When you hire a tax professional—be it a CPA, Enrolled Agent, or another paid preparer—to file your federal or California state tax returns, you expect accurate and legally compliant work. Yet, tax law is notoriously intricate, so it’s not uncommon for mistakes to occur. However, the IRS shows little leniency when errors—whether intentional or unintentional—arise. Taxpayers experiencing problems due to improperly handled income tax returns and related obligations may face significant civil and criminal tax penalties if the IRS believes they (or you) deliberately engaged in fraudulent practices or if they (or you) fail to correct the inaccuracies.
What to Do When Your Tax Preparer Makes a Mistake
If you hired a tax preparer to complete your return, you have an expectation that the work will be done properly. But sometimes the preparer, either intentionally or unintentionally, may make a mistake on your tax return that the IRS catches, potentially resulting in an audit and ordinarily followed by an assessment of additional tax penalties and interest.
After a change in tax laws over a decade ago, anyone who prepares a tax return can be held liable for mistakes made in preparing a return for someone else.
A tax preparer who made mistakes in your return could be subject to an IRS monetary penalty. The IRS does take into account the preparer’s testimony regarding the cause of the mistake, and errors deemed reckless carry the biggest penalties. It’s possible that if the preparer was acting in good faith and made an “honest” mistake, financial penalties could be waived.
The preparer also may receive a non-financial penalty or sanction, such as being unable to prepare any returns for a period of time.
Consider contacting the Tax Law Offices of David W. Klasing today to schedule a 10-minute reduced rate initial consultation with an experienced Tax Attorney. We know how to sort out the law and the facts in a tax controversy, and determine exactly who is responsible for the mistakes in your tax return and protecting your rights with the IRS.
What should you do if your tax preparer makes a mistake, and what is their liability? This is an informative blog on the topic of tax preparer liability, sketching the conditions under which a tax preparer may be liable for his or her errors, and the correlative penalties. To learn more on this topic, see our article on Tax Preparer Fraud
Who is Liable – the Tax Payer or the Tax Preparer?
Even if your preparer commits an egregious error or engages in fraudulent activity, you generally remain liable for paying any additional tax, interest, and civil penalties the IRS or the California Franchise Tax Board (FTB) assesses. This is because tax returns are filed under penalties of perjury, which places responsibility on the taxpayer to ensure correctness. That said, a tax preparer who knowingly or negligently caused an underreporting or inflated refund may face separate fines, injunctions, or criminal tax charges under IRC §6694 and California state regulations. In some situations, the preparer might offer to reimburse you for part or all of the penalties and interest if they acknowledge fault, though you’ll still typically owe the shortfall in tax. The taxpayer can potentially sue a preparer for negligence, where tax was paid that cannot be gotten back and for penalties and interest.
What are the Tax Penalties?
Under IRC § 6694, the IRS imposes a penalty on a tax return preparer that understates a taxpayer’s liability, and that is determined by whether he made any part of the understatement due to taking an “unreasonable position” that he knew (or reasonably should have known) of the position, or if he made any part of the understatement due to “willful or reckless conduct.” A penalty of $1,000 or 50% of the income (to be) derived may occur for each error on a return or claim for refund. However, if the preparer had reasonable cause for the understatement, and he acted in good faith, then IRC 6694(a)(3) exempts these penalties. A good tax attorney should be able to inform you whether a preparer had a “reasonable cause” for the understatement.
If the preparer made an understatement with “willful or reckless conduct” he shall pay a penalty on each return (or claim for refund) of $5,000 or 50% of the income derived. What’s “willful or reckless conduct”? It is defined as any willful attempt in any way to understate a tax liability, or a reckless or intentional disregard of the tax law. IRC 6694(b)(2).
In addition to the monetary penalties, there are non-monetary penalties, like an “injunction,” which is a basically a court order saying the preparer cannot practice in her professional capacity for a certain period of time. This can be far more devastating than the monetary penalties, because she would likely lose many clients. Moreover, the preparer may be required to re-open every like and non-like return that she prepared for the years falling within the statute of limitations. Finally, a preparer may also lose his license if found liable for tax preparer fraud.
Tax Preparer Liability
In the past, a tax preparer was not liable for gift (Form 709) and estate and generation-skipping (Form 706) tax returns. But a tax preparer was liable for income tax returns. Thus, for example, if a tax preparer committed an error–intentionally or unintentionally–on Forms 1040, 1040A, 1040EZ, 1041s, or 1065 (partnership) and 1041 (grantor trusts), the preparer was liable.
Today, since 2007, a tax preparer will be liable for errors committed on any return. This is because the Internal Revenue Code (IRC) §6694 was modified–broadened, really–replacing “an income tax return preparer” with “a tax return preparer.” Thus, a tax preparer may be liable for all federal tax returns and claims for refund.
