Cecily Zamora
If a tax preparer makes a mistake on your tax return, you may be wondering who is liable for the error. Ultimately, any taxes owed are the responsibility of the taxpayer. However, depending on the situation, the tax preparer may be held liable for mistakes made and may face penalties such as fines, suspension of their license, or reopening of old tax returns. The IRS will review complaints and may investigate if they find potential violations. If the tax preparer is at fault, they may lose their tax identification number and face further consequences. It is important to review your contract with the tax preparer, as it may outline responsibilities and liabilities in the event of mistakes.
| Characteristics | Values |
|---|---|
| Tax preparer liability | Tax preparers can be liable for mistakes, but the taxpayer remains responsible for the tax liability. |
| Taxpayer responsibility | The taxpayer is ultimately responsible for meeting tax obligations and ensuring the accuracy of their returns before filing. |
| IRS penalties | The IRS may enforce penalties on tax preparers, including fines, suspension of license, and reopening of old tax returns. |
| Non-monetary penalties | Non-monetary penalties include injunctions, preventing the preparer from practicing for a period. |
| Monetary penalties | Monetary penalties can range from $50 to $100,000, depending on the severity of the error, with monthly interest charged on unpaid penalties. |
| Tax preparer fraud | Taxpayers can file a complaint or sue for negligence, malpractice, or fraud if the tax preparer engages in wrongdoing or fraudulent activity. |
| Tax preparer errors | Errors can include failure to furnish a copy of the tax return, failure to sign the return, or failure to include a preparer tax identifying number (PTIN). |
| Taxpayer recourse | Taxpayers should review their contract with the tax preparer, as it may outline responsibility for mistakes and potential compensation. |
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What You'll Learn
Tax preparer liability
Taxpayers are ultimately liable for their taxes, even if a tax preparer made a mistake on their return. However, tax preparers can be held liable for mistakes under certain circumstances.
Tax preparers who are paid to prepare tax returns may face penalties if they do not follow tax laws, rules, and regulations. These penalties can include fines, suspension of their license, and reopening old tax returns. In some cases, tax preparers may lose their license if found liable for tax fraud.
The level of liability for a tax preparer depends on the contract they have with the taxpayer. If the contract states that the taxpayer is responsible for ensuring the accuracy of their returns before filing, then the tax preparer may not be held liable for mistakes. However, if the tax preparer is found to have committed negligence or malpractice, they can be held liable for penalties and interest.
If a tax preparer makes a mistake, the taxpayer should first contact the preparer to alert them of the issue and provide any related correspondence from the IRS. The taxpayer may also need to file an amended return with the IRS. If the mistake is substantial and not the fault of the taxpayer, the IRS may investigate and determine if the tax preparer is at fault. If so, the tax preparer may face penalties, including the loss of their tax identification number.
In some cases, taxpayers may be able to sue their tax preparer for negligence or malpractice if the mistake has caused significant issues. It is recommended to review the contract with the tax preparer and consult with a tax attorney to determine the best course of action.
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Taxpayer responsibility
As a taxpayer, you are ultimately responsible for meeting your tax obligations, even if you have hired a tax professional to prepare your taxes. This means that if you underpay the Internal Revenue Service (IRS) or a similar state body, such as the California Franchise Tax Board, you are still personally responsible for paying what you owe, even if you relied on professional advice when filing.
Your contract with your tax preparer will likely state that it is your responsibility to provide all necessary information and ensure the accuracy of your returns before filing them. It is important to keep good records, plan ahead, understand tax laws and due dates, and learn what adjustments, exemptions, deductions, and credits can be used to increase after-tax income. Taxpayers are expected to voluntarily declare all of their income and comply with tax laws, and they may face penalties for tax evasion or providing false information to the IRS.
