If My Tax Preparer Makes a Mistake, Who Pays?

Tax laws are complex, prompting many individuals to seek assistance from professional tax preparers. However, a common concern arises when errors occur on a tax return prepared by a professional. This article clarifies the taxpayer’s obligations, outlines common errors and their financial implications, and details the steps to correct mistakes and potentially seek compensation from a preparer.

Taxpayer’s Ultimate Responsibility

Despite engaging a tax preparer, the taxpayer retains ultimate responsibility for the accuracy of their tax return and for paying any taxes, penalties, and interest due to the IRS. When a taxpayer signs their return, they attest under penalty of perjury that the information is true, correct, and complete to the best of their knowledge and belief.

The IRS will primarily pursue the taxpayer for any underpayments, regardless of who prepared the return. Taxpayers are expected to exercise “due diligence” by reviewing their return before signing, ensuring all income is reported and all claimed deductions and credits are legitimate. Even if a preparer makes a mistake, the IRS will still seek payment from the taxpayer for any resulting tax liability.

The taxpayer’s legal obligation to the IRS is distinct from any potential liability the preparer may have to the taxpayer. While a preparer may be held accountable for their errors, this does not absolve the taxpayer of their initial responsibility to the government.

Common Preparer Errors and Financial Consequences

Tax preparers can make various errors, ranging from simple data entry mistakes to misinterpretations of complex tax law. These errors often include incorrect Social Security numbers, names, or filing statuses, as well as calculation mistakes. Preparers might also fail to report all income sources or incorrectly claim deductions and credits, leading to an underpayment of tax. Such inaccuracies can result in significant financial consequences for the taxpayer.

When an underpayment occurs due to a preparer’s error, the IRS assesses penalties and interest against the taxpayer. Common penalties include the accuracy-related penalty, which is 20% of the underpayment attributable to negligence or substantial understatement of income tax. There is also a failure-to-pay penalty, typically 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25%.

Interest also accrues on underpayments from the tax due date until the balance is paid in full. The IRS sets these interest rates quarterly, with the rate for underpayments for individuals typically at 7% per year for the first half of 2025. These penalties and interest charges are initially the taxpayer’s responsibility, even if they stem from the preparer’s mistake. In cases of overpayment due to preparer error, the taxpayer might miss out on a larger refund or even owe additional tax if an error is later corrected.

Correcting a Mistake

Discovering a mistake on a filed tax return requires prompt action. The first step involves reviewing the return for accuracy or seeking a second opinion from another qualified tax professional. This review helps pinpoint the specific errors and gather necessary supporting documents.

Once an error is identified, the taxpayer should contact the original preparer immediately. Provide them with detailed information about the suspected mistake and request that they amend the return. The preparer should be given the opportunity to correct their own work.

To correct a federal income tax return, taxpayers file Form 1040-X, Amended U.S. Individual Income Tax Return. This form is used for various corrections, such as adjusting income, deductions, credits, or filing status. An amended return can be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later, to claim a refund.

After filing Form 1040-X, any additional tax due should be paid as soon as possible to minimize further penalties and interest. If the amendment results in a refund, the IRS will issue it after processing. While penalties and interest are initially assessed against the taxpayer, it may be possible to request abatement of certain penalties from the IRS if the error was due to reasonable cause, rather than willful neglect.

Seeking Compensation from a Preparer

If a tax preparer’s error results in financial losses for the taxpayer, such as penalties, interest, or additional professional fees to correct the mistake, avenues exist to seek compensation from the preparer. Many professional tax preparers carry errors and omissions (E&O) insurance, also known as professional liability insurance. This insurance covers legal fees and potential settlements or judgments arising from claims of negligence, inaccurate advice, or mistakes in professional services. Taxpayers should inquire if their preparer has such coverage.

Taxpayers can attempt to negotiate directly with the preparer for reimbursement of the incurred costs. If direct negotiation is unsuccessful, formal complaints can be filed. The IRS Office of Professional Responsibility (OPR) investigates misconduct by tax professionals who practice before the IRS. Complaints can be reported using Form 14157, Return Preparer Complaint. State boards of accountancy or professional organizations may also handle complaints against their members.

In cases of significant financial damages, taxpayers might consider legal action, such as filing a claim in small claims court or pursuing civil litigation for professional negligence or breach of contract. Tax preparers can be held liable for errors, especially if they were negligent or engaged in willful misconduct. This legal process can be complex and may require the assistance of an attorney to navigate.