intentional deception, to justify referring tax professionals to CI. Practitioners should be alert for any of the following:

  • Appearance of Special Agents: Unlike Revenue agents, who handle civil audits, Special Agents are federal law enforcement officers. They have badges, carry firearms, and have the authority to execute search warrants and make arrests.
  • “Eggshell Audit” scenario: A civil auditor who abruptly stops asking questions and disappears for weeks may be consulting with a Fraud Enforcement Advisor to determine if your case meets criminal criteria.
  • Focus on methodologies: CI investigators look for systematic issues, such as repeated use of specific inflated deductions, fabrication of expenses, or kickback arrangements in which the preparer takes a percentage of a fraudulent refund.

Defense Against Allegations

In a criminal tax case, our defense strategy centers on the element of willfulness. To secure a conviction, the government must prove beyond a reasonable doubt that you knowingly and intentionally violated a legal duty. We work to demonstrate that any errors were the result of good-faith reliance, technical complexity, administrative oversight, or other honest mistakes, not a deliberate criminal scheme.

Contact an Orange County Tax Defense Attorney

As a tax preparer, your reputation is your most valuable asset. Even a single penalty assessment can set off a chain reaction, including license revocations and diminished client trust. It’s crucial to take immediate action if you receive a letter from the IRS regarding a preparer penalty or a Notice of Intent to Penalize. 

Contact Dallo Law Group at (949) 812-6930. Our experienced tax defense attorneys can help you respond to notices, represent you in appeals, and, if necessary, defend your interests in U.S. District Court. We are dedicated to providing clear, effective legal advocacy for the tax professionals who keep our community running.