10 IRS Penalties Tax Preparers Should Watch Out For

If you make a living by preparing other people’s taxes, being aware of the IRS penalties you may face for not following the guidelines for preparing returns is very important. You must avoid the potential pitfalls that come with preparing your client’s 2017 returns by exercising due diligence and good faith, evaluating the risks and consistently reviewing IRS policies and guidelines. 

Tax preparers are individuals who prepare a tax return or refund claim in exchange for compensation, or who hire others to prepare returns for compensation. If you want to avoid paying for penalties, you need to first learn what they are.

Tax Preparer Penalties

1. IRC § 6694 – Understatement of taxpayer’s liability

• IRC § 6694(a) – Unreasonable positions that resulted in understatement. 
• IRC § 6694(b) – Willful or reckless conduct that resulted to understatement. 

2. IRC § 6695 – Other assessable penalties with regards to the preparation of other people’s tax returns.

• IRC § 6695(a) – Not giving a copy to the taxpayer will result in a $50 penalty for  IRC § 6107 non-compliance. In a calendar year, the maximum penalty imposed on any tax return preparer shall not exceed $26,000.
• IRC § 6695(b) – Not signing a return. For each failure of signing a return or claim for refund as required by the policies, there is a $50 penalty. In a calendar year, any tax return preparer can expect a maximum penalty not exceeding $25,500.
• IRC § 6695(c) – The penalty for each failure to comply with IRC § 6109(a)(4) regarding furnishing an identifying number on a return or claim is $50 and the maximum penalty in a calendar year shall not exceed $25,500.
• IRC § 6695(d) – Not keeping a copy or list will result to a penalty of $50 as it is a non-compliance with IRC § 6107(b) regarding retaining a copy or list of a return or claim. The same maximum penalty of $25,500 is imposed on any tax preparer.
• IRC § 6695(e) – Filing an incorrect information return shall have a penalty of $50 for non-compliance with IRC § 6060. In a return period, the maximum penalty imposed is not exceeding $25,500.
• IRC § 6695(f) – A tax preparer shall be penalized with $510 for endorsing or negotiating any check made in respect of taxes imposed by Title 26 which is given to a taxpayer.
• IRC § 6695(g) – The eligibility for earned income credit must be diligently determined. Failure to do so will result in a penalty of $510 for each failure to comply with the EIC due diligence requirements imposed in regulations.

3. IRC § 6700 – Promoting abusive tax shelters shall be penalized and is generally equal to $1,000 for each organization or sale of an abusive plan or arrangement.

4. IRC § 6701 – A tax preparer that aids and abetts understatement of tax liability shall receive a penalty of $1,000 and shall be penalized only once for documents related to the same taxpayer for a single tax period or event.

5. IRC § 6713 – If a tax preparer discloses or utilize information of the returns, a penalty is imposed amounting to $250 for each unauthorized activity. Any person shall receive the maximum penalty of not exceeding to $10,000 in a calendar year.

6. IRC § 7206 – Fraud tax preparers and those that release false statements shall face a fine of not more than $100,000, no more than three years of imprisonment, or both if convicted.

7. IRC § 7207 – Fraudulent returns, statements, or other documents shall have the same fine as IRC § 7206 if convicted.

8. IRC § 7216 – If a tax preparer is guilty of a misdemeanor for knowingly or recklessly disclosing information furnished related to a tax return or using such information for any purpose other than preparing or assisting in the preparation of such return, a fine of not more than $1,000, imprisonment for not more than 1 year, or both (together with the costs of prosecution) once convicted.

9. IRC § 7407 – A tax preparer may be enjoined by a federal district court from engaging in specific proscribed conduct or in extreme cases, from overall continuing to act as a tax return preparer.

10. IRC § 7408 – A person may be enjoined by the federal district court from engaging in specific proscribed conduct (including any action, or failure to take action, which is in violation of Circular 230).