IRS Penalties When Your Tax Preparer Makes Errors
It’s unsettling to trust someone with your taxes, only to discover errors on your return and hear those dreaded words: “IRS penalties when your tax preparer” made a mistake. Facing potential IRS penalties due to your tax preparer’s actions can seem overwhelming, conjuring up worst-case scenarios.
No one wants to face the IRS alone. Understanding your rights and available options is the essential first step in addressing this challenge.
Table of Contents:
- Taking Immediate Action
- Verify the Preparer’s Error
- Contacting Your Tax Preparer Directly
- Know Your Rights and Options
- Understand the Statute of Limitations
- Making Payments, No Matter What
- Filing a Formal Tax Preparer Complaint With the IRS
- How To Go About Making a Report
- Contacting Other Organizations
- Recovering Financially from Tax Preparer Mistakes
- When to Seek Further Legal and Financial Advice
- IRS Penalties When Your Tax Preparer Includes Deliberate Fraud
- Penalties for Tax Preparer Fraud
- How the IRS Investigates and Prosecutes
- Conclusion
Taking Immediate Action
First, thoroughly review your tax return before signing it. Your signature signifies your confirmation that all information within the document is accurate.
It becomes significantly more challenging to dispute discrepancies if the IRS assumes your signature implies agreement with the submitted documents. Verify that the information provided to your tax preparer was accurate and complete.
Verify the Preparer’s Error
Are you certain the error is the return preparer’s fault? You have a responsibility to provide all necessary documents detailing your income and assets to ensure an accurate return.
If you failed to provide complete information, it becomes difficult to hold the preparer solely responsible. In such instances, the responsibility, and any resulting preparer penalties, may fall on you.
Contacting Your Tax Preparer Directly
If you confirm the mistake, promptly communicate with your tax return preparer. Sometimes, they can rectify the issue with an amended return.
Depending on the circumstances, the tax preparer might cover the costs of penalties and other incurred expenses. It is always a good idea to discuss and see about resolving this as quickly as possible.
Know Your Rights and Options
Before engaging their services, carefully examine your agreement to understand how they handle errors. Clear agreements outline resolution procedures.
Sometimes, a preparer is obligated to cover interest and preparer penalty arising from their errors, though not always the additional tax owed. Some professionals also offer options for added protection.
This added protection could mean the professional covers additional costs, such as the taxes you ultimately owe. These are often add-ons and not part of a base service, though.
Understand the Statute of Limitations
You have a limited timeframe to rectify errors. Typically, if you overpaid, you have three years to file an amended return and claim a refund.
However, you must provide clear evidence of overpayment. If you underpaid due to errors, the IRS can pursue the remaining balance for three years from the date of the mistake.
If the error is substantial (e.g., underreporting income by 25% or more), they have up to six years to collect the unpaid funds. Fraudulent situations, however, have no such time constraints. Actively attempting to evade tax liability and intentionally withholding key tax information can lead to indefinite pursuit by the IRS.
Making Payments, No Matter What
Despite any errors made by the preparer, you are ultimately responsible for paying your tax bill to the IRS. Your tax obligations remain.
Ignoring your taxes due won’t result in the IRS seeking funds elsewhere. Instead, pay all debts, and then discuss how your preparer could reimburse you for their mistake and any return preparer penalties.
Filing a Formal Tax Preparer Complaint With the IRS
If your tax professional exhibits severe negligence, consider notifying relevant tax organizations. The primary agency for complaints regarding IRS matters is the IRS itself.
Reasons to alert the IRS include unethical conduct and contract breaches. You should also consider notifying them if the preparer intentionally avoids communication or refuses to cover penalties they legally owe.
How To Go About Making a Report
Utilize Form 14157, the Tax Return Preparer Complaint. Provide specific details, including names, addresses, and a comprehensive timeline.
Include any supporting documents related to your filed dispute. The more information you provide the easier the process might go.
