Can You Do Someone Else’s Taxes? The Rules to Know
Understand the legalities and responsibilities of preparing tax returns for others, distinguishing between unpaid assistance and professional tax services.
Many individuals consider assisting others with their tax returns, whether for family, friends, or as a professional service. The rules vary significantly depending on whether compensation is received, which impacts obligations and oversight from tax authorities. This article explores the different contexts of preparing taxes for others, from informal help to formal professional services.
Volunteering to Prepare Taxes for Others
Individuals frequently assist family members, friends, or others with their tax returns without receiving any payment. No specific prohibitions exist for preparing tax returns for others without compensation. This informal assistance allows individuals to leverage their knowledge to help others navigate the tax system.
Even when providing uncompensated assistance, accuracy is important. While not considered a “paid preparer” by the IRS, the person assisting still contributes to the financial reporting of another individual. The taxpayer remains responsible for their return’s accuracy, so the preparer’s attention to detail is valuable, ensuring all income is reported and eligible deductions and credits are claimed correctly.
An individual not compensated for preparing a tax return is not classified as a “paid preparer” by the IRS. This means they are not subject to the specific regulations and requirements that apply to professional tax preparers. For instance, an uncompensated preparer does not need a Preparer Tax Identification Number (PTIN) from the IRS.
An unpaid preparer does not sign the “Paid Preparer Use Only” section of the tax form. This section is reserved for those who prepare returns for compensation. However, if the return is e-filed, the unpaid preparer might be involved in the electronic signing process, such as signing Form 8879, a declaration for an e-filed return.
Volunteer programs like the IRS Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) offer free tax preparation services to qualifying individuals (e.g., lower income, disabled, limited English proficiency, or aged 60+). Volunteers in these programs receive IRS certification after passing tax law training and adhere to strict standards, including privacy and quality review procedures. These volunteers prepare returns without personal compensation, and the taxpayer retains responsibility for reviewing and approving their return before submission.
Understanding Paid Tax Preparation Rules
When tax preparation services are provided for compensation, the individual becomes a “paid preparer” under IRS regulations. This classification applies to anyone who prepares, or substantially prepares, all or a significant portion of a tax return or claim for refund for a fee. This includes not only the person who signs the return but also those who provide advice that substantially contributes to the return’s content.
A key requirement is obtaining a Preparer Tax Identification Number (PTIN). All individuals who prepare federal tax returns for compensation must have a PTIN, renewed annually and included on every tax return.
The IRS mandates electronic filing for preparers who anticipate filing 11 or more individual income tax returns (Form 1040 series) during a calendar year. To electronically file returns, a preparer or firm must obtain an Electronic Filing Identification Number (EFIN) from the IRS, which requires an application process including a suitability check.
Paid preparers must sign the “Paid Preparer Use Only” section of the tax return and include their PTIN. They must provide a copy of the completed return to the taxpayer and retain a copy or client list for three years from the later of the return’s due date or filing date.
The IRS also governs the conduct of tax professionals through Treasury Department Circular 230. This publication sets forth the rules governing individuals who practice before the IRS, including attorneys, Certified Public Accountants (CPAs), and Enrolled Agents (EAs). Circular 230 establishes standards of competency, diligence, and ethical behavior, and outlines prohibited conduct, such as taking frivolous tax positions or charging unconscionable fees. While tax return preparation is not considered “practice” before the IRS for all purposes of Circular 230, many of its principles, especially those related to accuracy and due diligence, apply broadly to paid preparers.
Beyond federal regulations, some states have additional licensing or registration requirements for paid tax preparers. These state-specific rules can include educational prerequisites, bonding requirements, and separate registration fees. For example, some states require tax preparers to register with a state council or board, often requiring specific continuing education hours in state tax law.
Key Responsibilities and Due Diligence
Anyone preparing a tax return for another person has a responsibility for accuracy and due diligence, regardless of compensation. This means taking reasonable steps to ensure all information on the return is correct, complete, and supported by documentation. The preparer should make reasonable inquiries if the information provided by the taxpayer appears incorrect, inconsistent, or incomplete.
Maintaining client confidentiality is important when handling sensitive financial and personal information. Preparers must protect taxpayer data from unauthorized disclosure and use appropriate security measures. The unauthorized disclosure or use of taxpayer information can lead to significant penalties, including fines and imprisonment.
Adequate record-keeping is a shared responsibility. While the taxpayer is responsible for keeping their own records, preparers also have obligations. These records are important for both the preparer and the taxpayer in case of an IRS inquiry or audit.
Consequences for non-compliance or errors vary depending on the preparer’s status. For uncompensated preparers, errors might lead to strained relationships or the need for the taxpayer to file an amended return, potentially incurring penalties or interest from the IRS.
Paid preparers face more formal consequences for non-compliance or errors. The IRS can impose penalties for various failures, such as negligent understatement of tax liability, which can result in a penalty of $1,000 or 50% of the preparer’s fee, whichever is greater. Willful or reckless conduct leading to an understatement can increase this penalty to $5,000 or 75% of the preparer’s fee. Other penalties may apply for failing to sign a return, provide a copy to the taxpayer, or meet due diligence requirements related to certain credits like the Earned Income Tax Credit (EITC). Beyond financial penalties, misconduct can lead to suspension or disbarment from practicing before the IRS.