However, while you are ultimately responsible for your taxes, you are not without recourse if your tax preparer makes a mistake. You can review your contract with your tax preparer to understand their responsibilities and determine if they have errors and omissions insurance. If you can prove that your tax preparer made a mistake and you relied on their advice in good faith, you may be able to seek a correction, avoid fees and penalties, or have your tax preparer pay these costs. In cases of significant wrongdoing, you can file Form 14157 with the IRS to formalize your complaint, and in severe cases, you can report them to professional bodies.
Additionally, as a taxpayer, you have certain rights when dealing with the IRS. The IRS must provide clear explanations of the law and its procedures in all tax forms, instructions, publications, notices, and correspondence. You have the right to receive a written response regarding the Office of Appeals' decisions and to take your case to court if necessary. The IRS must also explain how it selects taxpayers for audits and provide opportunities for review by an Appeals Officer.
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IRS penalties
The Internal Revenue Service (IRS) charges penalties for a variety of reasons, including failure to pay taxes on time, inaccurate tax filings, and underpayment of taxes. These penalties are designed to ensure compliance with tax laws, regulations, and timely payment of taxes owed. While taxpayers are ultimately responsible for meeting their tax obligations, there are instances where tax preparers may face penalties for mistakes or misconduct.
Taxpayer Responsibility
It is important to understand that even if you hire a tax professional, such as a Certified Public Accountant (CPA) or attorney, to prepare your taxes, the ultimate responsibility for the accuracy of the tax filings and any tax owed falls on you as the taxpayer. This means that if there is an underpayment or issue with your tax filings, you are still responsible for resolving it and paying any outstanding amounts, even if you relied on professional advice.
Tax Preparer Penalties
Tax preparers can face IRS penalties for mistakes or misconduct under Internal Revenue Code (IRC) Sections 6694 and 6695. These penalties may include monetary fines, non-monetary penalties, or both.
#### Monetary Penalties
Monetary penalties for tax preparers can vary depending on the nature and severity of the mistake or misconduct. Here are some examples:
- Understatement due to Willful or Reckless Conduct: A penalty of $5,000 or 75% (whichever is greater) of the tax preparer's income for preparing the tax return. This applies when a tax preparer intentionally or recklessly understates a taxpayer's liability or disregards tax laws.
- Failure to Furnish Copy to Taxpayer: A penalty of $50 for each failure to provide a copy of the tax return or refund claim to the taxpayer, with maximum penalties adjusted annually (e.g., $27,000 in 2022, $28,000 in 2023, etc.).
- Failure to Sign Return: A penalty of $50 for each failure to sign a tax return or refund claim, with a maximum penalty adjusted annually (e.g., $27,000 in 2022).
- Failure to Furnish Identifying Number: A penalty of $50 for each failure to include the preparer tax identifying number (PTIN) on a tax return, with a maximum penalty adjusted annually (e.g., $27,000 in 2022, $28,000 in 2023, etc.).
- Failure to Retain Copy or List: A penalty of $50 for each failure to keep a copy or list of the tax return prepared, with a maximum penalty adjusted annually (e.g., $27,000 in 2022).
- Failure to File Correct Information Returns: A penalty of $50 for each failure to include correct information on tax returns, with a maximum penalty adjusted annually (e.g., $27,000 in 2022, $28,000 in 2023, etc.).
#### Non-Monetary Penalties
In addition to monetary penalties, tax preparers may also face non-monetary penalties for misconduct or negligence. These can include:
- Injunction: A court order prohibiting the tax preparer from practicing in their professional capacity for a certain period.
- Loss of License: A tax preparer may lose their license if found liable for tax preparer fraud or other serious misconduct.
- Civil Penalties: Depending on the state, tax preparers may be subject to civil penalties for errors or misconduct, which can vary in severity.
Resolving Issues and Seeking Recourse
If you believe your tax preparer has made a mistake, you should first review your contract with them and consult a tax attorney to understand your options. You may be able to demonstrate good-faith reliance on their advice, which could lead to penalty abatement or a reduction in the amount you owe. Additionally, you can file a complaint with the IRS by filling out Form 14157 if you believe your tax preparer engaged in significant wrongdoing or negligence.
