Are Tax Preparers Liable for Mistakes?

Taxpayers rely on tax preparers for accurate returns due to complex and evolving tax laws. This reliance places significant responsibility on preparers. Understanding their duties and when they are accountable for errors is important for taxpayers.

Defining Preparer Duties and Mistakes

Tax preparers must uphold a standard of care, exercising the skill and diligence of a reasonably competent tax professional. Their primary duty is to prepare accurate returns based on client information and applicable tax laws.

A “mistake” in tax preparation can manifest in various ways, ranging from simple clerical errors to more serious issues. Clerical errors might include transposing numbers or minor calculation mistakes. More complex errors can stem from misinterpretations of tax law or failures to apply the correct regulations.

Negligence occurs when a preparer fails to exercise due diligence, such as not thoroughly verifying information or overlooking relevant tax laws. Willful misconduct or reckless conduct involves a more deliberate disregard for rules and regulations, or an intentional attempt to understate tax liability. While preparers rely on the accuracy of information provided by their clients, they also have a duty to make reasonable inquiries if something appears incorrect or incomplete.

Establishing Preparer Accountability

Tax preparers can face accountability through two main avenues: penalties imposed by the Internal Revenue Service (IRS) and civil liability to their clients. These mechanisms aim to ensure adherence to tax laws and protect taxpayers from financial harm due to preparer errors.

The IRS imposes penalties directly on tax preparers for various types of errors and misconduct. Under Internal Revenue Code Section 6694, a penalty applies if an understatement of tax liability is due to an unreasonable position taken by the preparer, and they knew or should have known about it. This penalty can be the greater of $1,000 or 50% of the income the preparer earned from that return. An unreasonable position is generally one for which there is no substantial authority, or it is not properly disclosed.

More severe penalties apply for understatements due to willful or reckless conduct. This includes a willful attempt to understate tax liability or a reckless disregard of rules and regulations. The penalty for such conduct is the greater of $5,000 or 75% of the income derived by the preparer from that return. The IRS can impose both types of penalties on the same return, though the more severe penalty is reduced by any amount paid under the first type.

Beyond understatements, the IRS imposes penalties for other failures, such as failing to furnish a copy of the return to the taxpayer, not signing the return, or not including their Preparer Tax Identification Number (PTIN). For instance, the penalty for failing to furnish a copy to the taxpayer or sign the return is $60 per failure for returns filed in calendar year 2025, with a maximum penalty of $31,500 for each failure type. Penalties also apply for failing to meet due diligence requirements for certain tax benefits, like the Earned Income Tax Credit, with a penalty of $635 per failure for 2025.

In addition to IRS penalties, a tax preparer can be held civilly liable to their client for damages resulting from errors. This typically falls under professional negligence, also known as malpractice. To prove professional negligence, a client generally must demonstrate four elements: the preparer owed a duty of care, the preparer breached that duty, the breach caused financial harm, and the client suffered actual damages.

Breach of contract is another legal theory, arising if the preparer failed to fulfill the terms of an agreement to prepare an accurate return. In cases of severe misconduct, such as deliberate misrepresentation or concealment of facts, fraud claims might be pursued. While tax preparers are not required to guarantee specific outcomes, they must act with reasonable care and competence. The damages a taxpayer might seek in such claims include additional taxes, penalties, interest, and professional fees incurred due to the preparer’s error.

Steps for Addressing Preparer Errors

If a taxpayer discovers an error made by their tax preparer, prompt action is important. The first step involves contacting the tax preparer directly to discuss the mistake. Clear communication is essential, and taxpayers should provide any documentation supporting their claim.

Regardless of who corrects the error, the tax return will likely need to be amended. For individual income tax returns, this involves filing Form 1040-X, Amended U.S. Individual Income Tax Return. This form allows taxpayers to correct previously filed Forms 1040, 1040-SR, or 1040-NR. Taxpayers generally have three years from the date they filed their original return, or two years from the date they paid the tax, whichever is later, to file an amended return for a credit or refund.

When the original preparer is unresponsive, uncooperative, or if the error is significant and complex, seeking advice from an independent tax professional is advisable. This could include a Certified Public Accountant (CPA), an Enrolled Agent (EA), or a tax attorney. These professionals can assess the situation, advise on the best course of action, and assist with amending the return or dealing with the IRS.

Considering civil litigation against a preparer is a significant step, typically pursued after other avenues have been exhausted. This action aims to recover damages, such as additional taxes, penalties, interest assessed by the IRS, and any professional fees incurred to correct the error. A tax attorney can evaluate the strength of a potential claim and guide the taxpayer through the legal process if litigation becomes necessary.