Is a Tax Preparer Liable for Mistakes?

Tax preparers help individuals and businesses navigate complex tax law. Errors can occur on tax returns, leading to consequences for taxpayers. Understanding when a tax preparer is responsible for mistakes is important for users. This article discusses preparer accountability, common errors, client responsibilities, and avenues for recourse.

Defining Tax Preparer Liability

Tax preparers operate under professional standards and a duty of care to clients. They must exercise reasonable care in preparing tax returns. Not every mistake results in liability; it depends on the preparer’s conduct and error’s nature. Simple errors may not lead to liability, but negligence, gross negligence, or fraud can.

Negligence is a preparer’s failure to exercise reasonable care. This includes overlooking tax law or making computational mistakes. Gross negligence is a severe disregard for professional duties, showing reckless indifference to return accuracy. Fraud, the most serious misconduct, involves intentional misrepresentation or deceit for personal gain or to harm the client or government.

Engagement letters outline the scope of services a tax preparer provides. They clarify preparer and client responsibilities, defining the preparer’s duty boundaries. By detailing services, an engagement letter helps manage expectations and define preparer responsibility.

The IRS sets ethical standards for tax practitioners through Circular 230. It outlines professional responsibilities for those practicing before the IRS, including attorneys, CPAs, and enrolled agents. It requires practitioners to exercise due diligence in preparing tax returns and documents, and in determining the correctness of representations made to clients and the IRS. It also addresses standards for advising clients on tax return positions and preparing returns, requiring a realistic possibility of being sustained on its merits. Violations can lead to penalties, suspension, or disbarment from practicing before the IRS.

Common Preparer Errors

Tax preparers can make errors leading to financial repercussions. Common errors include mathematical miscalculations in income, deductions, or credits. These can result in incorrect tax liability, leading to underpayments or overpayments. Even transposition errors or misplaced keystrokes can cause discrepancies.

Misinterpretation or misapplication of tax law is another issue. This occurs when a preparer incorrectly applies tax regulations or fails to stay updated on tax law changes. Such mistakes can lead to incorrect tax treatment of income or expenses, resulting in an inaccurate tax outcome. For example, incorrect reporting of cryptocurrency transactions is a growing area of concern.

Preparers may fail to include deductions or credits, causing tax overpayments. This involves overlooking eligible expenses or credits like the EITC or Child Tax Credit. Incorrect income reporting, such as omitting sources or miscategorizing earnings, can lead to tax underpayments and IRS penalties. Filing status errors, like choosing an incorrect status (e.g., “Married Filing Separately” instead of “Married Filing Jointly”), can also impact liability and refund.

Client Obligations

While tax preparers bear responsibility, clients also have obligations. Taxpayers are responsible for the accuracy of information on their tax return, even if a professional prepares it. Clients must provide accurate, complete, and timely information to their preparer. Withholding information or providing incorrect data can impact the prepared return’s accuracy.

Clients should ensure necessary documents (W-2s, 1099s, deduction statements) are submitted timely. Failure can lead to omissions or inaccuracies not the preparer’s fault. Clients should also carefully review the prepared tax return before signing and authorizing its submission to the IRS.

A client’s failure to fulfill obligations can affect a preparer’s liability. If a preparer errs due to incomplete or inaccurate client information, or if the client approves a return with an obvious error, the client may share responsibility. The preparer’s duty of due diligence, as outlined in Circular 230, requires reasonable inquiries, but they can rely on client-provided information unless it appears incorrect or inconsistent.

Recourse for Mistakes

If a taxpayer discovers a preparer’s mistake, the first step is to contact them directly to discuss and seek correction. Many preparers will amend the return without charge if the error was their fault. If the preparer is unresponsive or unwilling to correct the mistake, other avenues are available.

Correcting errors on a filed tax return involves filing Form 1040-X. This form allows taxpayers to adjust income, deductions, credits, or filing status for a previously filed return. Form 1040-X can be filed electronically for the current and two prior tax periods, though paper filing remains an option. An amended return must be filed within three years of the original return’s filing date or two years from the tax payment date, whichever is later.

For complaints against a tax preparer, taxpayers can file Form 14157 with the IRS. This form reports misconduct, such as failing to provide a copy of the return, not signing it, or misrepresenting credentials. If the preparer filed or altered a return without consent, Form 14157-A should also be completed and submitted with Form 14157. These forms help the IRS investigate violations of ethical standards and guidelines established in Circular 230.

Beyond the IRS, taxpayers can contact state boards of accountancy or professional organizations if the preparer holds a license. CPAs are licensed by state boards, and attorneys by state bar associations; these bodies have disciplinary procedures for misconduct. In cases of substantial financial harm from preparer negligence or malpractice, pursuing civil action, such as a lawsuit, is an option. This is a last resort, requiring demonstration that the preparer breached a duty of care, and this breach caused the taxpayer’s financial damages, which can include IRS penalties and interest.