By Kevan McLaughlin
Tax return professionals face a variety of liability risk challenges in their line of work, one being the IRS. In fact, tax preparer investigations are a common occurrence. CPA’s, Enrolled Agents, Attorneys, and non-registered return preparers may encounter such problems as injunctions, preparer or promoter penalties, and criminal or ethics investigations.
For example, the US Justice Department’s Tax Division and the IRS work hard to shut down tax return preparers or promoters using the civil injunction program. They do this by suing tax preparers to bar them from engaging in specified misconduct or from preparing tax returns for others. More than 500 return preparers were put out of business by this initiative in the past 10 years alone.
Adding to this inherent risk for some came in the form of the Earned Income Tax Credit (“EITC”) Due Diligence Standards of which, by regulation, requires return preparers to meet four different standards. The first two cover filling out the correct forms and calculating the penalty correctly. The next two, however, bring about the most prominent consternation for these professionals; that being to ensure that they did not, or should not have, known information used to prepare the tax return was incomplete, inconsistent or incorrect. Furthermore, preparers must keep that specific information, documented contemporaneously, in their client files for a specified period to document this claim. The failure to meet any one of the four due diligence standards originally subjected a return preparer to a $500 penalty, for each tax return, which is now also adjusted for inflation. More still, the scope of the EITC Due Diligence Standards was recently extended to Head of Household filing status, education credits, and the Child Tax Credit. Thus, a preparer can now face a $2,000 penalty, for each tax return, adjusted for inflation.
What’s more, state and other federal regulators often go after an individual preparer following any IRS case, putting even more risk on the person. Some authorities even place liability on a firm itself, beyond the acts of the individual tax professional. For example, Treas. Reg. § 1.6695-2(c) and Circular 230 § 10.36 create liability for a firm itself if it fails to take adequate steps to mitigate unethical behavior.
The best option for preparers and firms is to invest in a review of its compliance practices and to know a good legal team that is well versed in IRS Tax Preparer penalties, including 6694(a) and (b), 6695, injunctions, criminal investigations, and Circular 230 ethics counseling. These attorneys should also possess deep domain expertise in CPA licensure defense for a wide array of matters, including California Board of Accountancy (CBA) investigations and Public Company Accounting Oversight Board (PCAOB) audits. Knowing where to turn BEFORE regulators call upon you is critical.
About the author: As the founder of McLaughlin Legal, San Diego tax attorney and Adjunct Professor in Ethics for Accountants, Kevan P. McLaughlin focuses his practice on all aspects of Federal and California tax law, with a particular emphasis on representing tax preparers and CPAs in civil and criminal tax litigation and controversy cases. Reach him at firstname.lastname@example.org.