If you are a tax preparer facing a due diligence audit by the IRS, you might be concerned about some of the deductions that you have given your clients.
Common Deductions That Cause IRS Issues
The most common deductions that we have seen causing trouble for our clients are:
- Earned Income Tax Credit (EITC)
- American Opportunity Tax Credit (AOTC)
- Child Tax Credit (CTC)
- Additional Child Tax Credit (ACTC)
- Credit for Other Dependents (ODC)
- Head of Household filing status (HOH)
A few of the credits mentioned above are often the result of clients providing information that does not truly belong to them. For instance, if a client provides the social security number of a child they claim is their own, you may not second guess that information. However, the problem arises when that child’s social security number appears on another person’s tax return.
Head of Household filing status is frequently misunderstood. Just because somebody is single and runs their own household does not entitle them to use this status. They must have dependents who also live with them for more than half of the year.
Schedule C and IRC § 6700 — Promoting Abusive Tax Shelters
Schedule C brings into question your involvement in preparing fraudulent tax returns. If each return looks the same (deductions are of the same kind) and the result is consistently negative, it’s time to create transparency in your own understanding of tax returns and tax laws.
If your investigation becomes criminal, you will want to demonstrate your intent to prepare legitimate tax returns.
Penalties Commonly Imposed by the IRS
Here is a list of penalties the IRS commonly applies to our clients:
IRC § 6694 — Understatement of Taxpayer’s Liability by Tax Return Preparer
§ 6694(a) — Understatement due to unreasonable positions.
Penalty: Greater of $1,000 or 50% of income derived from the return or claim for refund.
§ 6694(b) — Understatement due to willful or reckless conduct.
Penalty: Greater of $5,000 or 75% of income derived.
IRC § 6695 — Other Assessable Penalties Regarding Preparation of Tax Returns
§ 6695(a) — Failure to furnish copy to taxpayer.
$50 per failure, max $26,000/year.
§ 6695(b) — Failure to sign return.
$50 per failure, max $26,000/year.
§ 6695(c) — Failure to furnish identifying number.
$50 per failure, max $26,000/year.
§ 6695(d) — Failure to retain copy or list.
$50 per failure, max $26,000/year.
§ 6695(e) — Failure to file correct information returns.
$50 per failure, max $26,000/year.
§ 6695(f) — Negotiation of taxpayer’s refund check.
Penalty: $520 per incident.
§ 6695(g) — Failure to exercise due diligence in determining eligibility for EITC, CTC, ACTC, ODC, AOTC, and/or HOH filing status.
Penalty: $520 per failure (2019 amounts).
IRC § 6700 — Promoting Abusive Tax Shelters
Penalty for promoting abusive tax shelters:
$1,000 per organization or sale (or 100% of income derived, whichever is less).
IRC § 6701 — Aiding and Abetting Understatement of Tax Liability
Penalty:
$1,000 per incident ($10,000 for corporate returns). Only applied once per taxpayer for a single tax period or event.
IRC § 6713 — Unauthorized Disclosure or Use of Information
Penalty:
$250 per unauthorized use/disclosure, max $10,000/year.
IRC § 7206 — Fraud and False Statements
Guilty of a felony.
Fine up to $100,000 ($500,000 for corporations).
Imprisonment up to 3 years, or both, plus costs of prosecution.
IRC § 7207 — Fraudulent Returns, Statements, or Documents
Guilty of a misdemeanor.
Fine up to $10,000 ($50,000 for corporations).
Imprisonment up to 1 year, or both.
IRC § 7216 — Unauthorized Disclosure or Use of Information
Guilty of a misdemeanor for knowingly or recklessly disclosing tax return information.
Fine up to $1,000.
Imprisonment up to 1 year, or both.
IRC § 7407 — Injunctions Against Tax Return Preparers
A federal district court may enjoin a tax return preparer from:
- Engaging in proscribed conduct
- Continuing to act as a preparer in extreme cases
IRC § 7408 — Injunctions Against Tax Shelter and Reportable Transaction Violations
A federal district court may enjoin a person from:
- Engaging in proscribed conduct, including violations of Circular 230
If you are facing scrutiny from the IRS for due diligence violations or preparer penalties, it is crucial to seek legal guidance from an experienced Tax Preparer Penalty Attorney in Atlanta, Georgia.