What Are Tax Return Preparer Penalties?

As defined by I.R.C. Section 7701(36)(a), an “income tax return preparer” is any person who prepares a substantial portion of a federal income tax return for compensation. For example, this may be someone at a seasonal tax service shop, an accountant or CPA, or even a tax attorney. But, this is not someone who prepares his or her own return, of prepares a return for a family member or friend for free. Title 26 of the United States Code (also known as the Internal Revenue Code or “I.R.C.”) Section 6694 imposes a penalty on an income tax return preparer who: 1) prepares a return containing an understatement of liability due to a position for which there is no realistic possibility of being sustained on the merits, 2) knows or should have known of the unrealistic position, and 3) fails to disclose the facts or basis for the position or the position is frivolous. Subsections (b) and (c) of I.R.C. § 6695 impose penalties on tax return preparers who fail to sign returns they prepare or who fail to furnish an identifying number with respect to any return for which they are the return preparer. This provision is important to the IRS because the lack of such identification on returns may require the IRS to devote additional resources to identifying and selecting returns for audit, especially if there is a pattern of false deductions or credits by a return preparer. This ease of identifying false returns related to a single preparer would lead to increased recovery of taxes by the IRS. Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person: (1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document, (2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and (3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person. Under IRS Section 6701(b), the penalty is $1000 for essentially every return that the tax preparer knew was claiming a false understatement of tax, but the penalty is limited to one imposition for each year involving a particular taxpayer. For example, if a return preparer prepares knowingly false returns for Jimmy in 2010, 2011, and 2012,  and a knowingly false tax return and a false amended return for Jane in 2010, the return preparer would be penalized $3000 for Jimmy’s three returns but only $1000 for the two filed for Jane. The eleventh circuit held, in 2014, that the burden of proof in Section 6701(b) cases brought by the IRS is not the usual minimum of a “preponderance of the evidence” (sometimes described as “more likely than not”) but the higher “clear and convincing evidence” usually applied in civil fraud cases.  (Note: the clear/convincing standard is lower than the “beyond a reasonable doubt” standard.)  This ruling may have made it worthwhile in many cases to zealously fight imposition of these penalties. The Wilson Tax Law Group has significant experience in handling return preparer penalty cases, injunction cases, and criminal cases involving charges of tax fraud against return preparers.  In addition, our firm can help taxpayers affected by IRS audit projects against clients of return preparers the IRS deems fraudulent.