Tax Preparer Penalties to Avoid

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Year-end is just around the corner, and before you know it, it will be tax time. Now is an excellent time to brush up on the tax laws to avoid making any tax preparer errors that could cost you penalties with the IRS. 

What is a Tax Preparer?

A tax preparer is someone who prepares tax returns and accepts compensation for doing so. Regardless of whether the individual is a signing or non-signing tax preparer, they could be held liable if the return contains errors. Some examples of tax preparers are tax attorneys, CPAs, enrolled agents, tax appraisers, and other licensed tax professionals. Even unlicensed people who accept compensation for preparing a tax return are liable to the IRS for any errors. 

Top Tax Preparer Penalties to Avoid

Some of the most common tax preparer errors that could result in an IRS penalty include:

Understatement of a Taxpayer’s Liability by a Tax Return Preparer

According to U.S. law, Sec. 6694, the IRS may penalize a tax preparer for understatement due to unreasonable positions or willful or reckless conduct. That means that if the tax preparer does not do everything in their power to reflect the taxpayers’ liability accurately, they may have to pay steep penalties and may also be held legally liable for the understatement.

Failure to Furnish a Copy to the Taxpayer

Tax preparers are required by law to furnish the taxpayer with a copy of the completed tax return no later than the date they sign it. If the tax preparer fails to comply, the IRS could charge them $50 per incident unless the error was due to a reasonable cause and not willful neglect. The maximum penalty for this is $25,000 in a calendar year. 

Failure to Sign the Return

Additionally, a tax preparer who fails to sign a tax return may be fined $50 for each instance. The maximum penalty for this in a calendar year is $25,500.

Failure to Furnish an Identifying Number

Whenever a tax preparer files a return for a company or individual, they must supply the employer’s tax ID, preparer tax identification number (PTIN), or both. If the tax preparer fails to do so, the IRS may penalize them $50 for each instance unless they can prove it was due to reasonable cause. In addition, if a tax preparer substitutes their own social security number in place of the taxpayers’ or uses an expired PTIN, they may also be fined. The maximum penalty in a calendar year is $25,000.

Failure to Retain a Copy or List

Signing and non-signing tax preparers must keep a copy or list of any tax returns they file. If they do not, the IRS may fine them $50 for each violation with a maximum penalty of $25,500 in a calendar year.

Failure to File Correct Information Returns

If a tax preparer files a return with incorrect information, the IRS has the right to penalize them $50 for each return with errors. The maximum penalty in a calendar year for this violation is $25,500.

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