Preparer Penalties

Question 1

What must a tax preparer ensure when taking a position on a tax return?

Answer 1

The position must have substantial authority or, if disclosed, a reasonable basis.

Question 2

What types of positions are not allowed on a tax return?

Answer 2

Frivolous positions, which have no basis in law or are deemed frivolous by the U.S. Tax Court or federal courts.

Question 3

How long does the IRS have to assess penalties after a return is filed?

Answer 3

The IRS has three years, but there is no statute of limitations for fraudulent returns.

Question 4

What is the “substantial authority” standard?

Answer 4

It is an objective standard where the weight of supporting authorities is substantial compared to opposing authorities.

Question 5

How does “reasonable basis” compare to “substantial authority”?

Answer 5

Reasonable basis is a high standard but less stringent than substantial authority.

Question 6

What standard must tax shelters meet?

Answer 6

A “more likely than not” confidence level (greater than 50%).

Question 7

What forms can be used to disclose uncertain tax positions?

Answer 7

Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement).

Question 8

Can disclosure on Form 8275 avoid all penalties?

Answer 8

No, it cannot avoid penalties for negligence, tax shelter misstatements, or fraudulent claims, among others.

Question 9

What is tax avoidance?

Answer 9

Legal methods to reduce or minimize tax liability.

Question 10

What is tax evasion?

Answer 10

Illegal acts to evade or defeat tax liability, such as fraud or concealment.

Question 11

What are some signs of income fraud?

Answer 11

Omitting income, unexplained wealth, and concealing sources of income.

Question 12

What are examples of deduction fraud?

Answer 12

Claiming fictitious deductions or using personal expenses as business deductions.

Question 13

What is a “badge of fraud”?

Answer 13

Indicators like false statements, concealed records, or improper conduct during examinations.

Question 14

What are the penalties under §7206 for fraud by a tax preparer?

Answer 14

A fine up to $250,000 ($500,000 for corporations), imprisonment up to three years, or both.

Question 15

What are the penalties under §7207 for fraudulent statements?

Answer 15

A fine up to $10,000 ($50,000 for corporations), imprisonment up to one year, or both.

Question 16

What is the penalty for an unreasonable position?

Answer 16

$1,000 or 50% of the preparer’s fee, whichever is greater.

Question 17

What is the penalty for willful or reckless conduct?

Answer 17

$5,000 or 75% of the preparer’s fee, whichever is greater.

Question 18

What is the penalty for aiding an understatement of tax liability (§6701)?

Answer 18

$1,000 per document or $10,000 for corporate-related documents.

Question 19

Who can be penalized for aiding understatement of tax?

Answer 19

Anyone who knowingly assists or advises on a tax understatement, even without preparing the return.

Question 20

What is the penalty for failing to sign a tax return?

Answer 20

$60 per return, up to $30,000 per year.

Question 21

What is the penalty for failing to provide a copy of the return to the taxpayer?

Answer 21

$60 per occurrence, up to $30,000 per year.

Question 22

What is the penalty for negotiating a taxpayer’s refund check?

Answer 22

$600 per check, with no maximum limit.

Question 23

What must a preparer do to meet due diligence for credits like EIC or CTC?

Answer 23

Complete Form 8867, verify information, and maintain records for three years.

Question 24

What is the penalty under §6713 for disclosing taxpayer information?

Answer 24

$250 per violation, up to $10,000 per year.

Question 25

What is the penalty under §7216 for knowingly disclosing taxpayer information?

Answer 25

A fine of up to $1,000, imprisonment up to one year, or both.

Question 26

How long does a preparer have to pay an IRS penalty?

Answer 26

30 days after receiving the demand for payment.

Question 27

What can a preparer do if they disagree with a penalty?

Answer 27

Pay at least 15%, file a claim for refund, and potentially proceed to court.