Welcome to part 2 of ethics. Here is some stuff you’ll need to know:
- Recall who is a tax return preparer
- Recall situations that would result in federal tax return preparer penalties
Apply potential federal tax return preparer penalties given a specific scenario
Who is a Tax Return Preparer (TRP)?
A tax return preparer is anyone who:
- Prepares for compensation
- Employs one or more persons to prepare for compensation
- Prepares all or a substantial portion of any return
- Claims a refund of tax under the Internal Revenue Code
This is especially broad so you’ll know a TRP when you see one.
Signing vs Non-signing TRP
Signing – they bear primary responsibility over the return (usually the partner or manager). They actually sign their name on the return as the preparer.
Non-signing – the person who actually prepared the return or a substantial portion of the return even though they don’t sign the return. Easy right?
Signing tax return preparers always bear responsibility for the tax return but non-signing tax prepares have some exceptions.
General rule: You’re not a non-signing tax return preparer if the schedule, entry, or other portion of the return or claim for refund involves amounts of gross income, amounts of deductions, or amounts on the basis of which credits are determined that are:
- Less than $10,000, or
- Less than $400,000 and also less than 20 percent of the gross income as shown on the return or claim for refund (or, for an individual, the individual’s adjusted gross income).
What does that all mean? Basically if you fill out a form that has $10,000 or more in deductions then you’re a TRP. Although if the deduction is more than $10,000 but less than 20% of total income then you’re not a TRP.
You’re Not a TRP If…
- An official or employee of the Internal Revenue Service (IRS) performing official duties
- Any individual who provides tax assistance under a Volunteer Income Tax Assistance (VITA) program established by the IRS, but only with respect to those returns prepared as part of the VITA program.
- An individual providing only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund.
- An individual preparing a return or claim for refund for a trust, estate, or other entity of which the individual either is a fiduciary or is an officer, general partner, or employee of the fiduciary.
I wouldn’t worry too much about this so don’t try to memorize too much. My sources are listed here.
No easy way to do this so I’m just going to list some penalties and how they impact TRPs.
1) Understatement of taxpayer’s liability by tax return preparer.
The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.
2) Promoting abusive tax shelters
The penalty is for a promoter of an abusive tax shelter and is generally equal to $1,000 for each organization or sale of an abusive plan or arrangement.
3) Penalties for aiding and abetting understatement of tax liability
The penalty is $1,000 ($10,000 if the conduct relates to a corporation’s tax return) for aiding and abetting in an understatement of a tax liability.
4) Disclosure or use of information by preparers of returns
The penalty is $250 for each unauthorized disclosure or use of information furnished for, or in connection with, the preparation of a return. The maximum penalty on any person shall not exceed $10,000 in a calendar year.
5) Fraudulent returns, statements, or other documents
Guilty of a misdemeanor and, upon conviction, a fine of not more than $10,000 ($50,000 in the case of a corporation), imprisonment of not more than one year, or both.
There are a bunch more so instead of listing all of them out I’ll share the link with you here. This is a lot to memorize but it’s something you’ll have to do. When in doubt it’s probably a $1,000 penalty per wrongdoing.
- Who is a TRP – you’ll know one when you see one. Most people who touch a tax return are a tax return preparer (unless you meet that one exception).
- What are some tax return preparer penalties? See above, when in doubt it’s probably $1,000 per offense.