Minding Your Mistakes – 3 Critical Tax Preparer Penalties

Being mindful of your business’s tax responsibilities is difficult enough to imagine on its own. It’s even more distressing to be a company whose service is to manage several companies’ ledgers simultaneously! Your clients count on your duty and credibility as a tax preparer to provide quality customer service. This means maintaining quality tracking of all accounting procedures while staying up-to-date with the IRS’s latest policies and guidelines.

 

Avoiding Penalties from the IRS

Tax preparers have the added risk of compromising another person’s business—leading to lengthy arguments and expensive amounts of compensation to rectify the situation. Unfortunately, making mistakes isn’t uncommon for amateur or even veteran preparers. This is why they need to undergo rigorous training to review their output and double-check for any mistakes. Besides making mathematical inaccuracies, failure to observe the changes in IRS policies can lead to hefty fines. For this reason, you must stay vigilant to avoid incurring any of the penalties below:

 

#1. IRC § 6694 or tax understatements

IRC § 6694 or the understatement of a taxpayer’s liability by tax return preparer can be due to one of two reasons: understatement from unreasonable positions or willful or reckless conduct. Citing inaccuracies in your tax return can be grounds for an understatement, especially if it accounts for more than 10% of a business entity’s tax or around $5,000 for individual taxpayers. This usually incurs either a flat fee of $1,000, $5,000, or 50% of the derived income concerning the return or claim for refund.

 

#2. IRC § 6695 or miscellaneous assessable penalties in improper tax preparation procedures

IRC § 6695 covers several penalties that pertain to individual inconsistencies in complying with the right format and submission of tax papers. This can range in several offenses, from failing to furnish an identifying number, sign a return, file current information returns, or determine the eligibility of earned income credit. The penalties can range from as low as $50 to as high as $25,500 under a return period. Keep in mind these penalties can accumulate within a single failed tax return, which is why every small mistake piles up to a larger cumulative penalty fee.

 

#3. IRC § 7206 and IRC § 7207 or fraud

IRC § 7207 is a penalty incurred due to a misdemeanor charge of fraudulent returns, statements, and other financial documents. This results in a fine of $10,000 for individual taxpayers and $50,000 for business entities. Additionally, you may also face imprisonment of not more than a year. In relation to the penalty above, IRC § 7206 is a more severe case of fraud and false returns resulting in a fine not greater than $100,000 for individual taxpayers and $500,000 for business entities. It can ultimately result in imprisonment of no more than three years, together with additional prosecution costs assigned by a court judge.

 

The Bottom Line

Tax preparers will vary in professions and specializations, from tax specialist attorneys to licensed CPAs. Each one has a particular ground to cover for another business entity or individual client. Nevertheless, they all require seamless documentation and archiving software to ensure that they’re providing accurate and precise reports back to their clients. Thankfully, tax preparers can benefit from modern tools to aid in their day-to-day tasks. Utilizing modern tools to streamline your accounting processes is the best way to avoid making crucial tax preparation mistakes. We can provide you with versatile tax software for preparers to ensure that you won’t incur any penalties in your tax form submissions. Try our software’s free demo today, and discover how it can optimize your accounting procedures!

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