Caveat Emptor - Buyer Beware - Understanding the Role of the Tax Preparer in Your Taxes

Part 4:  Can You Be Held Responsible for Your Preparer’s Actions?!

Ultimately, the answer is “yes”, YOU are responsible for whatever numbers are put on YOUR tax return.  You have to sign under penalties of perjury that what you have put on your tax return is true and accurate.  Does this mean that your tax preparer can get a free “get out of jail” card?  No.  Preparers can be held civilly and criminally liable for the returns that they prepare.  But, ultimately, it is you as the taxpayer that is responsible for paying for your taxes.  There are certain provisions of the Code that allow for exceptions to certain penalties based upon reasonable cause such as reliance on a tax professional.  But that will only get you out of penalties, not the tax due or the interest due.  Reliance upon a tax professional is seldomly allowed as a reason for a Failure to File or Failure to Pay penalty.  Ultimately, though, the exceptions for reasonable cause on accuracy related penalties are decided on a case-by-case basis.  Which brings us to today’s case:

Part 5:  I Thought The Statute of Limitations Expired and I Beat the IRS:  Wrong!

In 2019, 20 years later, the IRS sent a taxpayer a Notice of Deficiency for the tax years of 1993 to 1999.  The Tax Court held that the fraud statute under Section 6501 opened up the statute indefinity.  Despite the fact that the court determined that the taxpayer acted in good faith and that the preparer was the one with the fraudulent intent.  The taxpayer appealed the case to the Third Circuit Court of Appeals where the Third Circuit upheld the Tax Court’s ruling. This ruling was in alignment with the Allen v. Commissioner case in 2007 which also held that the taxpayer was responsible for the actions of the tax preparer. 

The Tax Court and now the Third Circuit have clearly insisted that anyone’s intent can taint a tax return, which creates a tough road ahead for the taxpayer.  It means that you as a taxpayer must be diligent in selecting whose advice you take and in monitoring your preparer.

Part 6:  What Do I Do Now?  How Do I Choose the Right Preparer?  How do I Stay Off the IRS’s Radar?

First of all, I beg of you, please please do not go to a fly by night tax preparer.  Find someone who does taxes for a living, all year long.  I highly recommend that you use a Certified Public Accountant or an Enrolled Agent.  Ask about their credentials, their education, their continuing education. Ask them “who ‘actually’ prepares your return?”  Are they going to prepare it or an associate, or is it being outsourced?  If so, then that is fine, as long as they disclose that to you so that you know who is doing your work.  Does your preparer know “you” or are you just another person walking through their door? 

If they are promising you a big refund when you have never had one before, RUN!  Are they offering you cash on the spot?  If so, then you are being scammed by taking a Refund Anticipation Loan. 

Ask to see a copy of your tax return BEFORE they e-file it.  Do the numbers on it make sense to you?  Check your “refund” line and make sure it is YOUR account number and routing number on it.  Despite it sounding scary, a tax return is generally fairly simple to understand.  Make sure your W-2 numbers match the face of the return.  Flip through it to see what “schedules” are attached.  Do you see something called a Schedule C that says you are a Lawncare business and yet you don’t have a business?  Did they try to tell you “Aww..you can deduct that!” and it sounds too good to be true?  Then it probably is.  The majority of people that I have seen victimized by preparers over the years were victims of a scheme where someone convinced them that they had been missing out on a deduction or they have “found” something that no one else knows about. That is a confidence scheme.

I have found that the majority of taxpayers are good people who want to do the right thing.  And they don’t want to overpay their taxes.  And there is nothing wrong with that kind of thinking.  But reality is that taxes are a part of our life.  Despite all of my misgivings over the state of our government these days, I am very grateful that we have somewhat civilized society.  It takes you and me and everyone to pay our fair share of taxes to make the world work, for us to have streets to drive on and for us to have police, military and firemen to protect us. Don’t become a victim to a bad tax preparer.  Stay smart. Ask questions.