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Tax Preparer Penalties

The IRS has great power and very broad authority to initiate a thorough investigation of a tax preparer. If during these inquiries, it is deemed that the tax professional prepared the return incompletely or inaccurately, then he may face civil penalties and even criminal investigations. In some instances revocation from the IRS e-filing program may occur.

The IRC Sec. 6695(g) and IRC Sec. 6694(b) govern tax preparer penalties and it is imperative to have understanding of the nuances involved. Typically, only an experienced tax attorney can apply the knowledge of how the IRS views these failures and rules and how it administers these penalties. However, because the IRS reckons it is your responsibility that your tax return accurately reflects your figures, despite the fact that a tax preparer helped you with it, you can also get into trouble with substantial penalties, interest, and additional taxes.

Types of Tax Preparer Penalties

When a tax professional is hired to prepare your tax returns, the IRS expects that person to act with prudence, discretion, and competence. When that does not happen, there are a variety of penalties a tax preparer can face which include:

  • Failure to Sign Return – Tax preparers must sign off on their clients’ returns. The penalty is $50 for each failure to sign a return or claim for refund as required by regulations. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a calendar year.

  • Providing False Information – Fraud and false statements are considered felonies under IRS rules. The penalties can reach up to $100,000 for individual returns and up to $500,000 for corporate returns. Materially incorrect statements may include removing or hiding goods for the purposes of tax evasion and falsifying or concealing information.

  • Promoting Abusive Tax Shelters – These are illegal investments made with the purpose of lowering tax liability. The penalty is the lesser of a $1000 or 100% of the income the tax preparer earned from the activity.

  • Not Furnishing a Client’s Tax Identification Number – Any return prepared by a preparer must include the preparer tax identification number (PTIN), the employer’s number, or both. The penalty is $50 for each failure to comply with this statute and a maximum $25,000 for all documents filed during a calendar year, adjusted for inflation.

Calculating Tax Preparer Penalties

Factors that affect the amount of penalties a tax preparer can face can be a bit complicated. For understatement of tax, the calculation is 50% of the preparer’s fee that he charged his client or $1000 minimum in cases where the computation is less than the $1000. As an example, if the client was charged $600 to complete his return and has a side business that generates $2000 per year and the preparer knowingly did not include the extra side income, he can be penalized for $1000 because 50% of $600 is only $300. In this same example, if the preparer charged the client $5000 to do the return, then his penalty would be $2500, as the 50% computation is larger than $1000.

As far as maximum penalties the sky is the limit. For reckless conduct, a preparer can face a penalty of 75% of what was charged to the client for doing the tax return. In addition, the number may continue to climb if multiple penalties are tacked on. Besides the above mentioned instances there may also be penalties due to failing to retain a copy of filed tax return, failing to file certain informational returns, or failing to diligently check client’s head of household status, among others.

It is important to note that a tax preparer may minimize (and even avoid) the amount of the penalty if he can prove that he demonstrated reasonable cause and prove that he was acting without reckless conduct in his decisions and actions. Furthermore, a tax preparer has 30 days to request an appeal from the IRS before the penalty is assessed.

Steps to Avoid Tax Preparer Penalties

For tax preparers that had reasonable cause and acted in good faith, the IRS provides leniency to certain mistakes. Obviously, the nature and materiality involved in the error and frequency plays a major role in how the IRS will pursue action.

Among the best practices for tax preparers is to stay up-to-date with tax laws in order to avoid negligence or breaking the law. Always be mindful to make accurate calculations and completing records properly can greatly enable upholding the tax laws. It is to the IRS’s benefit to deter and shut down fraudulent tax preparers because that would mean hundreds of erroneous tax returns will be stopped. Therefore, as long as you have displayed due diligence and set up good faith efforts in obtaining and verifying information, as well as promptly responding to any IRS requests, most tax preparers can be good to go.

Conclusion

Primarily the responsibility of accurate information is placed on the individual client; however, a tax preparer must always be ready with relevant follow up questions for evaluation purposes and to ensure that tax policies and guidelines are adhered to. Costly penalties and revocations to the tax preparer can be greatly reduced with best practices and knowledge of potential pitfalls that can lead to fees and worse.

Because tax preparer penalties have grown increasingly complicated, tax attorneys are the best professionals to interpret the IRC Sec. 6695(g) and IRC Sec. 6694(b) which provide the details and guidelines of responsibilities and penalties imposed to tax preparers. The tax attorneys at Dallo Law Group can assist you in this area. We can provide you a good overview of what you may be facing both civil and criminal and help guide you to proper compliance. In addition, our expertise also includes state requirements which are often analogous to the IRS statutes. Do not wait until your professional reputation and business is damaged; give us a call at 619-795-8000.