I’m Facing an IRS Audit But I Rely on a Tax Professional—Am I At Risk?
February 21, 2023
If you’re like most high-income individuals, you rely on an accountant or other tax professional to prepare your federal tax returns. In doing so, you trust that your tax professional will do the right thing, and accurately calculate your tax liability while taking advantage of the various credits, deductions and exemptions that are available.
You do this for two reasons. First, you aren’t interested in figuring out how to file your taxes on your own. Second, you don’t want to worry about dealing with the Internal Revenue Service (IRS).
But, what if you end up dealing with the IRS anyway?
Unfortunately, this is a situation that many high-income taxpayers find themselves facing each year. Accountants and other tax preparers make mistakes, and, when they do, their mistakes fall back on their clients. If you are facing scrutiny from the IRS but you rely on a tax professional, here is an overview of what you need to know:
The IRS Holds Taxpayers Accountable for Paying What They Owe
We’ll get this out of the way first: Even if your tax preparer made a mistake, you are still required to pay what you owe. While you may be able to avoid underpayment penalties (as discussed in detail below), you are still required to satisfy your outstanding tax liability and pay interest on all past-due amounts.
The reason for this is that the IRS does not allow taxpayers to avoid liability simply because their tax preparer made a mistake. Hiring a tax preparer is not an insurance policy against future liability for past mistakes—even if those mistakes weren’t yours. If you owe federal income tax, you have to pay it. This is true even if you didn’t realize you would have to pay it when your tax preparer filed your return.
Taxpayers Who Rely on Their Tax Professionals Can Avoid Some Liability Based on “Reasonable Cause”
If your accountant or other tax preparer made a mistake, you are liable for all past-due amounts and for interest. By default, you are also liable for penalties. Interest and penalties begin to accrue immediately upon underpayment, and the IRS imposes penalties regardless of whether a taxpayer prepared his or her returns personally.
But, it is possible to avoid these penalties in some cases. Section 6664(c)(1) of the Internal Revenue Code provides that:
“No penalty shall be imposed . . . with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”
Good-faith reliance on a tax preparer’s advice is one example of “reasonable cause” under Section 6664(c)(1). While later provisions of Section 6664(c) go on to establish exceptions to the “reasonable cause” defense, taxpayers who are facing penalties due to their tax preparers’ mistakes will be able to rely on Section 6664(c)(1) in many cases. Of course, the key here is that the taxpayer actually relied on his or her tax preparer’s advice and did not contribute to causing the underpayment. If a taxpayer has reason to believe that his or her returns are inaccurate, or if a taxpayer provides inaccurate or incomplete information to his or her accountant, the “reasonable cause” defense generally will not apply.
To reiterate, the “reasonable cause” defense applies with respect to penalties only—not to back taxes or interest. However, as IRS penalties can be substantial (especially for high-income taxpayers), engaging a lawyer to assert this defense on your behalf will be well worth it in most cases.
Dealing with the IRS When Your Tax Preparer Made a Mistake
Let’s say you find yourself in this situation. You hired an accountant to prepare your federal income tax returns, and now you are facing an IRS audit. What should you do?
- Take Action Promptly – Any time you are facing an IRS audit, it is important to take action promptly. If you owe interest and/or penalties, these will continue to accrue, so, the sooner you resolve your tax controversy, the better.
- Collect Your Financial Records – To accurately assess your tax liability and confirm that your tax preparer made a mistake, you will need to collect your financial records for the tax year (or years) at issue. If you provided these to your tax preparer previously, you may already have them gathered in one place.
- Collect all Communications with Your Tax Preparer – Along with collecting your financial records, you should also collect all written communications between you and your tax preparer. This includes emails and text messages going both ways.
- Consult with a Tax Attorney – Once you have this documentation, you will want to consult with a tax attorney. An experienced tax lawyer will be able to review your records and filings to determine what mistakes were made and why, and then he or she will be able to use this information to chart your path forward.
- Make an Informed Decision About How to Deal with the IRS – Based on your tax attorney’s assessment of the circumstances at hand, you will need to make an informed decision about how to deal with the IRS. While this may involve asserting the “reasonable cause” defense, you may have other options as well.
Ultimately, when dealing with a tax preparer’s mistake, informed decision-making is the key to moving forward. By working with an experienced tax attorney, you can resolve the IRS’ inquiry as quickly and favorably as possible, and you can ensure that your federal liability is no greater than necessary.
Discuss Your Situation with Tax Attorney Lawrence Brown in Fort Worth, TX
If you are dealing with the IRS after hiring an accountant or other tax professional to prepare your federal returns, we encourage you to contact us promptly for more information. To discuss your situation with tax attorney Lawrence Brown in confidence, please call 888-870-0025 or tell us how we can reach you online today.