CPA or Loan Preparer Made Errors: Am I Still Liable??

• Additional Tax

Generally, the taxpayer remains responsible for the additional tax assessed. The IRS and other taxing authorities assess tax on the taxpayer’s liability, regardless of whether the deficiency is caused by a preparer’s mistake.

• Interest

The taxpayer generally remains liable for the interest arising from an incorrect tax return. Interest is a function of the underpayment and the timing of the payment, and it typically continues to accrue until the tax deficiency is fully resolved.

• Civil Penalties

The taxpayer may also remain liable for any civil penalties that are assessed by the IRS or other taxing authority. While it is sometimes possible to avoid penalties in the case of an honest preparer error, these errors are more likely to trigger penalties like those for negligence or substantial understatement.

• No Debt Elimination

If a preparer provides reimbursement to a client for tax amounts owed as a result of the preparer’s error, the reimbursement does not eliminate the taxpayer’s underlying tax debt. While a preparer may agree to pay the assessed amounts on behalf of their client, this is a private contractual matter that does not discharge the taxpayer’s legal obligation to the IRS or other taxing authority.

• Perjury Penalties and Taxpayer Liability

Tax returns are filed under penalties of perjury. This means that taxpayers, not their preparers, are legally responsible for the accuracy of the information on their tax returns. While a preparer’s error may explain why a return is inaccurate, the legal burden of ensuring accuracy ultimately falls on the taxpayer.

What Happens When a Preparer Accepts Records But Never Files?

If you discover that your CPA or other tax preparer made a mistake on your tax return, there are a few potential options available to you:

• File an Amended Return (Form 1040-X): If you discover an error after your tax return has been filed, you can file an amended return. This form can correct mistakes such as reporting inaccurate income or failing to claim a legitimate deduction, credit, or other tax benefit.
• File an IRS Complaint: If you have concerns about your tax return preparer’s conduct, the IRS provides Form 14157, “Complaint: Tax Return Preparer.” This form is specifically designed for taxpayers to report misconduct by their preparers. This includes, but is not limited to:
• Making unauthorized changes to your tax return,
• Adding fraudulent deductions and credits, and,
• Any other actions that rise to the level of misconduct and fraud.
• Additional Reportable Misconduct: Beyond the examples listed above, there are other scenarios that may warrant filing an IRS complaint. For example, if a preparer refuses to sign your tax return, refuses to give you a copy of your signed tax return, or misdirects your tax refund to themselves or another party, these actions may also constitute reportable preparer misconduct.

In these cases, it will be important to preserve all documentation that you possess that helps support your allegations. This includes, but is not limited to, emails and other communications from your CPA or other tax preparer, as well as copies of tax documents such as W-2s, 1099s, and any records you provided to your preparer.

When Can a Taxpayer Recover Losses from a CPA’s Preparation Error?

What happens in these cases, and what are the key issues, will depend on whether your tax return preparer is a CPA, loan preparer, or another type of professional, whether the return preparer has liability insurance coverage, and whether a formal engagement agreement exists. While the circumstances of your case will dictate your options for seeking reimbursement for errors, there are several key issues that come into play in these situations.

1. Did the Tax Preparer Fail to Meet the Professional Standard of Care?

A preparer who makes mistakes on a client’s tax return or loan application can be at risk for a civil claim if, in fact, their errors were the result of negligence or professional malpractice. If your CPA or other tax preparer has failed to meet the professional standard of care applicable in your situation, you may have grounds to sue for negligence or professional malpractice.

2. What Damages can a Taxpayer Seek in a Civil Claim Against a Tax Preparer?

If a civil claim is warranted, a negligent CPA or other tax preparer should be held liable for any penalties and interest that the taxpayer owes to the IRS (or other taxing authority) because of the preparer’s error. In many cases, the taxpayer has also suffered financial losses as a result of the preparer’s error. If these losses can be attributed to the preparer’s error, the taxpayer may be able to recover these damages in a civil claim as well.

3. Does the Engagement Agreement Between the Taxpayer and Tax Preparer Allocate Responsibility?

When determining whether a tax return preparer was negligent or committed professional malpractice, it will be important to examine the engagement agreement. The engagement agreement is a contract between the taxpayer and the tax return preparer that outlines the preparer’s obligations to the taxpayer. In many cases, the engagement agreement will also include language allocating responsibility between the parties for ensuring that the preparer has accurate information to include on the return. For example, in typical engagements, the taxpayer will agree to provide all information needed to properly prepare the return.

