How to Navigate IRS Tax Preparer Penalties
As a tax preparer, you’ve put yourself in a position to mediate between the IRS and your clients. Your clients are entrusting their entire financial tax situation to you, and the IRS is also putting their trust in you to provide them with the most accurate and up-to-date information you possibly can.
Unfortunately, as a human being, you’re subject to making mistakes.
When that happens professionally, there will be consequences. One of those consequences could be a tax preparer penalty levied against you by the IRS. Have you recently received a notice regarding an IRS penalty? If so, it’s important to plan your next steps carefully, as you want to protect yourself, your clients, and your career.
Learn more about tax preparer penalties and how to cope with them below.
Who Can Face Tax Preparer Penalties?
As you’d likely infer from the name, tax preparer penalties are only levied against professionals who prepare tax returns for other individuals. Taxpayers might face several different types of tax penalties and consequences when filing their own returns. However, tax preparer penalties are exclusively levied against business professionals, not individuals preparing their tax returns.
Under the law, a tax preparer is anyone who prepares taxes for compensation or employs people to prepare taxes for payment. The types of tax experts who could face tax preparation penalties include:
- Tax attorneys
- Enrolled agents
- Certified Public Accountants
- Anyone who gets paid to prepare tax returns
If these tax experts do not follow the proper tax procedures and laws, then they can face tax preparer penalties.
Understanding Your Legal Obligation as a Tax Preparer
If you’ve chosen to become a tax preparer, you already know that you’ll need to prepare and file taxes for other individuals as a part of your job obligations. It’s equally important, however, to understand your legal obligations as a tax preparer. As part of your job, however, you take on professional liability for the returns you file.
In other words, you take on responsibility for filing everything correctly.
Under Section 6695 of the Internal Revenue Code, tax preparers who make mistakes on their clients’ returns will be held responsible for the errors. You are legally obligated to do your due diligence and file your client’s returns to the best of your ability once they hire you. Failing to uphold this duty of care could open you up to potential lawsuits and tax preparer penalties from the IRS.
Types of IRS Tax Preparer Penalties
When a typical taxpayer makes an error on their returns, they can face several tax penalties. From filing late to incorrectly reporting income, mistakes can be costly.
For that reason, many individual taxpayers turn to tax experts to prepare their returns for them. Preparer penalties come into play when the tax preparer makes a mistake on your returns. Below, we’ll review some of the most common types of preparer penalties levied against tax experts.
Understatement of Taxpayer’s Liability
This type of penalty can occur when a tax preparer understates how much a taxpayer owes on their returns. This understatement may be intentional or accidental, and the distinction is important. If the tax preparer should have reasonably figured out that the tax was being understated, the penalty is $1,000 or half of the tax preparer’s income to prepare the return (whichever is greater).
When the IRS believes that the tax preparer understated the taxpayer’s liabilities on purpose or due to recklessness, the penalty will be levied at either $5,000 or 75% of the preparer’s fee to prepare the return (whichever is greater).
Promoting Abusive Tax Shelters
Unfortunately, some tax experts intentionally promote illegal tax actions like using abusive tax shelters. When tax preparers do this, they can be penalized either $1,000 or 100% (whichever is less) of the gross income the person made on the arrangement. If they tell a taxpayer that a credit or deduction related to an abusive shelter is allowable, they can incur a penalty of 50% of the income they received.
Failure to File Correct Information on Returns
Of course, many tax preparers make genuine mistakes, like making errors when inputting information on a taxpayer’s return. For instance, a preparer might accidentally put $13,060 on an income portion instead of $12,060. This difference may seem small, but a small error could make a major difference in some cases. When a preparer error leads to incorrect information on a return, the penalty is $50 for each error.
Failure to Sign the Return
The signature on a tax return is very important. It signifies that the person signing the return has taken their time to verify the accuracy of everything listed on the return. It also conveys liability for any errors.
When an individual does their own taxes, they sign the returns. When a tax preparer does someone else’s taxes, they have clients sign paper returns or they have clients sign forms authorizing them to e-file. The preparer also has to sign, and if they don’t, they can face a $55 fine.
Failure to Furnish a Copy to the Taxpayer
On top of preparing everything as accurately as possible, tax preparation services should also always provide a copy of a tax return or a refund claim to the taxpayer. When the preparer fails to remit this copy or refund claim, they could face a penalty of $55 for each failure.
How Does the IRS Calculate Penalties?