Who is a “Tax Return Preparer”?
There are two types of tax return preparers: (1) Those licensed to practice under state law and before the IRS. These include your CPAs, attorneys, enrolled agents, enrolled actuaries, appraisers, and the like. (2) Those who are not licensed (called “unenrolled” tax preparers), who are permitted to prepare returns but disallowed from practicing before the IRS.
IRC § 7701(1)(36)(A) defines a “preparer” as “any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed . . . or any claim of refund.” Thus, a preparer does not include someone who did a tax return without receiving compensation. However, case law includes within the definition of a preparer one who did other services for the client, even though, strictly speaking, no compensation was received for preparing the return itself.
Common Scenarios Where Tax Preparers Face Liability
Negligence or Simple Mistakes
Tax preparers must adhere to high standards of conduct under provisions like IRC §6694(a) and IRS Circular 230. A minor oversight—such as omitting a Form 1099, transposing figures, or failing to note a recent change in tax law—can be considered negligence if it leads to understating a client’s tax liability. The IRS (and, in California, the FTB) can impose monetary penalties for such errors, and repeated or frequent occurrences can result in harsher fines or even revocation of the preparer’s e-file privileges. Additional sections, like IRC §6695, also impose disclosure and signature requirements that a negligent preparer may violate if they fail to sign returns, neglect to provide the taxpayer with a copy or omit their Preparer Tax Identification Number (PTIN).
Willful or Reckless Conduct
Where a preparer intentionally overstates deductions, claims nonexistent dependents, or omits income, the violation escalates to willful or reckless misconduct under IRC §6694(b). Fines for willful infractions are much higher because they represent a more serious departure from legal and ethical standards. In egregious cases, the Department of Justice (DOJ) or FTB can pursue felony charges against the preparer for facilitating tax evasion—often under statutes like IRC §7206(2), which explicitly criminalizes willful assistance in preparing a false return. The preparer may also risk permanent loss of licensure if found guilty.
Aiding and Abetting Fraud
If a tax preparer colludes with a client to prepare fraudulent returns, hide revenue streams, or inflate credits—thereby understating the tax owed—both parties risk significant civil and criminal tax penalties under IRC §§7201, 7206, and parallel California state tax laws. Preparers who orchestrate extensive refund schemes often face multi-year prison terms, hefty restitution orders, and permanent professional disbarment. Even smaller, willful misstatements can lead to felony tax charges if proven “material” to the tax outcome. The Ninth Circuit has held (Edwards v. United States) that any material misstatement—regardless of whether the government actually lost revenue—can violate IRC §7206(2).
Preparers Liable for More Than Just Income Tax Returns
Before 2007, IRC §6694 primarily targeted those who prepared “income tax returns.” However, legislative revisions broadened liability to “any return of tax imposed . . . or any claim for refund,” thereby encompassing gift tax (Form 709), estate and generation-skipping transfer tax (Forms 706), and other returns beyond traditional income tax filings. This expansion means a paid preparer is potentially liable for errors on virtually any federal tax return or refund claim. Additionally, tax preparers can face penalties for failing to sign a return or exercise due diligence (e.g., IRC §6695), breaching client confidentiality (IRC §6713), and promoting abusive tax shelters (IRC §6700).
Given the IRS’s heightened enforcement efforts—often focusing on return preparers and “material advisers” who may be facilitating fraudulent or abusive schemes—tax professionals must exercise extreme caution. “Badges of fraud” or repeated infractions can prompt civil and criminal tax investigations, leading to substantial fines, the permanent loss of a preparer’s license, and, in severe cases, prison time. If you suspect your practices or those of your firm fall under such scrutiny, prompt consultation with an experienced dual-licensed Tax Attorney and CPA is vital to prevent escalation into criminal tax enforcement. It is sometimes said that while the focus of an accountant is accuracy, the focus of an attorney is advocacy. Our Office’s expertise and training combine both fields: We place a premium on both accuracy and client advocacy. Contact us online here or call 888-564-1409 to speak to a tax preparer fraud attorney to discuss your case.
Consequences for Fraudulent or Negligent Preparers
Monetary Fines
- Ranging from $50 for minor infractions to over $100,000 for serious abuses under the IRC and matching state laws.
- Additional monthly interest often accrues on unpaid balances.
License Suspension or Practice Injunction
- A court injunction can ban the preparer from practicing for a set period.
- The IRS may also revoke e-file privileges or require them to resubmit past returns if the misconduct appears pervasive.
Re-Examination of Old Returns
- If the IRS believes the preparer systematically repeated the same offense, it may reopen prior-year returns or investigate “like” or “non-like” returns under the applicable statute of limitations.
