We’ve all heard complaints from disgruntled taxpayers about tax preparers who say they did a lousy job. A Connecticut state senator thinks she has a solution: make them pay.
Patricia Miller, who represents the 27th district in the Connecticut state senate, recently introduced a bill that would hold tax preparers financially responsible for errors. SB 814 would require that “when a taxpayer paid less than income tax due to a tax preparer’s error, the tax preparer will file an amended return at no cost to the taxpayer and be responsible for any additional taxes, penalties, or interest owed.”
The bill is currently booked for a public hearing on the matter. There are likely to be many questions about the proposal; I know I have several.
First on my list is how you would define tax preparer error: Many things can go wrong when preparing and filing a tax return, and not all of them are within the preparer’s control.
While we can agree on some types of errors, such as poor math or failing to include taxpayer information that was provided in a timely and appropriate manner, others are not so obvious. What happens if there is a software failure? What happens if the tax authority bounces a return due to a technical problem? What if there is a question as to whether the data was timely provided to the tax preparer? What if the records were provided to the preparer through a medium, such as text, outside of the tax preparer’s normal processes? Or in a format that the tax preparer can’t parse?
The easy answer is that it would be determined on a case-by-case basis. But that raises fundamental questions about which party would bear the burden of proof and the process for defending any accusation. Given the volume of returns prepared, that could present real and time-consuming financial hurdles for tax preparers who could be on the receiving end of angry taxpayers, even if the fault isn’t so clearly theirs.
I was also concerned about the time restrictions and the notice to the preparer. For example, if a taxpayer received notice on January 1, 2023 that there was a return error but waited until December 31, 2023 to notify the preparer, would the preparer still be liable for any related penalties and interest? What is the obligation of the taxpayer to mitigate the damages?
Assuming those details can be ironed out, there’s another problem: holding the tax preparer liable for any additional taxes owed. Interest and penalties may be imposed solely because of an error, but the additional tax would have been payable by the taxpayer with or without the error. Here is an example. Let’s say a tax preparer forgot to include a Form 1099 on the return, resulting in an underpayment assessment of $1,000 plus a $300 penalty and interest. It may be the case that the tax preparer is required to pay the $300 in penalties and interest, as that would not have been assessed to the taxpayer without the tax preparer’s error, but the $1,000 in tax would have been due regardless of whether the tax preparer taxes made a mistake. Retaining the tax preparer for someone else’s tax bill feels onerous.
I understand that taxpayers expect a level of competence from tax preparers. And I’m not suggesting that tax preparers should get a pass for making costly mistakes. But realistically, most tax preparers want to do a good job. They care about their reputation and business and want to keep customers happy and satisfied. And when alerted to a bug, most would appreciate the opportunity to correct it.
Fixes already exist
It is also worth noting that there are mechanisms to resolve these issues.
If you have a financial loss due to the actions of a tax preparer and they don’t help you resolve it, you can usually file a claim against your business. That’s why professionals of all stripes have insurance.
If the tax preparer is not a professional, you can report it to the IRS. To make a report, complete a Return Preparer Complaint (Form 14157available on the IRS website).
Depending on the tax preparer’s credentials, you may also want to report it to your professional licensing and/or disciplinary boards:
- To find out how to report a lawyer, contact your state’s disciplinary board or bar association.
- To find out how to report a certified public accountant, contact the state agency that licenses certified public accountants in your state. The AICPA maintains a list of state agencies here.
- Since enrolled agents are federally licensed, Form 14157 is sufficient.
The best solution?
With so many processes already in place, I’m not sure more legislation is the best solution. I wanted to understand the reasons for the bill and contacted Ms. Miller’s office, but she did not respond to my request for comment.
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