Honesty with your tax preparer is as crucial as honesty with your doctor, but neither one of them guarantees their work is always the right treatment. If a tax preparer makes a mistake or even does something unethical, the Internal Revenue Service still comes after you for any increased tax liability. But, the IRS will typically not impose an extra assessment for fraud when you rely upon a tax professional. The penalty for a fraudulent act is 75 percent of understated tax liability.
As the taxpayer, you are primarily responsible for any errors on your tax return. All taxpayers have a legal duty to pay the correct amount of tax on their income plus any penalty and interest for late payment. However, reputable tax preparers usually correct their mathematical errors without charge. They also pay any IRS penalty or interest caused by determination of the correct tax after the due date. Some tax preparers sell insurance for an extra fee that pays any additional tax caused by their computation errors up to a specified limit.
Anyone charging fees to prepare federal income tax returns must comply with IRS rules. One section of regulations requires tax preparers to exercise due diligence in assuring that forms and schedules are accurate. The American Institute of Certified Public Accountants also imposes standards of reasonable care on the tax work of CPAs. Although the overall directive is for tax preparers to make appropriate inquiries into your records, you are still responsible for your correct tax liability. Any punishment of the tax preparer for mistakes is a separate matter.
IRS regulations over tax preparers also dictate that they not ignore conflicting taxpayer information. Tax professionals are allowed to rely upon the statements you make in good faith and without verification. However, a tax preparer cannot conveniently disregard known information. Beyond these government regulations, the AICPA has concrete rules for all CPAs that demand further inquiry into information that appears incorrect, incomplete, or inconsistent. Still, reprimand of the tax preparer is distinctive from you owing the IRS for any error caused by miscommunication.
Relying upon your tax preparer to judge the treatment of certain details on your tax return typically entails decisions about tax deductions. IRS requirements state that tax positions must have support from reliable sources or disclose that support may not exist. The AICPA also requires due diligence by CPAs about tax positions. You still owe the IRS for any tax assessment resulting from unacceptable judgments by your tax preparer. However, you might have a legal claim against him for failure to follow mandated standards. Tax preparers often have liability insurance to cover such claims.
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.