The IRS can go after professional tax preparers with many different penalties related to filing inaccurate or fraudulent tax returns. Targeting tax preparers allows the IRS to affect a large number of tax returns because each tax preparer can be responsible for completing tax returns for hundreds of taxpayers.
Some of the penalties related to understatement of tax that the IRS can charge tax preparers with include:
IRC § 6694(a) – Understatement due to unreasonable positions. The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.
IRC § 6694(b) – Understatement due to willful or reckless conduct. The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund. Effective for tax returns prepared in 2016 the penalty is the greater of $5,000 or 75% of the income.
A position is generally considered unreasonable if there is not substantial authority for it in the tax law. For tax shelters, there is a higher standard that must be met. The position must be one which would be more likely than not be sustained on its merits if challenged by the IRS.
If a tax preparer willfully disregards information furnished by the tax preparer or other persons, they are subject to the enhanced penalty under IRC section 6694(b).
For example, if the taxpayer states that they want to claim children that are not their qualifying dependents, the tax preparer would be subject to the penalty for willful conduct for filing a return that wrongfully attempts to understate tax liability. Consult with a tax attorney immediately if the IRS is investigating you with respect to willful or reckless conduct as a tax preparer.
There are also tax preparer penalties under IRC section 6695 for several types of improper conduct, including:
IRC § 6695(a) – Failure to furnish copy to taxpayer. The penalty is $50 for each failure to comply with IRC § 6107 regarding furnishing a copy of a return or claim to a taxpayer. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a calendar year.
IRC § 6695(b) – Failure to sign return. The penalty is $50 for each failure to sign a return or claim for refund as required by regulations. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a calendar year.
In addition to these penalties, tax preparers can also be referred to the IRS Office of Professional Responsibility. Tax preparers may be suspended, disbarred, or enjoined from engaging in certain activities. An experienced tax attorney can help you defend you if you have been charged with IRS tax preparer penalties.