From filing accurate and honest returns to protecting clients’ information, tax preparers shoulder several weighty responsibilities. Failing to complete them can not only impact your professional reputation – it could result in losing your license as a tax preparer, paying penalties to the IRS, and, in the most extreme cases, jail time. Despite the seriousness of these consequences, you shouldn’t live in fear of losing your license or career. By educating yourself on legal requirements for tax preparers and maintaining a commitment to ethical practices, you can stay in good standing with the IRS, your state, and other licensing boards. In this article, we will delve into the duties and responsibilities of tax preparers, the types of tax preparer licenses, and the potential pitfalls that could lead to license revocation.
Tax Preparer Duties and Responsibilities
A tax preparer’s duties extend beyond merely filling out forms. These are some of the standards that the IRS and various state boards expect tax preparers to uphold:
Filing accurate returns
Of course, intentional fraud is one sure way to violate this expectation, but tax preparers can also face consequences for ignorance. To prepare taxes ethically, you must know tax laws well enough to avoid inaccurate returns.
Tax preparer due diligence
The IRS requires tax preparers to perform reasonable due diligence to ensure their clients truly are eligible for certain tax credits such as the Child Tax Credit, Earned Income Tax Credit, American Opportunity Credit, and Lifetime Learning Credit.
Safeguarding clients’ data
Tax preparers are required by law to have a Written Information Security Plan (WISP) to protect their clients’ sensitive data. To make sure yours is up to standards, see our step-by-step instructions for creating a WISP for your tax practice.
Maintaining records for returns and providing copies to clients
Keeping complete, accurate records and providing all necessary copies and forms to both the IRS and your clients is crucial. Tax software that allows you to keep and organize paperless records is extremely helpful for maintaining this standard.
What is a tax preparer license?
Attorneys, CPAs, and EAs
Before we dive into things that could cost you your license, it’s helpful to define what a tax preparer “license” is. There are different credentials for tax preparers, and some tax preparers work with no formal credentials. Attorneys, CPAs, and Enrolled Agents all have strict professional and ethical standards, and violating them could cost them their credentials.
Non-credentialed tax preparers
For non-credentialed tax preparers, their “license” is essentially their Preparer Tax Identification Number (PTIN) and Electronic Filing Identification Number (EFIN). The PTIN is required to file any tax returns on behalf of another person, and the EFIN is required to file returns electronically, which tax preparers are required to do if they file more than eleven tax returns in a year. For anyone who hopes to make a career out of tax preparation, an EFIN is just as essential as a PTIN. Failing to perform the duties listed above and result in having your PTIN revoked or in being unable to renew it.
State licenses
Finally, certain states have their own licenses or requirements for tax preparers. While the industry is mostly unregulated in some states, states such as California hold tax preparers to stricter licensing standards – continue reading for more details.
Things that could cost you your tax license
Several factors can jeopardize a tax preparer’s license. These include but are not limited to:
- Fraudulent activities: Engaging in fraudulent activities, such as knowingly providing false information on tax returns, can lead to severe consequences, including license revocation and jail time.
- Negligence: Failing to exercise tax preparer due diligence and care in preparing tax returns can result in inaccuracies that may lead to financial harm for clients and legal consequences for the tax preparer.
- Lack of personal compliance: Even if you file all your clients’ returns accurately, you risk losing your PTIN if your own returns are inaccurate or if you have unpaid tax liability.
- Data breaches: In an era where cyber threats are prevalent, tax preparers must prioritize data security to protect their clients from identity theft. If a data breach occurs due to negligence on your part, you not only compromise client information but can also face penalties and lose your PTIN.
Tax preparer penalty 101
In addition to having their PTIN revoked, tax preparers can also face penalties from the IRS if they fail to follow “tax laws, rules, and regulations.” This includes tax preparers who understate their client’s tax liability (whether due to unreasonable positions or willful or reckless conduct), tax preparers who prepare fraudulent returns or statements, and tax preparers who misuse clients’ personal information. Other violations include promoting abusive tax shelters and failing to sign returns or maintain proper records.
Some of these violations have relatively minor consequences, such as the $55 fine for not signing a return. Others, such as fraud, can cause thousands of dollars in fines and even jail time. Tax professionals must be aware of the potential consequences and take proactive steps to avoid such situations. To make sure you avoid the most common violations, review the IRS’s tax preparer penalties.
What is the Franchise Tax Board?
The Franchise Tax Board (FTB) is a key player in tax regulation and enforcement in California. In addition to handling the state’s personal and corporate income taxes, it also regulates the tax preparer industry through the California Tax Education Council (CTEC). All non-exempt tax preparers in California are required to register with the CTEC and uphold its standards. (Exempt preparers include attorneys, CPAs, EAs, and certain banking or trust officials). Tax preparers in California should be well-versed in the rules and regulations set forth by the FTB to ensure compliance and avoid potential issues that could threaten their license.
What is the FTB Tax Practitioner Hotline?
The FTB Tax Practitioner Hotline provides a direct line of communication between tax preparers and the FTB, offering assistance with issues related to client accounts, tax law inquiries, and procedural questions. Note that even if you don’t reside in California, the FTB could still be a valuable resource for you if any of your clients earn income in California and are therefore subject to California state taxes.
In conclusion
Protecting your PTIN or your credential as a CPA, EA, or attorney requires a commitment to ethical conduct, continuing tax law education, and best practices in data security. By understanding the potential pitfalls that could lead to license revocation and taking proactive measures to avoid them, tax preparers can safeguard their professional standing and ensure the trust and confidence of their clients.