4. Did Inaccurate or Incomplete Information Provided by the Taxpayer Contribute to the Preparer’s Error?

If a tax return preparer has made errors, a taxpayer may still be liable to a taxing authority if the errors were the result of providing inaccurate or incomplete information. This is true even if the preparer ultimately produced a tax return that contains errors. Taxpayer compliance in this area will be one of the key issues in cases involving preparer negligence or professional malpractice.

5. Is a Taxpayer Subject to a Deadline for Pursuing a Claim for a Negligent Preparer’s Preparation Error?

With respect to determining whether you are subject to a specific deadline for pursuing a claim for a negligent CPA or other preparer’s preparation error, our lawyers will need to know the state in which you are located and your preparer’s relationship to you. Our attorneys can explain your options and identify the specific legal and ethical protections that apply in your situation once we are able to answer these questions.

Todd Spodek has been selected to Super Lawyers for six consecutive years.

When Do IRS Preparer Penalties Apply to an Error?

The IRS imposes several types of penalties on preparers that can help trigger reimbursement for taxpayers who may suffer the financial consequences of their CPA’s or other tax preparer’s errors. These penalties may also be used as evidence in a civil claim if a taxpayer has grounds to sue their CPA or other tax preparer for professional malpractice or negligence. The following are the most common tax return preparer penalties under the Internal Revenue Code (IRC):

• IRC § 6694(a), Understatements Due to Unreasonable Position: IRC § 6694(a) deals with understatements that are a result of “Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position.” According to this section, the IRS may impose a penalty on a preparer if it has “If a tax return preparer-(A) prepares any return or claim of refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2), and (B) knew (or reasonably should have known) of the position, such tax return preparer shall pay a penalty.” and the preparer “knew or reasonably should have known” that the position they took was, in fact, unreasonable. This subsection also provides a reasonable-cause and good-faith exception to the penalty in many cases. Generally, the penalty under IRC § 6694(a) is greater of $1,000 or fifty percent of the amount of income, fees, or commission derived by the preparer from the preparation of the return to which the penalty applies.
• IRC § 6694(b), Understatements and Overstatements Due to Willful or Reckless Conduct: IRC § 6694(b) deals with understatements (and overstatements that improperly reduce tax) in returns that resulted from “willful or reckless conduct.” This can include making willful or reckless disregard of the correct tax amount, such as by forging signatures, making claims for credits that are not legitimate or that are wholly unfounded, or any other similar actions that rise to the level of “willful or reckless conduct.” Generally, the penalty under IRC § 6694(b) is greater of $5,000 or seventy-five percent of the amount of income, fees, or commission derived by the preparer from the preparation of the return to which the penalty applies.

How Could Willful Conduct Affect Criminal and Professional Discipline?

If a taxpayer’s preparer’s efforts were willful, this could trigger criminal prosecution and disciplinary actions by the IRS and other agencies. For example, if a taxpayer’s preparer willfully assisted in the preparation of a false return that failed to properly include all forms of income, it may implicate IRC § 7206(2), and the preparer may also be subject to other charges. But if the preparer merely made an ordinary accidental preparation error, then the issue is civil rather than criminal in nature, and it will be unnecessary to pursue charges against the preparer.

When Can the IRS Impose Monetary Penalties?

Beyond tax assessments made against taxpayers, the IRS can also impose monetary penalties against tax preparers. These penalties are specifically described in IRC § 6694, and they apply when a tax return preparer takes an unreasonable position, makes mistakes in their reports, or willfully or recklessly misstates a taxpayer’s tax liability or taxes that a taxpayer owes.

When Can the IRS Seek a Federal Injunction?

In addition to imposing monetary penalties, the IRS can also seek federal injunctions against tax preparers who engage in prohibited conduct. Such conduct may include preparing fraudulent returns, soliciting clients through deceptive means, and charging unreasonable fees.

When Can the IRS Office of Professional Responsibility (OPR) Discipline a Preparer?

The IRS OPR is responsible for enforcing ethical requirements that apply to practitioners licensed to practice before the IRS, which include lawyers, CPAs, enrolled agents, and preparers who participate in the Annual Filing Season Program. The OPR is tasked with enforcing Circular 230, which is a comprehensive set of guidelines and regulations that specify the responsibilities of practitioners when preparing federal returns. When preparers fail to adhere to Circular 230, they can face additional penalties and restrictions, including disbarment from practice before the IRS, which generally bars practice for at least five years and other similar measures.

Talk It Through With a Lawyer

Every case turns on its own facts. Todd Spodek is the managing partner of Spodek Law Group, a second generation firm his father opened in 1976, and the firm takes federal criminal and white collar matters nationwide. Call 888 348 8028 to talk it through.