Contacting Other Organizations
Consider informing other relevant authorities if you believe the situation isn’t being handled appropriately. This might include state bar associations in your area, or even the taxpayer advocate service.
The IRS provides options for online filing or submitting printed copies of a dispute. You have the complete freedom to select either submission method.
Recovering Financially from Tax Preparer Mistakes
A good initial step is to directly communicate with the preparer about how they might address the payment issues caused. Certain contracts or situations may allow you to receive funds directly from the preparer for expenses, penalties, and possibly interest and taxes if specific coverage for these errors exists.
Review those terms to understand the arrangements between you and the preparer’s organization. It could also be beneficial to consult with others and explore options for recovering costs.
When to Seek Further Legal and Financial Advice
Seek assistance for complex, unusual, or substantial issues involving unpaid balances or returns. Consulting with a tax attorney provides clarity on intricate matters concerning collection laws.
Tax professionals understand specifics to support informed resolutions when dealing with large entities. A qualified financial advisor can review the situation from various perspectives.
| Action Needed | Steps Involved | Considerations |
|---|---|---|
| Document Everything | Maintain detailed records of all interactions, communications, and evidence. | This facilitates a stronger dispute, should the situation escalate. |
| Check Insurance Coverage | Some tax return preparers offer insurance policies. | If such coverage exists, determine if it can help resolve payments, fines, and interest owed. |
| IRS Payment Plan | If unable to pay immediately, discuss installment options with the IRS. | This can alleviate immediate financial pressure from unexpected penalties. |
| Legal Action for Recovery | Explore legal avenues to recover penalties and other costs from the tax preparer. | Verify if your agreement permits such action. |
| Continuous Learning and Review | Stay informed about current tax laws and best practices for accuracy and compliance. | This contributes to a smoother filing process. |
IRS Penalties When Your Tax Preparer Includes Deliberate Fraud
Situations involving intentional misconduct differ significantly from genuine human error, leading to different consequences. The IRS views deliberate misinformation as a severe breach of trust by tax professionals.
They have distinct and specific procedures for pursuing prosecution in these preparer penalty case. Preparer penalty investigation often occurs with these issues.
Penalties for Tax Preparer Fraud
When a tax return preparer is found to have committed criminal actions, they may face jail sentences of several years. Financial preparer penalties could potentially exceed $100,000 if the tax preparer is found to have acted illegally.
For individuals, there are potential penalties, though less severe, up to $100,000. For businesses, the penalties could be much higher.
How the IRS Investigates and Prosecutes
Investigations involve thorough checks across financial details, potentially spanning multiple years. This in-depth review occurs when discrepancies arise, and filings appear irregular.
This scrutiny helps identify instances of fraud. Sometimes, this review incorporates information from third parties or anonymous tips from individuals formerly associated with the company.
These investigations may be initiated by an IRS operating division, resulting in a program action case. A lead sheet is often prepared, and a thorough return preparer penalty investigation takes place.
The penalty case file is carefully reviewed, and a penalty approval form must be completed. The small business/self-employed operating divisions often handle such penalty case.
Conclusion
Dealing with “IRS penalties when your tax preparer” makes an error can be a stressful experience. Stay informed about available strategies and your rights for handling such situations regarding your income tax return details.
Remember that consistent and proactive communication throughout the service period is critical. Always communicate with your tax preparer when issues arise.
It takes a great deal of professionalism for your tax expert to prepare your tax returns accurately and without mistakes. When errors occur, however, this might get you wondering how they can affect you as a taxpayer and the steps you ought to take to remedy them. You can avoid serious IRS penalties and fines by following these tips to handle tax preparer errors.
Evaluate Your Tax Return before Signing It
The general way to prevent tax preparer mistakes from occurring is to carefully read your tax return before you sign it. Tax returns include a statement at the end that highlight that the taxpayer agrees that all of the information on the return is accurate and factual.
