Tax Preparer Penalties: Who Is a Preparer?

Changes to the tax preparer penalty statute have increased the penalties applicable to return preparers and raised the standard of conduct, but the penalties now apply to non-signing preparers.

August 2009
by Raymond Placid and Wayne Cecil/The Tax Adviser

In 2007, Treasury issued a report indicating that the uncollected tax revenue attributable to tax evasion and noncompliance activities (i.e., the tax gap) was approximately $345 billion for tax year 2001. That report included 16 legislative proposals aimed at increasing voluntary compliance and reducing the tax gap. One of the proposals contained a provision to increase the penalties associated with preparing a tax return, raise the standard of conduct for preparers, and draw more practitioners into the scope of the tax preparer penalty provisions.

On the heels of Treasury’s tax gap report, Congress substantially revised the tax preparer penalty statute. Under the revised statute, a tax return preparer will be subject to a penalty for unreasonable positions taken on a tax return. The penalty is the greater of $1,000 or 50 percent of the fee charged for preparing the return. For tax return positions associated with willful or reckless conduct, the penalty is the greater of $5,000 or 50 percent of the fee charged for preparing the return. The government will consider good faith and reasonable cause in assessing the penalty, unless the preparer’s conduct is willful or reckless.

Before these amendments, the tax preparer penalty statute applied only to income tax return preparers. The recent legislation broadened the scope of the statute to include preparers of income, estate and gift tax returns as well as certain information returns.

The recent changes to the tax preparer penalty statute are substantial and have already taken effect. Therefore, all tax return preparers should make sure they understand the risks and vicissitudes associated with the revised statute.

Who Is a Tax Return Preparer?

In general, any person or entity who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or any claim for refund is a preparer. A person may be a preparer without regard to professional status, educational qualifications, nationality, residence or the location of the person’s place of business.

Preparers of income, estate, and gift tax returns are subject to the statute (previously only preparers of income tax returns were affected). Preparers of information returns are also included if the data reported on the information return constitute a substantial portion of another taxpayer’s tax return. For example, the preparer of a Form 1065, U.S. Return of Partnership Income, may be deemed to be the preparer of a partner’s individual income tax return if the items on the partnership return constitute a substantial portion of that partner’s income tax return.

This article has been excerpted from The Tax Adviser. View the full article here (PDF).