Originally published at AVVO.com

Millions of tax returns are filed each year by return preparers, including Certified Public Accountants, Enrolled Agents, franchised tax return companies, and small companies with unregulated preparers. All of them should know that there are a lot of penalties should they violate the IRS rules.

1. Due Diligence Penalties

   The Internal Revenue Code lists a variety of violations, many of which carry a monetary penalty. Some of these include “understatement of taxpayer’s liability by tax return preparer,” either by taking an unreasonable position on a return or engaging in reckless conduct, failure to sign a return, failure to retain copies of returns they prepare, “failure to be diligent in determining eligibility for certain tax benefits” (especially the earned income credit, additional child tax credit, American Opportunity Credit, and head of household filing status.) The IRS will contact a preparer or firm and schedule a visit, and during the visit will inspect the office, the file system, office procedures, and several actual tax return files from one or more years. THEY ARE LOOKING FOR VIOLATIONS! I have represented many tax return preparers during these due diligence visits, and can instruct the return preparers how to best prepare for the examination by the Internal Revenue Service.

2. What Happens When the IRS Assesses a Return Preparer with Due Diligence Penalties

   If the IRS discovers violations either on tax returns, in the files, or even in the way the return preparer locks its cabinets, it will propose monetary penalties in a letter. We have seen penalties proposed against individual tax return preparers in excess of $100,000! The proposed penalty assessment can be appealed within 30 days, and this is where an attorney can be of assistance. A formal protest or appeal must follow IRS guidelines, and needs to contain all defenses and documents which can possibly help to eliminate or reduce the various proposed penalties. We have found that at this stage, getting the case in front of an independent Appeals Officer at the IRS often gets the penalties reduced if not removed entirely. The 30 day appeal period may not be extended or missed.

3. Sometimes the IRS Will File a Lawsuit Against, or even Criminally Charge a Return Preparer

   Over the past few years we have been involved in several cases where the IRS takes action to get a court injunction to prohibit the return preparer from filing any more returns. This can potentially put the return preparer out of business. Also, we have dealt with the IRS Criminal Division when they have reason to believe that a return preparer is engaged in a regular effort to prepare phony returns with exaggerated numbers to inflate their clients’ refunds. Another avenue which we have seen is for the IRS to propose to shut down the ability of the return preparer to file returns electronically through their E-File system, another way in which a preparer could be put out of business. In this last scenario, the return preparer again has appeal rights, and an opportunity to show that they have corrected their nonconforming business practices, or to show that the examiner was incorrect in determining that the return preparer or E-File Provider made mistakes. The appeals that we file in these cases are detailed and require a lot of coordination with the client.