Last year, the IRS audited more than 650,000 tax returns in the United States. An audit can be a stressful and complicated process, and it’s one most of us would rather avoid. In fact, many Americans choose to pay a certified tax preparer to get their return ready to file so that they avoid the risk of going through an audit.
But what do you do when the person you trusted to prepare your taxes makes a mistake? Read on to learn more about tax preparer negligence and what you can do to deal with it.
Who Can Be a Tax Preparer?
Before we dive into the details of tax preparer negligence, let’s talk some about who can be a professional tax preparer. Most of us think of CPAs and accountants as the people responsible for tax preparation. And while these people do make up a large number of professional tax preparers, they aren’t the only ones who can do the job.
You might be surprised to learn that appraisers, actuaries, and even attorneys can serve as tax preparers with the right certification. You can also get tax preparers who are “unenrolled” – in other words, those who cannot practice before the IRS. However, these people can still count as professional tax preparers if they get paid for their work.
What Are Tax Preparers Liable For?
In the past, tax preparers were liable only for mistakes on certain types of returns. They could not be charged with negligence for gift returns, generation-skipping returns, or estate returns. In 2007, laws changed so that, these days, tax preparers can be held liable for mistakes on any type of return, not just income tax returns.
However, there are still some criteria tax preparers must meet in their mistakes in order to be considered liable. In particular, the preparer can’t be held liable for a mistake that they could not reasonably have prevented. For instance, if you reported the wrong income to them, they are not responsible for filing the wrong income on your return.
Types of Tax Preparer Misconduct
There are two basic types of tax preparer misconduct: unreasonable position and willful or reckless conduct. Unreasonable position misconduct happens when a tax preparer made an earnest mistake, but one they should reasonably have detected. For instance, reporting someone’s income to be $5,000 when it is, in fact, $50,000 is an unreasonable position.
Willful or reckless conduct occurs when the tax preparer knowingly acts in a way that is against the law. Your tax preparer may know full well that you have an asset or extra source of income and choose not to report it, in spite of federal law. This type of misconduct is more severe and carries harsher punishments.
Penalties for Misconduct
How much your tax preparer gets penalized for mistakes will depend on which type of misconduct they committed. If a tax preparer can show that they had a reasonable cause for the mistake and that they acted in good faith, they won’t have to pay any penalty. If they get convicted of unreasonable position misconduct, they’ll have to pay a fine of $1,000 or 50 percent of their income for that tax preparation.
If your tax preparer gets convicted of willful or reckless conduct, however, their penalty will be more severe. They’ll have to pay a fine of $5,000 or half of the income they got from preparing that return. There may also be some non-monetary penalties if your tax preparer gets convicted of this offense.
In some cases, your tax preparer may face more than just fines if they get convicted of negligence. In the lightest cases, they may get served an injunction. This will prevent them from preparing taxes professionally for a period of time, which can lose them a lot of clients.
In more severe cases, your tax preparer may be required to re-open all the returns they worked on during the statute of limitations for the case of negligence. This can be time-consuming and exhausting and may also mean that they lose clients. And if your tax preparer is convicted of tax fraud, they could lose their license to practice for good.
Can You Sue Your Tax Preparer?
If you believe your tax preparer made a mistake or willfully messed up your taxes, one of your first questions may be if you can sue. After all, they mishandled your money and may have gotten you in a lot of trouble with the IRS. An audit or rejected tax return can take a serious toll on your credit score, as well as the rest of your finances.
If your tax preparer has committed negligence or malpractice, you can sue them for that behavior. Depending on where you live, it may be rare, however, for you to recover 100 percent of the money you lost. Some states rule that you are partly responsible for reviewing your return to make sure everything is correct before you file, making the mistake partially your responsibility.
Who Pays for the Mistake?
So if both you and your tax preparer are responsible for mistakes on your return, who’s responsible for paying the penalties and extra fees? In most cases, you’ll be responsible for paying any extra income tax that you legally owe. After all, tax preparer negligence or not, you still owe the government taxes on that income.
However, if you racked up penalties, fees, or interest because of the mistake on your taxes, the responsibility for paying those can go either way. If the tax preparer is judged to be liable for the mistake, they may have to pay those fees. But most of the time, the most reasonable course of action for taxpayers is to take their preparer to small claims court to try to get that money back.
