IRS Regulations and Penalties for Tax Return Preparers

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Below you’ll find some of the most common IRS regulations and penalties for tax return preparers that you could see on the REG CPA exam.

TRPs Need a Preparer Tax Identification Number (PTIN)

Tax return preparers are required to obtain a preparer tax identification number (PTIN). Signers and non-signer preparers are subject to this requirement.

Definition of a Tax Return Preparer (TRP)

The definition of a tax return preparer (TRP) is:
“Any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code.”

This includes anyone who prepares any federal income tax returns, and estate and gift tax returns, and is paid to do so. Being compensated is key. One layperson helping their mom do her taxes in TurboTax is not considered a preparer.

Keep in mind it includes anyone who prepares a “substantial portion” of the return as well, not just the signing TRP.

Tax Return Preparer Penalties

Below are some of the most common TRP penalties you could see questions about on the REG CPA exam.

Aiding or Abetting Federal Tax Evasion

If a TRP aids or abets federal tax evasion, then the TRP can be prohibited from working as a preparer, AND face federal criminal prosecution.

Fine for Endorsing or Negotiating a Taxpayer’s Check

If a TRP endorses or otherwise negotiates a refund check issued to a taxpayer, this is not allowed and the TRP will pay a fine of $530. So, a TRP cannot endorse and cash a client’s refund check, even if for some reason the client asked them to.

Fine for Understating a Taxpayer’s Tax Liability

Understating a taxpayer’s tax liability: If the preparer takes unreasonable positions which understate a taxpayer’s tax liability, the penalty is the greater of $1,000 or 50% of the income derived by the TRP with respect to the return or claim for refund. Also, if there is understatement due to willful or reckless conduct, the penalty is the greater of $5,000 or 75% of the income derived by the TRP with respect to the return or claim for refund.

Fine for Failure to Furnish Copy of Return to Taxpayer

If the TRP fails to provide the client with a copy of the return, there is a $50 penalty for each instance.

Fine for Failure to Sign Tax Return

A penalty of $50 for each instance of not properly signing a return.

Fine for Failure to Provide PTIN

A penalty of $50 for each failure to provide the TRP’s identification number on a return.

Fine for Failure to Retain Copy of Tax Return

A penalty of $50 for each instance of not retaining a copy of the return.

Fine for Failure to File Correct Information Return

Any person that employs other TRPs needs to file an information return that lists the names and social security numbers of such employees. Failure to file this information results in a penalty of $50.

Determining Eligibility for Earned Income Credit

Failure to be diligent in determining eligibility for earned income credit results in a penalty of $530 for each failure.

Fine for Promoting Abusive Tax Shelters

Penalty is $1,000 for each case in which such a shelter was planned or arranged.

Fine for Understatement of Tax Liability

Aiding and abetting understatement of tax liability results in a $1,000 fine.

Unauthorized Disclosure of Information by a TRP

If a TRP discloses or uses information from preparing a return for any other purpose then preparing and filing the return, there is a $250 fine for each use of such information, up to a maximum of $10,000 in a calendar year. This is also a misdemeanor, and upon conviction a fine of $1,000 and imprisonment of up to a year. Also, if the disclosure or use is made in connection with a crime relating to the misappropriation of another person’s taxpayer identify, the penalty increases to $1,000 for each use or disclosure, up to a maximum of $50,000 in a calendar year.

Fraud and False Statements

This is guilty of a felony, and upon conviction a fine of not more than $100,000 and possibly imprisonment for not more than 3 years, or both.

Fraudulent Returns or Statements

This is guilty of a misdemeanor, and upon conviction a fine of not more than $10,000 and possibly imprisonment of not more than a year.

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