IRS Tax Preparer Penalties: An In-Depth Review

Now that Tax Day has come and gone, tax preparers can finally breathe a sigh of relief. The busy season is over, and it is time for some much-deserved rest and relaxation. But if you receive a notice or letter from the IRS, your rest and relaxation can be over very quickly. Learn what tax preparers need to know about facing IRS penalties from experienced Texas tax attorney Lawrence Brown:

The IRS Targets Tax Preparers After Tax Day

The IRS doesn’t just target noncompliant taxpayers after Tax Day. It also targets tax preparers. It targets tax preparers who take advantage of unsuspecting taxpayers, and it also targets tax preparers who assist taxpayers with defrauding the federal government.

But, even inadvertent mistakes can lead to IRS scrutiny—and IRS penalties—as well. As discussed below, recordkeeping violations, oversights when finalizing clients’ returns, and other similar types of issues can trigger penalties that apply on a per-violation basis. When tax preparers make the same mistakes on multiple clients’ returns, they can face substantial aggregate penalties.

Tax Preparers Can Face Substantial Penalties

For tax preparers, there are two main factors that can lead to the imposition of substantial penalties. These are: (i) the number of different penalties the IRS imposes on tax preparers; and (ii) the way in which the IRS calculates tax preparer penalties.

Types of IRS Tax Preparer Penalties

The IRS has the authority to directly impose several different penalties on tax preparers. These penalties include, but are not limited to, penalties for:

• Understating taxpayers’ liability
• Promoting abusive tax shelters
• Making false or fraudulent statements
• Preparing false or fraudulent returns, statements or other documents
• Failure to be diligent in determining taxpayers’ eligibility for credits and exemptions
• Failure to sign taxpayers’ returns
• Failure to furnish a preparer tax identifying number (PTIN) 
• Failure to maintain or provide required records

Tax preparers will typically learn that they are facing one or more of these penalties when they receive a notice or letter from the IRS. While tax preparers may receive advance notice of potential penalties in some cases, oftentimes, the IRS will simply notify tax preparers of penalties that have already been imposed—and then tax preparers will need to either pay promptly or successfully seek removal in order to avoid additional liability.

How the IRS Calculates Tax Preparer Penalties

When calculating the tax preparer penalties listed above (among others), the IRS considers four main factors. These factors are:

• The Number of Violations (and Taxpayers Involved) – As noted above, many of the IRS’s tax preparer penalties apply on a per-violation basis. Thus, the more times a tax preparer commits the same violation, the greater the penalties that apply.
• The Nature of the Violation(s) At Issue – The base penalties for tax preparer violations range from tens of dollars to tens of thousands of dollars. As a result, the nature of the violation(s) at issue is a key factor in determining tax preparers’ penalty liability.
• The Tax Year(s) Involved – Just as repeating the same violations on multiple taxpayers’ returns can trigger greater aggregate penalties, repeating the same violations across multiple tax years can trigger greater aggregate penalties as well.
• Inflationary Adjustments – Many federal penalties (including IRS penalties) are adjusted periodically for inflation. As a result, the current penalties that apply may be significantly higher than the base penalties stated on the IRS’s website.

In high-stakes cases, it is not unusual for tax preparers to face hundreds of thousands of dollars, if not millions of dollars, in potential penalties. As a result, it is imperative that tax preparers make informed and strategic decisions about how to proceed, and this begins with engaging an experienced Texas tax attorney.

Tax Preparers Have the Right to Request Penalty Removal

Tax preparers who are facing IRS penalties have the right to seek penalty removal. Seeking penalty removal is also generally a necessary precursor to filing a formal appeal. If you are facing substantial IRS penalties as a tax preparer, an experienced Texas tax attorney can assist you with assessing the validity of the IRS’s determinations, gathering the evidence needed to challenge the IRS’s determinations, and then seeking removal of any unwarranted penalties.

Tax Preparers Have the Right to File a Penalty Appeal if Necessary

If informal efforts to secure penalty removal are unsuccessful, tax preparers can challenge their IRS-imposed penalties with the Independent Office of Appeals. Importantly, once the IRS rejects a request for removal, tax preparers must generally file their appeals within 30 days. While there are various grounds for filing an appeal, filing a successful appeal requires an informed approach and strategic legal representation.

What You Should Do if You Receive a Letter or Penalty Notice from the IRS

With all of this in mind, what should you do if you are facing IRS penalties as a tax preparer? In this scenario, you should:

• Determine What Action the IRS Has Taken (or is Planning to Take) – It will be important to determine if the IRS has already imposed penalties or is in the process of conducting an investigation—as these are very different scenarios that require very different strategies.
• Assess the Applicability of All Potential Tax Preparer Penalties – Tax preparers who are facing IRS penalties should independently assess the applicability of all potential tax preparer penalties so that they can make an informed decision about how to respond to the IRS.
• Assess Any Other Potential Legal Risks – In some cases, tax preparers who are facing IRS penalties could be facing other legal risks as well. If you are under investigation for aiding and abetting tax fraud, for example, you could be at risk of facing criminal prosecution.
• Work with Experienced Tax Counsel to Decide How Best to Proceed – Ultimately, tax preparers who are under scrutiny from the IRS will need to work with experienced tax counsel to decide how best to proceed. Time can be of the essence in these cases, so we strongly recommend seeking legal advice as soon as possible.

Request a Confidential Consultation with Texas Tax Attorney Lawrence Brown

If you are facing substantial IRS penalties as a tax preparer, we invite you to contact us for more information. Call 888-870-0025 or send us a message online to request a confidential consultation with Texas tax attorney Lawrence Brown.