As you may have noticed from the penalty amounts listed above, many of the IRS’s consequences involve a fine based on a per-incident basis. The IRS does consider the total number of violations when calculating the overall penalty a preparer will face. They also consider the specific types of regulations that were violated.
It also makes a difference how many tax years are involved in the filing. Finally, the IRS considers inflation rates to determine the overall fine amount.
What is Reasonable Cause? Good Faith Exceptions to IRC 6694a
Under the good faith exception to IRC 6694a, the preparer can have tax preparer penalties removed if they can show that they understated tax liability for a client due to a reasonable cause. The preparer must show that they acted in good faith in submitting the returns.
Can IRS Tax Preparer Penalties Be Removed?
Yes. It is possible to have tax preparer penalties removed or abated. There are several ways this can happen. When you initially receive your IRS letter regarding the penalty, you have the option to send a written request to the IRS. In this request, ask the IRS to remove the penalty. You’ll want to provide them with a good reason as to why they should do this.
If the IRS denies this request, then you can still take action to remove the penalty by appealing the IRS’s decision. If you plan on going through the appeals process, it’s best to hire a tax lawyer to help you.
What if You Did Something Wrong While Preparing Taxes and Agree? What Are Your Options?
Do you agree with the IRS’s assessment? If you know you made a mistake, don’t beat yourself up! That is what the IRS penalty system is designed to do. It’s meant to show you what you did wrong and help you correct your behavior. If you agree with the penalty, simply contact the IRS to pay it off, but first, whenever possible, always request penalty relief. There’s no reason to pay penalties if you don’t have to.
How to Set Up a Payment Plan
If you know you made a mistake, and you’re ready to take accountability but can’t pay right away, then don’t fret. You can apply for a payment plan with the IRS. In general, the IRS will accept a payment plan so long as you genuinely can’t pay off the penalty. If the IRS has reason to believe that you could pay the penalty without a payment plan, however, then they may not approve you.
If you’re ready to apply for a payment plan, then you can either contact the IRS directly or work with a tax attorney.
Can a Tax Preparer Go to Jail?
Yes. A tax preparer can go to jail if they commit a criminal tax offense with jail time as a potential consequence. Jail time is very rare, and it only happens a handful of times every year in extreme situations.
Tax fraud is one of the most common tax offenses that can lead to jail time, but it isn’t the only one. Tax preparers can also go to jail for tax evasion or intentionally lying to an IRS employee.
Tax Fraud: Definition and Penalties
Tax fraud is defined as intentional wrongdoing or false reporting on one’s taxes to avoid paying the fair share of taxes that are owed.
According to the IRS, individuals who make false statements on returns and commit fraud can be charged with a felony. This charge can result in jail time of up to 3 years. On top of that, a conviction will also result in substantial fines. You could be fined up to $100,000 as an individual and up to $500,000 as a corporation. On top of that, you’ll need to pay any court fees associated with your prosecution, too.
Do You Need an IRS Lawyer?
The Congressional Budget Office has proposed increased funding for the IRS, and one of the reasons for this spending is to increase available funds for IRS enforcement activities. With that in mind, you need to understand that the IRS will be fiercer in its attempts to collect in the coming years.
That’s just one of the many reasons why you should use an IRS lawyer if you get into a situation where you’re in conflict with the IRS. For instance, if you’re struggling to understand your legal rights or potentially facing legal consequences due to your tax decisions, then that’s a good time to hire a lawyer.
How to Find the Right Legal Representative to Help with Your Tax Situation
While all tax attorneys are highly qualified, not every tax lawyer can provide you with the same quality of representation. That’s why you must look for a few key factors before hiring a lawyer to ensure they’re a good fit to represent you. Here is what to look out for:
- Past experience handling similar tax cases
- Case results that demonstrate their ability to represent clients successfully
- Positive past reviews from clients
- An attorney who has the time to take on your tax situation
When you find an attorney who exemplifies all these traits, you’ve likely found a high-quality professional!
Are You Facing Tax Preparer Penalties?
If you’ve recently received a notice from the IRS about being penalized, then it’s natural to feel some apprehension and fear. After all, you don’t want what happened to affect your career negatively.
The good news is that you can overcome this situation and continue to thrive in your profession! Use the tips outlined in this article to help you easily navigate tax preparer penalties. It’s up to you if you want to fight the penalty or just pay it. If you’re concerned about the potential legal consequences of your actions, then it’s best to consult with an IRS tax lawyer before moving forward.
Here at W Tax Group, we can help you navigate your tax issues and make sure that your legal bases are covered. To get help now, book a consultation with our legal team today to discuss your situation with our attorneys.