If you sign the return before evaluating it completely, you may find it more difficult to defend yourself of that end statement. In fact, it obligates you to read through the return and check it for mistakes that could cost you a large amount of extra taxes or IRS fines and penalties later.
If you do notice errors on your tax return, you should point them out right away to the tax preparer. You have every right as a client to require the tax preparer to either clarify or fix the errors before you sign the return.
Ensure the Errors are Truly the Fault of the Tax Preparer
Another tip for dealing with errors on your tax return involves ensuring the tax preparer truly is to blame for them. You shouldn’t have any fault from your end. After all, you have the duty of providing all of the documentation and evidence of income and assets to the tax preparer. He or she cannot easily take a guess at how much you earn and to what exclusions or deductions you are entitled.
If you cannot provide the needed information to prepare a correct and factual tax return, the tax preparer cannot be faulted for the errors. In this instance, the blame will fall on you for not providing everything the tax preparer needed to do your taxes accurately.
Contact the Tax Preparer in Person
If you find errors on your tax return, you should get in touch with the tax preparer as quickly as possible. If possible, you should meet with this individual in person to review the return and point out the errors. In some cases, the preparer may be able to make the necessary corrections or submit an amended return for you.
Likewise, depending on your situation, the tax preparer may be willing if not obligated to pay for your IRS fees, penalties, and interest accrued on your tax debt. The tax preparer may not gain your full reliance. However, he or she may be able to resolve the situation before it costs you anymore money with the IRS.
Know Your Rights as a Client
Before signing a contract with the tax preparer, you should read through the agreement thoroughly and understand your rights as a client. In particular, the contract should clearly state what solutions the preparer can grant to you if or when he or she makes an error preparing your return.
In some cases, the preparer may be obligated to pay the interest and penalties you accrued as a result of the errors but not the extra taxes you owe to the IRS. In other scenarios, you may have the chance to purchase extra insurance on your return that obligates the preparer to pay for the interest and penalties as well as the extra taxes you owe due to his or her errors.
You should take note, however, that this obligation will not be upheld if it is identified that you caused the preparer to make errors on the return. If you deliberately or accidentally withheld information about your income, assets, or other taxpayer details, the preparer will not have to conceal expenses related to the errors.
Know the Statute of Limitations
If an error is made by your tax preparer when preparing your return, you have a limited amount of time to act in order to solve the situation. In most instances, the statute of limitations is three years for errors that caused you to pay too much to the IRS. To solve this problem, you bear the burden of providing evidence that you overpaid and are owed a refund on that money.
If the mistakes caused you to underpay the IRS, you could face collection efforts on the remaining balance for three years from the time of the error. The IRS has three years from that date to collect the money you owe to the federal government. However, if the error is significant such as leaving out or not reporting 25 percent of your income, the IRS has up to six years to collect on that debt from you.
By the way, no statute of limitations applies to situations like fraud or evasion. If you do not file your taxes, deliberately defraud the IRS, or withhold information from it on purpose, the IRS has an unlimited amount of time to pursue and collect money from you.
Pay the Penalties
In spite of the mistakes your tax preparer made, it is up to you to pay what you owe to the IRS at the end of the day. You bear the responsibility of paying penalties and interest, not the tax preparer.
If you fail to pay this money, even with the preparer’s errors, the IRS will come after you and not the tax professional for this debt. After you pay the penalties, you can then follow up reimbursement from your tax preparer.
Notify the IRS and Other Organizations
You also have the choice of notifying the IRS and tax professional organizations about your tax preparers errors. Particularly, you should notify the IRS if your tax preparer:
- Behaves unethically
- Violates the term of your contract or engagement letter
- Deliberately avoids contact with you
- Refuses to reimburse you for penalties, fines, and other money he or she owes you
You also can notify professional organizations such as the American Institute of Certified Public Accountants, the American Bar Association, and the National Association of Enrolled Agents about your preparer’s misconduct.