As a resident of the United States of America, you have to file for the taxes as per the law. You may choose to do your taxes yourself, or you may hire an independent tax preparer for the tax preparation of your returns. If you end up hiring a professional tax preparer, as a taxpayer and a paying customer, you have certain expectations for the work to be done with due diligence and efficiency.
Suppose, there was an intentional or an unintentional mistake on your tax returns and the IRS has caught it. This kind of mistake may end up in an audit, followed up by an imposition of several penalties and interests levied against you.
Licensed Vs. Unlicensed Tax Return Preparers
There are two types of tax return preparers;
- Those who have acquired a license to practice from the IRS and the State.
- Those who are permitted to prepare tax returns for paying clients, but are not licensed to practice before the IRS.
The first kind is the more respectable sort and the ones we are mostly familiar with. Those who belong to this category are;
- Certified Personal Accountants or CPAs
- Tax attorneys
- Enrolled agents
- Enrolled actuaries
- Appraisers and more!
The unlicensed ones are called ‘un-enrolled tax preparers’.
IRS Defines a Tax Preparer as-
The IRS Code §7701(1)(36)(A) states that a tax preparer is someone who prepares taxes for individuals or businesses in return for a compensation. Therefore, someone who receives no compensation for doing your taxes is not considered a tax preparer.
The compensation is preferably monetary in nature, but it is not always so. The tax preparer may receive compensation in the form of another service from the taxpayer.
Tax Penalties for a Tax Preparer Negligence
Revoking the License to Practice
The IRS can subject a proven negligent tax preparer to monetary penalties. Willful or reckless errors carry the biggest penalties. The IRS is obligated to carry out a full investigation. It also takes a tax preparer testimony into account.
The penalties could be lessened or even waived for an honest mistake or a mild case of human error.In the most severe of cases, containing malicious manipulation of tax records, the license of the tax preparer can be revoked and even a criminal investigation may be launched.
Suspension of the License to Practice
For some mild cases of negligence, the tax preparer may receive a non-monetary penalty. They may receive a permanent record in their files or even have their licensed suspended for a fixed amount of time.
The IRS Code §6694 ensures that the IRS impose a penalty on a tax prep who understates a taxpayer’s liability in order to cheat the government out of taxes. The severity or imposition of the penalties largely depends upon the reason behind this act. If the tax preparer did this because of a ‘reasonable cause’ for these understatements, then these penalties may be completely waived.
However, if the crime was done due to ‘willful or reckless’ conduct, then the IRS may impose a penalty of $1,000 or 50% of the income for each error on a tax return or a claim for refund.
Loss of Reputation and Practice
Reckless or intentional disregard of the tax law goes against all the principles of the IRS. The monetary loss aside, the negligent tax preparer may end up losing their license, reputation, and the trust of the clients. A permanent red flag may be entered into their record that is accessible to any potential future client. Even if the license is restored later on, it may not command the same prestige it once did.
Among the non-monetary penalties, one is commonly known as an ‘injunction’. An injunction is a court order which states that the preparer cannot continue to practice in a professional capacity for a certain period of time.
An injunction can have much more devastating consequences for a tax preparer than a monetary penalty. They could lose their clients in that time. They could be forced to re-open all previous filing cases for the years that fall within the statute of limitations. Finally, the court could revoke the license to practice in most severe cases of negligence.
Who Pays the Price for a Tax Preparer’s Negligence?
A little over a decade ago, the sole responsibility in the tax returns used to lie only with the taxpayer. However, changes in the tax laws ensure that your tax preparer can be held responsible for the mist akes made in a client’s tax returns.
You can file a complaint with a tax regulatory authority on your own or you can hire a lawyer for said services. Many law firms and tax advisors specialize in sorting out a tax controversy and determining the person at fault for a mistake in the tax returns. They can help protect your rights with the IRS.
Tax Preparer’s Negligence in the Law
Since the changes made in the tax laws in 2007, a tax preparer may be held liable for the mistakes made in a client’s tax return. The IRS has a fixed list of codes which reflect the tax laws. The IRS Code §6694 ensures the imposition of a liability on a tax preparer in case of mistakes in all federal tax returns and claims for refund.
Before this amendment to the tax law, the liability for gift, estate, and generation-skipping tax returns did not lie with the tax preparer. However, they could still be held liable for the malicious or accidental mistakes made on income tax returns.
As the taxpayer, you must never forget to check your tax returns before filing them, regardless of the trust you have in your tax preparer. Any tax advisor can tell you, your vigilance is as much important as the tax preparers’ because they usually ask you to sign an agreement which may allow them to circumvent responsibilities.
However, in case of willful negligence, your tax preparer can and will be pursued to the full extent of the law.