Can Tax Preparers Be Held Liable for Errors?

Tax preparers assist individuals and businesses with their annual tax obligations. The complexity of tax laws often leads taxpayers to seek professional help, entrusting preparers with sensitive financial information and accurate tax filings. This reliance underscores the importance of competent and ethical tax preparation.

The relationship between a taxpayer and their preparer is built on trust, expecting the preparer to possess expertise in tax regulations. Errors or misconduct can have substantial financial consequences for taxpayers, including additional tax liabilities, penalties, and interest charges. Understanding preparer responsibilities and potential accountability is crucial for anyone engaging their services.

Understanding Tax Preparer Obligations

Professional tax preparers are bound by duties and ethical responsibilities to ensure accuracy and integrity. These obligations include due diligence, accuracy, client confidentiality, and professional competence. Preparers must exercise reasonable care in preparing returns. This means making reasonable inquiries to obtain and verify client information.

The Internal Revenue Service (IRS) outlines standards of conduct for tax preparers in Circular 230. This guidance requires preparers to act with integrity and competence. Tax advice and return positions must be based on a good faith belief of being sustained on their merits. Preparers must also advise clients of potential penalties for any position taken on a return if there is a realistic possibility of penalty.

Taxpayers expect their preparer to understand and correctly apply relevant tax law. This includes identifying and utilizing all permissible deductions, credits, and filing statuses. Preparers must avoid aggressive positions that lack substantial authority. The preparer’s role is to serve the client’s best interests within legal bounds, upholding professional standards and ethical conduct.

Circumstances Leading to Preparer Liability

Tax preparers can face liability for actions or inactions that cause financial harm to clients or violate professional standards. Negligence is a common basis for liability, occurring when a preparer fails to exercise the reasonable care expected of a professional. Examples include significant mathematical errors, misinterpreting tax law due to insufficient research, or failing to gather complete client information.

Fraud or intentional misconduct is another serious circumstance leading to liability. This involves deliberate actions such as misrepresenting facts on a tax return, falsifying documents, or actively aiding tax evasion. Such conduct can lead to severe penalties for the preparer, including criminal charges. The IRS imposes specific preparer penalties for actions like promoting abusive tax shelters or aiding understatement of tax liability.

A breach of contract can also form the basis of a preparer’s liability if an explicit or implicit agreement for specific services was not fulfilled. For example, if a preparer agrees to file a return by a deadline but fails, resulting in late filing penalties, this constitutes a breach. Similarly, a breach of fiduciary duty may arise when a special relationship of trust exists, and the preparer acts against the client’s financial interest or misuses their position for personal gain. This could involve conflicts of interest or inappropriate use of confidential client information.

Oversight and Enforcement Mechanisms

Several governmental and professional entities oversee tax preparers and enforce their standards of conduct. The Internal Revenue Service (IRS) plays a primary role in regulating federal tax preparers. The IRS has authority to impose various preparer penalties for non-compliance, such as preparing returns that take unreasonable positions or demonstrating willful conduct.

Beyond monetary penalties, the IRS can also suspend or disbar preparers from practicing before the agency under Circular 230. This means a preparer could lose their ability to represent clients before the IRS or prepare federal tax returns. Disbarment is typically reserved for serious offenses like gross incompetence or disreputable conduct.

State boards of accountancy or specific tax preparer boards also exercise oversight, particularly for licensed professionals like Certified Public Accountants (CPAs) and Enrolled Agents (EAs). These state bodies investigate complaints, conduct disciplinary hearings, and impose sanctions. Sanctions range from reprimands to the suspension or revocation of a preparer’s professional license. Losing a state license effectively prevents a preparer from legally offering tax preparation services within that state.

Professional organizations, such as the American Institute of CPAs (AICPA) or the National Association of Enrolled Agents (NAEA), maintain their own codes of conduct for members. While these organizations cannot impose legal penalties, they can take internal disciplinary actions against members who violate ethical standards. These actions might include censures, suspension of membership, or expulsion from the organization, which can impact a preparer’s professional standing and reputation.

Recourse Available to Taxpayers

Taxpayers harmed by a tax preparer’s actions or inactions have several avenues for recourse. One option is to report misconduct to the relevant regulatory bodies. For federal tax return issues, taxpayers can report unethical or incompetent preparers to the Internal Revenue Service. The IRS accepts complaints through various channels, and specifically provides Form 14166, “Tax Return Preparer Complaint,” for this purpose. Reporting to the IRS typically initiates an investigation into the preparer’s conduct and may lead to disciplinary action, but it does not directly result in financial compensation for the taxpayer.

If the preparer is a licensed professional, such as a CPA or Enrolled Agent, taxpayers can file a complaint with their respective state licensing board. These boards investigate allegations of professional misconduct and have authority to impose disciplinary measures, including license suspension or revocation. Like reports to the IRS, state board actions focus on regulating the preparer’s conduct rather than compensating the individual taxpayer for losses.

For taxpayers seeking financial compensation due to a preparer’s error, pursuing a civil action, such as a professional negligence or malpractice claim, may be necessary. This involves consulting legal counsel to assess the viability of a lawsuit against the preparer. Such legal action aims to recover financial losses directly attributable to the preparer’s errors. These losses could include additional taxes owed, penalties, interest, and legal fees incurred as a result of the preparer’s negligence.

Regardless of whether a taxpayer pursues a claim against their preparer, it is often necessary to correct any errors on their tax return. This involves filing an amended tax return, such as Form 1040-X, “Amended U.S. Individual Income Tax Return,” to report the correct information to the IRS. Filing an amended return ensures the taxpayer’s tax record is accurate and can help mitigate further penalties or interest from the IRS.