Criminal Referral
- Particularly with willful tax fraud, the DOJ may bring felony charges for conspiracy, aiding and abetting, or direct tax evasion.
When to File a Tax Preparer Complaint (Form 14157)
If your tax preparer’s conduct goes beyond simple mistakes—such as filing a return or altering data without your consent, inventing false deductions, or routing your refund to their account—you may formally complain to the IRS using Form 14157. Here are key scenarios:
Your Tax Return or Refund Has Been Impacted
- Falsified claims or altered filing statuses, expenses, or credits to maximize refunds.
- Changes made to your return without prior notice or consent.
- Misdirected refunds to accounts other than yours.
Your Return or Refund Has Not Been Impacted
- Improper or missing Preparer Tax Identification Number (PTIN).
- Refusal to sign returns or refusal to provide you a copy.
- Withholding your records until payment is rendered.
- Claiming false credentials (e.g., posing as an enrolled agent or CPA without valid licensing).
Characteristics of a Fraudulent Tax Professional
Taxpayers should watch out for unscrupulous preparers who:
- Manipulate Return Data: Filing incorrect statuses, fabricating dependents, or inflating expenses.
- Misdirect Refunds: Routing refunds to their own bank accounts.
- Refuse to Provide Copies: Refusing to sign or give you a copy of your return.
- Overcharge or Withhold Records: Charging exorbitant fees while using free or off-the-shelf software, then holding your documents hostage for payment.
- False Credential Claims: Pretending to be a CPA, attorney, or enrolled agent without valid licenses.
What To Do If Your Preparer Makes a Mistake
Confront the Preparer
- Bring the issue to their attention; they may fix the return or reimburse you for penalties and interest if they concede fault.
- For repeated or severe misdeeds, an amended return might be warranted.
Review Your Engagement Contract
- It often states you must ensure all information is complete and correct, but it may also outline the preparer’s responsibility for errors.
Confirm the Error is Not Yours
- If you gave inaccurate or incomplete info, the fault might partly lie with you.
- If the mistake truly belongs to the preparer, you can sometimes push for penalty abatement if you demonstrate good-faith reliance.
Consider Additional Action
- If your preparer engaged in significant wrongdoing, filing Form 14157 with the IRS helps formalize your complaint.
- In severe cases, you can also report them to professional bodies (AICPA, State Bar, etc.).
Tax Preparer Liability FAQ
Can I sue my tax preparer for making a mistake?
Yes, provided they have committed negligence, or a malpractice. California’s comparative negligence jurisdiction, in a lawsuit, the client is usually in the best position to catch an error, and therefore a 100% recovery is rare.
If a tax preparer makes a mistake, who has to pay?
Ordinarily the taxpayer will be responsible for any additional income tax, but the preparer can potentially be held liable for the additional penalties and interest. Quite often, the economics are such that the tax preparer is left with small claims court as the only viable economic option.
What should you do if your tax preparer makes a mistake?
Bring the matter to your preparer’s attention, and quite often an amended return is often warranted to correct the mistake. Most reputable preparers will cover the penalties and interest related to their own mistakes.
Contact the Tax Law Offices of David W. Klasing Today
At the Tax Law Offices of David W. Klasing, our dual-licensed criminal tax defense attorneys & CPAs offer an integrated legal and accounting approach for both taxpayers and tax preparers caught in the crosshairs of disputes stemming from preparer errors. We understand that such controversies can escalate quickly, moving from civil disagreements to felony-level criminal tax allegations – especially where “badges of fraud” are uncovered. That is why having more than just an accountant is vital in these high-stakes scenarios.
Our dual-licensed tax attorneys & CPAs deliver deeper protections under the attorney-client privilege, ensuring your disclosures stay confidential in the face of potential criminal tax inquiries. If you suspect your preparer’s actions – or your own complicity – produced questionable or outright fraudulent returns, we guide you through a domestic or offshore voluntary disclosure, often averting criminal tax prosecution and dramatically reducing related civil penalties. Should matters escalate to felony allegations, our extensive criminal tax defense background enables us to construct a robust defense aimed at preserving both your net worth and your personal freedom.
Even If you are a tax preparer who suspects you may have committed one of the offenses mentioned above, you need experienced legal counsel to safeguard your interests. Don’t wait for the situation to spiral. Call the Tax Law Offices of David W. Klasing at (800) 681-1295 or connect with us online to schedule a reduced-rate initial consultation. Our nationally recognized, award-winning team stands ready to clarify your exposure, tackle immediate compliance challenges, and shield your personal and financial interests if a civil dispute begins to veer into criminal tax territory.
