Taxpayers vulnerable for preparers’ errors
Taxpayers are responsible for mistakes made by tax preparers. You can’t just point at your tax professional to avoid liability.
Using an incompetent tax preparer could be costly. Penalties and interest can be substantial depending on the circumstances.
If the IRS determines that you underreported your income, there are several types of penalties. One is the penalty for substantial underpayment of your tax liability. Substantial underpayment is understating your tax liability by at least 10 percent.
The negligence penalty does not require a set percentage but applies to disregarding rules.
The IRS punishes fraud with a 75% penalty. As an example, if you owed $10,000, the penalty would be $7,500.
If you claimed the Earned Income Tax Credit (EIC) and committed fraud by error, the IRS may ban you from claiming the EIC for the next two years. When the IRS determines that a taxpayer fraudulently claims the credit, the EIC is disallowed for ten years.
Tax returns which include the EIC have the highest audit rates. In 2021, the EIC can be as much as $6,728. Consequently, losing the EIC could be very costly.
Unfortunately, no federal competency standards currently exist for tax preparers. Anyone can be a tax return preparer with almost no knowledge. Tax return software's question and answer format enable people to prepare taxes without tax education.
The has recommended legislation to provide the IRS with authority to establish minimum competency standards since 2002. Both Biden and Trump Administrations have also recommended minimum standards for tax return preparers.
IRS Commissioner Charles Rettig has been a strong advocate of oversight of tax preparers.
Several studies have consistently shown that non-credentialed tax preparers had a higher rate of returns with an error. They would also be responsible for the highest rate percentage of EIC overclaims.
A Taxpayer Advocate survey found that the low-income population is more likely to be taken advantage of by unskilled or unscrupulous tax preparers.
Since the tax code is so complex, the majority of taxpayers pay preparers to complete their returns.
Unfortunately, many people don’t know how to determine whether a preparer is competent to prepare their tax return.
The vast majority of tax professionals are non-credentialed and are not required to take any courses in tax preparation or pass competency tests.
Requiring minimum competency standards for preparers would help to ensure accuracy and protect taxpayers.
Credentialed preparers, including attorneys, certified public accountants (CPAs), and enrolled agents (EAs), are generally required to pass competency tests and take a minimum amount of continuing education each year.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org.