Tax preparer penalties

Question 1

Tax preparer penalties

https://www.irs.gov/payments/tax-preparer-penalties

Answer 1

• Understatement of taxpayer’s liability
• Failure to furnish copy to taxpayer – IRC § 6695(a)
• Failure to sign return – IRC § 6695(b):
• Failure to furnish identifying number – IRC § 6695(c)
• Failure to retain copy or list – IRC § 6695(d):
• Failure to file correct information returns – IRC § 6695(e)
• Negotiation of check – IRC § 6695(f)
• Failure to be diligent in determining eligibility for certain tax benefits – IRC § 6695(g)
• Promoting abusive tax shelters
• Understatement of tax liability
• Disclosure or use of information by preparers of returns
• Fraud and false statements
• Fraudulent returns, statements or other documents
• Knowing or reckless disclosure or use of information by preparers of returns
• Actions to enjoin specified conduct related to tax shelters and reportable transactions

Question 2

Understatement of taxpayer’s liability

Answer 2

Understatement due to **unreasonable positions **— IRC § 6694(a): The penalty is $1,000 or 50% (whichever is greater) of the tax preparer’s income to prepare the tax return or claim

Understatement due to **willful or reckless conduct **— IRC § 6694 (b): The penalty is $5,000 or 75% (whichever is greater) of the tax preparer’s income to prepare the tax return or claim

Tax law: IRC Section 6694

Question 4

Promoting abusive tax shelters

Organize or sell abusive tax shelters.

We calculate the penalty differently depending on the conduct:

Answer 4

False statements about the tax benefits of the transaction: Penalty is 50% of the gross income the person made for the activity

Provides a gross valuation overstatement: Penalty is $1,000 or 100% (whichever is less) of the gross income the person made for the activity for each entity or arrangement (treated as a separate activity) and participation in each sale

Tax law: IRC Section 6700

Question 5

Understatement of tax liability

The penalty is $1,000 ($10,000 for a corporate tax return) for helping underestimate a person’s tax liability on their tax return.

Answer 5

We may assess this penalty only once for documents relating to the same taxpayer for a single tax period or event.

Tax law: IRC Section 6701

Question 6

Disclosure or use of information by preparers of returns

Applies to disclosures or uses made on or after July 1, 2019.

The penalty is $250 for each unauthorized disclosure or use of information given to a tax preparer to prepare a tax return. The maximum penalty assessed cannot be greater than $10,000 in a calendar year.

If an unauthorized disclosure or use of information is connected to an identity theft crime, the penalty is $1,000 for each use or disclosure. The maximum penalty assessed cannot be greater than $50,000 in a calendar year.

Tax law: IRC Section 6713

Question 7

Fraud and false statements

People assessed this penalty are charged with a felony crime and may be:

• Fined up to $100,000 ($500,000 in the case of a corporation)
• Imprisoned up to 3 years
• Required to pay for the costs of prosecution

Answer 7

This penalty also applies to fraudulent and false activities in connection with offers in compromise or a closing agreement.

Tax law: IRC Section 7206

Question 8

Fraudulent returns, statements or other documents

It may apply to people who prepare fraudulent returns, statements or other documents. People assessed this penalty are charged with a misdemeanor crime and may be:

Fined up to $10,000 ($50,000 in the case of a corporation)
Imprisoned up to 1 year

Tax law: IRC Section 7207

Question 9

Knowing or reckless disclosure or use of information by preparers of returns

Applies to tax preparers who knowingly or recklessly disclose information given to them to prepare a tax return or use the information for any purpose other than to prepare a return. Tax preparers assessed this penalty are charged with a misdemeanor crime and may be:

Fined up to $1,000
Imprisoned up to 1 year
Required to pay for the costs of prosecution

Tax law: IRC Section 7216

Question 10

Actions to enjoin specified conduct related to tax shelters and reportable transactions

The U.S. government may sue in federal district court to stop a person’s unlawful conduct regarding tax shelters and reportable transactions. The conduct may include violations in Circular 230 PDF and other laws about practicing before the IRS.

Tax law: IRC Section 7408

Question 11

How we calculate the penalty

We may calculate tax preparer penalties based on:

Number of violations
Regulations violated
Rates of inflation
Tax years involved

Question 12

Request a refund

If you paid a penalty that was assessed in error, you can request a refund with Form 6118, Claim for Refund of Tax Return Preparer and Promoter Penalties. Send the completed form to the IRS office that sent you the billing statement. You must request a refund within 3 years of the date you paid the penalty.

If you don’t pay the penalty, you may file Form 843, Claim for Refund and Request for Abatement. If you file Form 843, you can’t go to the U.S. District Court or U.S. Court of Federal Claims.