Is a Tax Preparer Responsible for Errors?

Many individuals and businesses seek assistance from tax preparers due to the complexity of filing taxes. A tax preparer helps prepare and file tax returns, ensuring compliance with tax laws and identifying potential deductions or credits. Questions often arise regarding their responsibility if errors occur. Understanding a tax preparer’s accountability for mistakes is important for both taxpayers and preparers. This article explores when a tax preparer is responsible for errors, taxpayer obligations, potential outcomes for preparers, and steps to take if an error is discovered.

When a Preparer Holds Responsibility

A tax preparer can be held responsible for errors on a tax return due to carelessness or deliberate misconduct. The IRS and professional standards outline specific conditions for preparer culpability.

Negligence occurs when a preparer fails to exercise due diligence, such as misinterpreting tax law or making simple errors. This can involve failing to properly calculate deductions or omitting required information. While not intentional, such oversights can lead to an understatement of tax liability.

More serious errors involve willful or reckless conduct, implying the preparer knowingly or intentionally disregarded tax laws. This includes attempting to understate a taxpayer’s liability or recklessly disregarding regulations. For instance, a preparer might ignore information provided by a taxpayer to reduce tax liability.

Fraud by a preparer represents the most severe misconduct, involving intentional falsification of information or creation of fictitious deductions. This can lead to criminal penalties, including fines and imprisonment. Such actions demonstrate a deliberate intent to deceive tax authorities.

Tax preparers are expected to uphold professional and ethical standards, such as those outlined in Treasury Department Circular 230. This regulation mandates due diligence in preparing returns, disclosing non-frivolous tax positions, and advising clients of potential penalties. It requires practitioners to exercise reasonable care in their work.

It is important to distinguish between errors originating from the preparer’s professional conduct and those stemming from incorrect information provided by the taxpayer. If a preparer makes a mistake based on the information given, they may be held responsible. However, if the error results from the taxpayer providing inaccurate or false information, the primary responsibility typically falls on the taxpayer.

Taxpayer Obligations

While a tax preparer assumes a significant role, the taxpayer retains ultimate responsibility for the accuracy and completeness of information submitted to tax authorities. This principle underscores the taxpayer’s ongoing duties throughout the tax preparation process.

The taxpayer’s primary obligation is to provide accurate, complete, and truthful information to their tax preparer. This includes all income, deductions, and credits relevant to the tax return. Failure to disclose complete and correct data can directly lead to errors on the return, regardless of the preparer’s diligence.

Before a tax return is filed, taxpayers are responsible for reviewing it thoroughly for accuracy and completeness. Signing the tax return, whether electronically or physically, signifies that the taxpayer attests under penalty of perjury that the information is true and correct. This signature legally binds the taxpayer to the contents of the return.

Maintaining adequate records to support all income, deductions, and credits claimed on the tax return is another important taxpayer responsibility. Proper record-keeping allows taxpayers to substantiate their reported figures if questioned by tax authorities. Errors arising from the taxpayer’s failure to provide accurate data or maintain supporting documentation generally fall under the taxpayer’s purview.

Outcomes for Preparers

Tax preparers found responsible for errors can face a range of consequences, from monetary penalties to the loss of their ability to practice. These outcomes enforce compliance and protect the integrity of the tax system.

The IRS can levy various penalties directly against preparers. Under Internal Revenue Code Section 6694, a preparer may face a penalty for an understatement of taxpayer liability due to an unreasonable position. If the understatement is due to willful or reckless conduct, the penalty increases. Internal Revenue Code Section 6695 outlines penalties for failures such as not furnishing a copy of the return to the taxpayer, not signing the return, or not including a preparer tax identification number (PTIN). A preparer who negotiates a taxpayer’s refund check can also face a penalty.

Beyond IRS penalties, preparers may face disciplinary actions from professional bodies. These include state boards of accountancy, state bar associations, and the IRS Office of Professional Responsibility. Such actions can result in censure, suspension, or disbarment from practicing before the IRS or in their professions. These disciplinary measures often stem from violations of ethical standards like those in Circular 230.

Preparers can also face civil liability, meaning they may be sued by affected clients to recover damages. These damages might include additional taxes, penalties, and interest incurred by the client due to the preparer’s error. If a preparer’s negligence leads to an audit or other IRS action, clients may seek compensation in court.

A preparer’s reputation can suffer significant damage from errors or disciplinary actions. Negative publicity or a damaged professional standing can lead to a loss of clients and reduced business. The long-term impact on a preparer’s career can be substantial, affecting their ability to attract new clients and maintain a viable practice.

Addressing a Discovered Error

Discovering an error on a filed tax return can be concerning, but taxpayers can take clear steps to address the situation. Prompt action can help mitigate potential issues and ensure compliance with tax regulations.

Initially, the taxpayer should identify and document the error’s nature. This involves pinpointing incorrect figures, omissions, or misinterpretations on the tax return. Gathering all relevant supporting documents to correct the error is an important next step.

The taxpayer should then contact the tax preparer who prepared the original return to discuss the discovered error. It is reasonable to expect the preparer to review the mistake and, if appropriate, prepare an amended return without additional charge. Maintaining clear communication throughout this process is important.

To formally correct an error on a previously filed individual income tax return, taxpayers must file Form 1040-X, Amended U.S. Individual Income Tax Return. This form is used to make adjustments to income, deductions, credits, or other entries. The amended return should clearly explain the changes and the reason for them.

If the preparer is unresponsive or unwilling to correct the error, or if misconduct is suspected, the taxpayer can report the preparer to the IRS. This can be done by submitting Form 14157, Complaint: Tax Return Preparer, or Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit, depending on the complaint. Additionally, if the preparer is licensed by a state professional board, a complaint can be filed with that board.

In situations where the error has led to significant financial harm, or if the preparer is uncooperative, seeking independent legal counsel may be appropriate. An attorney can advise on potential civil action against the preparer to recover damages, penalties, and interest incurred due to the error. Legal advice can help determine the best course of action to protect the taxpayer’s financial interests.