Ask for Recommendations
Of course, we all want to avoid winding up with one of the tax preparers who will commit malpractice or cause problems. But it can be hard to weed out the bad apples from the good, especially with so many preparers out there. One of the best ways to avoid the problem of tax preparer negligence is to ask for recommendations.
Talk to your friends, family, colleagues, and other trusted loved ones about who they use to prepare their taxes. If you have an unusual tax situation, try to ask loved ones who you know may be in similar situations. Talk to them about their experience with their preparer and whether they intend to use them again in the future.
Check on Credentials
While recommendations are a good place to start, you don’t want to end your research there. Once you’ve narrowed down a short list of preparers, start checking in on credentials. Ideally, you want to work with a preparer who’s licensed to practice before the IRS, as well as your state tax agency.
Look for an IRS Preparer Tax Identification Number (PTIN) on your potential preparers’ sites. It’s also a good idea to check on your state’s licensing requirements and make sure your preparer meets those criteria. And while it isn’t an official credential, an accreditation with the Better Business Bureau can speak volumes about the quality of a tax preparer.
Review Your Return
Even after you’ve found a tax preparer you trust, it’s important to do your own due diligence for your taxes. It’s not a good idea to hand over your tax paperwork and then sign the return without so much as glancing at the numbers. Even well-meaning tax preparers can make honest mistakes, and you don’t want to get left holding the bag for an incorrect return.
Although it may seem boring, take the time to read over your return before you submit it. Make sure all your information is correct, including your income and any deductions you’re taking. If you have questions about anything on your return or if you think something is wrong, do not hesitate to talk to your preparer about it.
Alert Your Preparer of Mistakes
If you do find a mistake on your tax return, the first thing you need to do is to bring it to your preparer’s notice. In many cases, the mistake may be an honest one, and fixing it before you submit the return will be simple. You won’t need to jump to filing a complaint or a lawsuit as soon as a mistake turns up.
Let your tax preparer know about the mistake and show them any documentation they need giving them the correct information. Once the problem is fixed, review your return carefully again before signing it. Don’t assume that, just because one mistake got fixed, there aren’t any more.
File Any Needed Amendments
The unfortunate truth is that, in some cases, mistakes happen, and they don’t get caught until after a return is filed. The good news is that you aren’t going to get in major trouble with the law for an honest mistake. The most important thing is that you take steps to correct it as soon as you discover the problem.
You can file an amendment that will update the information on your tax return with the appropriate numbers. If you do have to pay penalties associated with the mistake, talk to your tax preparer about them. Many reputable tax preparers will pay penalties related to mistakes they made without you having to take them to court over the issue.
Report Your Tax Preparer
In an ideal world, your tax preparer would help you fix any mistakes that showed up and pay for any penalties they caused. But you don’t need us to tell you that we do not live in an ideal world. If your tax preparer refuses to handle your situation responsibly or if there are more than a reasonable number of mistakes on your return, you may need to file a report about them.
The IRS has a website where you can report tax preparers who are not meeting industry standards. You’ll need to fill out Forms 14157-A and 14157 to file the complaint. If you’ve gotten a letter from the IRS about your mistaken return, be sure to include a copy of it with these two forms when you mail in your complaint.
Contact the Experts
Navigating taxes is tricky enough on its own without throwing in the added complication of tax preparer negligence. If you find yourself dealing with a bad tax preparer, you’re going to need help from someone who understands both the tax system and the legal system. Attorneys specializing in tax law will be able to help you navigate the complaint and lawsuit process, if it comes to that.
It’s a good idea to reach out to a tax attorney as soon as it becomes clear that your tax preparer is not going to fix your mistake. They can tell you what evidence you need to gather and help you mitigate damage with the IRS. The sooner you get them involved, the less money you’re likely to wind up losing.
Learn More About Tax Preparer Negligence
Tax preparer negligence can be a devastating thing to deal with, especially if your tax preparer refuses to fix their mistake. You can sue your tax preparer, but keep in mind that it may not always be worth the cost. It’s better to find a trustworthy tax preparer from the beginning by asking for recommendations and checking on credentials, as well as carefully reviewing your return.
If you’d like to learn more about tax preparer negligence, check out the rest of our site at Silver Tax Group. Our tax attorneys can solve your tax issues with fast action and proven results. Get started with a free case evaluation today and discover what the real tax attorneys can do for you.