Can a Tax Preparer Be Liable for Mistakes?
Understand when a tax preparer is responsible for errors on your tax return, your role in the process, and what recourse you have.
Tax preparers help individuals and businesses navigate complex tax laws. Taxpayers trust these professionals to accurately prepare and file returns. While preparers strive for precision, errors can occur. The question of whether a tax preparer can be held accountable for mistakes is a common concern. Understanding the circumstances of liability and avenues for recourse provides clarity.
Types of Preparer Mistakes Leading to Liability
Tax preparer errors range from simple data entry mistakes to professional negligence or willful misconduct. Basic errors, like clerical mistakes or miscalculations, can lead to an understatement of tax liability without malicious intent. Such errors can still result in the taxpayer owing additional tax, penalties, and interest to the Internal Revenue Service (IRS).
Negligence involves a preparer’s failure to exercise due diligence or reasonable care in preparing a return. This includes overlooking relevant tax laws, failing to ask appropriate questions, or not thoroughly reviewing supporting documentation. The IRS can assess penalties against preparers for understatements due to unreasonable positions, meaning there was no substantial authority for the position taken. This penalty can be the greater of $1,000 or 50% of the income derived by the preparer for that return.
The most severe category involves willful disregard of rules and regulations or fraudulent intent. This occurs when a preparer knowingly attempts to understate tax liability or recklessly ignores tax laws. For willful or reckless conduct, the IRS penalty on the preparer is the greater of $5,000 or 75% of the income derived from preparing that return. While the preparer faces these penalties, the taxpayer remains responsible for the actual tax due, plus any associated penalties and interest assessed by the IRS.
Client Responsibilities and Preparer Reliance
Even when engaging a tax professional, taxpayers retain responsibility for the accuracy and completeness of their tax return. The IRS considers the taxpayer accountable for all information reported, as it is signed under penalties of perjury. If a mistake is made, the IRS typically holds the taxpayer responsible for correcting it and paying any additional taxes, penalties, and interest.
Taxpayers must provide their preparer with accurate and complete financial information, including all income, deductions, and credits. A preparer’s ability to accurately complete a return depends on the information provided. If a client provides incorrect or incomplete data, the preparer may not be liable for resulting errors.
Taxpayers must review their completed tax return before it is signed and filed. Signing the return indicates the taxpayer’s belief that the information is correct. If a taxpayer fails to review the return and misses an obvious error, it could limit their recourse against the preparer. The concept of “reasonable reliance” suggests a preparer can rely on client-provided information unless there is reason to believe it is incorrect.
Recourse for Clients When Mistakes Occur
If a taxpayer discovers a mistake by their tax preparer that leads to financial harm, several steps can be taken. The initial step is to contact the preparer directly. Many preparers carry professional liability insurance, and reputable professionals may offer to cover penalties and interest incurred by the taxpayer due to their error. While the taxpayer remains responsible for the original tax liability, the preparer might reimburse associated penalties and interest.
If direct resolution with the preparer is unsuccessful, taxpayers can file a formal complaint. The IRS Office of Professional Responsibility (OPR) investigates misconduct by tax practitioners, including attorneys, Certified Public Accountants (CPAs), and Enrolled Agents. Complaints can be filed using IRS Form 14157, Complaint: Tax Return Preparer. This office ensures adherence to Circular 230, which sets ethical standards for those practicing before the IRS. For CPAs, complaints can be lodged with the state board of accountancy that issued their license, and for attorneys, with the state bar association.
As a last resort, if significant financial harm has occurred and other avenues fail, a taxpayer might pursue civil legal action against the preparer for malpractice or negligence. This could involve filing a lawsuit to recover damages, such as penalties and interest paid to the IRS, or other losses attributable to the preparer’s mistake. The feasibility of legal action depends on the extent of financial damage and the circumstances of the error.
Choosing a Qualified Tax Preparer
Selecting a competent tax preparer minimizes the risk of errors and financial complications. Verify the preparer’s credentials. Professionals like Certified Public Accountants (CPAs), Enrolled Agents (EAs), and attorneys have specific qualifications and are regulated by their licensing bodies or the IRS. All paid tax preparers must have a Preparer Tax Identification Number (PTIN), which should be included on returns they prepare. The IRS provides a searchable directory of federal tax return preparers with credentials and select qualifications.
Inquire about a preparer’s experience, specialization, and fee structure. A reputable preparer asks detailed questions about a taxpayer’s financial situation and requests supporting documents like W-2s and 1099s. They should also provide an engagement letter outlining the scope of services and responsibilities. Avoid preparers who base fees on a percentage of the refund or guarantee larger refunds without reviewing documents. Taxpayers should always review their completed return before signing it and ensure the preparer signs the return and provides a copy.