What Happens If Your Tax Preparer Makes a Mistake?

Taxpayers rely on tax preparers to navigate complex tax laws, but errors can occur on filed returns. Understanding the implications of such mistakes and the steps for resolution is important for managing tax obligations. Taxpayers should be aware of their rights and responsibilities when a preparer’s error affects their tax situation.

Identifying a Preparer Error

Discovering a tax preparer error can happen in several ways, such as through an IRS notice or during a personal review of the tax return. Another tax professional might also identify an error. Common mistakes include misreporting income, like omitting a Form 1099, or overlooking eligible deductions and credits. Incorrect filing status or mathematical errors are also frequent issues.

Taxpayers should always carefully review their tax return before it is filed, even when a professional prepares it. This proactive step can help catch inaccuracies like misspelled names, wrong Social Security numbers, or incorrect bank account information, which can cause significant delays. A discrepancy between the expected refund or tax due and the actual amount can also signal a potential error.

Correcting the Tax Return

Once an error on a filed tax return is identified, the next step involves correcting it by filing an amended tax return. For individuals, this is done using Form 1040-X, Amended U.S. Individual Income Tax Return. This form allows taxpayers to adjust income, deductions, credits, and other items that were incorrect on the original filing.

To complete Form 1040-X, taxpayers need their original tax return and any new or corrected tax documents. The form requires entering amounts from the original return, corrected amounts, and the net change. A clear explanation of the changes and the reason for the amendment must be provided in Part III of the form.

To claim a refund, an amended return must be filed within three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. If the original return was filed early, the three-year period is counted from the tax due date. For situations where additional tax is owed, there is no specific time limit for filing an amended return, but penalties and interest can accrue on underpayments until paid.

Understanding Penalties and Interest

Even if a tax preparer makes an error, the taxpayer is responsible for any resulting penalties and interest assessed by the IRS. The IRS imposes various penalties, including those for failure to file, failure to pay, and accuracy-related issues.

The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The failure-to-pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, also capped at 25% of the unpaid tax. If both penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty.

Accuracy-related penalties, such as those for negligence or substantial understatement of income tax, can amount to 20% of the underpayment. A substantial understatement occurs if the understated tax is more than the greater of 10% of the correct tax or $5,000 for individuals. Interest also accrues on underpaid taxes, compounded daily, at rates published quarterly by the IRS, which can be around 7% to 8% annually for individuals.

Taxpayers may request penalty abatement if they can demonstrate “reasonable cause” for the underpayment. Reasonable cause indicates that the taxpayer exercised ordinary business care and prudence but was unable to meet their tax obligations due to circumstances beyond their control. While reliance on professional advice can sometimes be a factor, it requires the taxpayer to have provided complete and accurate information to the preparer and acted in good faith.

Addressing Preparer Responsibilities

Tax preparers are held to professional standards and obligations. These regulations require preparers to exercise due diligence in preparing returns, ensure the correctness of representations made to the IRS, and promptly advise clients of any errors or omissions discovered. Preparers must also sign all tax returns they prepare and provide clients with a copy.

When a taxpayer discovers an error made by their preparer, the first step is to contact the preparer directly. It is advisable to gather all relevant documentation, including the original return, corrected information, and any correspondence from the IRS, before discussing the matter. The preparer should be given the opportunity to correct the mistake and file an amended return.

If the preparer is uncooperative or refuses to rectify the error, taxpayers have several avenues for recourse. They can report the preparer to the IRS Office of Professional Responsibility (OPR). State boards of accountancy or other professional organizations may also accept complaints against preparers. Additionally, some tax preparers carry professional liability insurance, also known as errors and omissions (E&O) insurance, which can cover legal fees and potential settlements resulting from claims of negligence or mistakes in tax preparation.