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Non-monetary penalties
While taxpayers remain liable for any additional taxes, interest, and civil penalties assessed by the IRS or the California Franchise Tax Board, tax preparers can also be held liable for mistakes on their clients' returns.
Tax preparers must adhere to high standards of conduct under provisions like IRC §6694(a) and IRS Circular 230. A minor oversight—such as omitting a Form 1099, transposing figures, or failing to note a recent change in tax law—can be considered negligence if it leads to understating a client’s tax liability.
- An injunction, or a court order prohibiting the preparer from practising in their professional capacity for a certain period. This can be devastating, as the preparer is likely to lose many clients.
- Reopening every like and non-like return prepared for the years falling within the statute of limitations.
- Revocation of the preparer's e-file privileges.
- Loss of license if found liable for tax preparer fraud.
- Loss of clients due to negative publicity.
If the IRS does find that penalties apply, tax preparers have 30 days to request an appeal before the penalty is assessed. If the preparer was acting in good faith and made an "honest" mistake, financial penalties may be waived.
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Tax preparer malpractice
Taxpayers are ultimately responsible for their tax obligations, even if they have relied on professional advice. However, tax preparers can be held liable for malpractice if their errors or omissions cause financial loss or other damages to the taxpayer.
Tax preparers are generally expected to exercise a level of care, skill, and diligence that is in line with the standards of their profession. In the United States, tax preparers can face penalties under the Internal Revenue Code (IRC) for mistakes on their clients' returns. These penalties can include monetary fines and even injunctions that prevent them from practising in their professional capacity for a certain period.
If a tax preparer makes a mistake, they may be able to submit a correction and may offer to pay any fees, penalties, and interest owed by the taxpayer. However, the taxpayer is still liable for the actual tax amount due and must ensure its accuracy.
To establish a malpractice claim against a tax preparer, the following must be demonstrated:
- The tax preparer owed a duty to the taxpayer: This is typically outlined in an engagement letter or verbal agreement to prepare the taxpayer's return.
- There was a breach of that duty: This occurs when the tax preparer makes a significant error or omits crucial information, resulting in a flawed return.
- The plaintiff suffered injuries: Any financial loss or damages incurred by the taxpayer due to the tax preparer's error must be proven.
- Proximate cause between the injury and duty: There must be a direct link between the tax preparer's breach of duty and the damages suffered by the taxpayer.
If facing an issue due to a tax preparer's mistake, it is advisable to consult a tax attorney to determine the best course of action. Complaints against tax preparers can be submitted to the IRS, and in some cases, penalty abatement may be pursued if good-faith reliance can be demonstrated. Additionally, taxpayers can seek recourse through civil lawsuits, claiming professional malpractice, and seeking compensation for damages.
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Frequently asked questions
Even if your tax return was filed by a tax preparer, you, as the taxpayer, are liable for any incorrect filing. However, depending on the type of mistake and the contract with the tax preparer, you may be able to file a complaint against the tax preparer.
If the mistake is not your fault, you will need to convince the IRS of the tax preparer's negligence. If the tax preparer is at fault, this can result in their tax identification number being rescinded. The IRS may also enforce penalties such as fines, suspension of their license, and reopening of old tax returns.
First, you should review your contract with your tax preparer. Most contracts state that you are responsible for providing all necessary information and ensuring the accuracy of your returns before filing them. Next, you should contact the tax preparer to alert them of the mistake and provide them with any related correspondence from the IRS.
Tax preparers may be liable for penalties if they do not follow tax laws, rules, and regulations. Examples of tax preparer penalties include failure to furnish a copy of the tax return to the taxpayer, failure to sign the return, and failure to include a preparer tax identification number (PTIN) on the return.
