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Tax Preparer Penalties Defense

Tax professionals including CPAs, tax attorneys, enrolled agents, and unlicensed tax return preparers are subject to a myriad of penalties for conduct which the IRS deems to be problematic. Others such as actuaries and appraisers can also be subject to penalties. These penalties can be civil or criminal. The consequences of these penalties can be severe.

Internal Revenue Code § 6694(a) provides that if any part of an understatement of a taxpayer's liability is due to an "unrealistic position" taken on his return, any income tax return preparer who knew (or reasonably should have known) of this position is subject to a penalty of $250. If the understatement is due to a reckless or intentional disregard of rules or regulations the penalty is $1,000 per occurrence. The preparer's employer, firm or entity also is subject to the penalty if it knew, or reasonably should have known, of the conduct giving rise to the penalty. While these may not seem like large amounts, if this penalty is assessed IRS employees are instructed to report the income tax return preparer to the IRS Office of Professional Responsibility also known as OPR.

A preparer who is referred to the IRS's Office of Professional Responsibility, may be subject to suspension, disbarment, or censure. In addition, if the preparer has violated Circular No. 230, the IRS may impose a monetary penalty in an amount up to the gross income derived or to be derived from the conduct giving rise to the penalty. Therefore it is critical that if an IRS agent even suggests the possibility of a penalty being imposed that the income tax return preparer immediately obtain advice from a tax attorney to determine how to proceed.

Other civil penalties that can be imposed against income tax returns preparers include:

  • Failure by an income tax preparer to sign a required return. IRC § 6695(b).
  • Failure by an income tax return preparer to furnish a required taxpayer identification number. IRC § 6695(c).
  • Failure by an income tax return preparer to furnish a copy of the tax return to the taxpayer. IRC § 6695(a).
  • Failure by an income tax return preparer to retain a completed copy of the return or a record of the taxpayer's name, identification number, taxable year, and type of return prepared. IRC § 6695(d).
  • Failure by an income tax return preparer to comply with the due diligence requirements with respect to determining a taxpayer's eligibility for, or amount of, the earned income credit. IRC § 6695(g).
  • Aiding and aiding and abetting the understatement of a tax liability. IRC § 6701.
  • Disclosing or using any tax return information other than to prepare or assist in preparing the taxpayer's return. IRC § 6713(a).

With all of these penalties there is a substantial possibility for a referral to the IRS Office of Professional Responsibility (OPR) with the threat of suspension, disbarment and/or large fines. In addition, as part of any IRS investigation the IRS may and probably will contact current and former clients. The knowledge by clients that the IRS is investigating a tax return preparer will likely have a devastating impact on the livelihood of the preparer. Just one more reason why a tax return preparer who learns of an investigation should immediately retain a tax lawyer to represent him. Of course, the IRS can also seek criminal penalties for sufficiently egregious conduct.

Even without bringing a criminal prosecution the IRS may seek to enjoin an income tax return preparer engaging in specific abusive practices or from acting as an income tax return preparer. IRC § 7407(a). An injunction may be issued if a court determines that the preparer has (1) engaged in conduct subject to a preparer penalty under §6694 or §6695, (2) engaged in conduct subject to a criminal penalty under the Internal Revenue Code, (3) misrepresented his eligibility to practice before the IRS, (4) misrepresented his experience or education as a preparer, (5) guaranteed the payment of any tax refund or the allowance of any tax credit, or (6) engaged in any other fraudulent or deceptive conduct that substantially interferes with the proper administration of the tax law; and that injunctive relief is appropriate to prevent the recurrence of such conduct.

Appraisers can also be subject to penalties. Internal Revenue Code § 6695A imposes a penalty on a person who prepares an appraisal that results in a §6662 substantial or gross valuation misstatement if the person knew or reasonably should have known that the appraisal would be used in connection with a return or refund claim. This penalty can be as much as 125% of the fee received for the appraisal.

If the IRS is considering a penalty against you as a professional you should seek immediate assistance from a qualified tax attorney at this earliest possible time.

Call us today at 800.380.TAX LITIGATOR or contact us online to discuss your legal options.

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