TPAW: Tax Return Preparer Penalties

A tax return preparer is a person who prepares a tax return, or a substantial portion of a tax return for payment. An individual who prepares a tax return for free is not considered a tax return preparer for these purposes. If you prepare tax returns in exchange for payment, you are subject to return preparer penalties if you don’t follow the tax laws, rules, and regulations when preparing returns. Examples of situations when a return preparer may be assessed a penalty include, but are not limited to:

Failure to sign a return or furnish a copy to the taxpayer;
Understatement of a taxpayer’s liability that is unreasonable, willful, or reckless;
Promoting abusive tax shelters; or
Knowing or reckless disclosure or use of a taxpayer’s information.

Paid return preparers should familiarize themselves with the laws and regulations applicable to paid tax return preparation, and the penalties associated with failure to comply. Paid return preparers should also become familiar with the standards in Circular 230, which contains regulations governing practice before the IRS.

The IRS provides the Practitioner Priority Line (866-860-4259) to assist preparers with account related issues and tax law questions. If you have a question about a client’s tax return or your obligations as a paid return preparer the IRS Practitioner Priority Line may be a helpful starting point.

As a paid return preparer, it is ultimately your obligation to exercise due diligence to ensure the accuracy of a client’s tax return. There are specific due diligence requirements for paid return preparers that file returns claiming certain tax credits such as the Earned Income Tax Credit. To assist paid tax return preparers in meeting the due diligence requirements when claiming tax credits on a client’s tax return, the IRS has created the Form 8867, Paid Preparer’s Due Diligence Checklist.

If you received a letter that you owe a preparer penalty, the letter will contain information about the type of penalty, the reason for the penalty, and what to do next. If you can correct the problem in the notice, the penalty may not apply. If you believe the information is not correct, or you don’t agree, you may be able to request a Penalty Appeal. But it is important that you read and respond to a preparer penalty letter quickly because you will have 30 days to request an appeal before the penalty is assessed.

 

Resources:

Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application and Renewal

PTIN Requirements for Tax Return Preparers

Form 6118, Claim for Refund of Income Tax Return Preparer and Promoter Penalties

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