If you’re a tax preparer, you’ve probably heard about IRS audits and the importance of compliance. But let’s be blunt—an IRS preparer audit isn’t just a minor inconvenience; it can destroy your reputation, hit you with severe financial penalties, and even put your business out of operation. Whether you’ve been in the business for years or you’re just starting out, you need to understand the seriousness of these audits and what’s required to stay compliant.
Here’s the lowdown on what an IRS preparer audit looks like, the penalties for non-compliance, and—most importantly—how to protect yourself and your business.
What Is an IRS Preparer Audit?
An IRS preparer audit is when the IRS reviews tax returns prepared by you or your office to ensure compliance with tax laws and regulations. They are not random. The IRS typically audits preparers when they identify a pattern of errors, omissions, or irregularities in the returns they file. In other words, if they suspect you’re cutting corners, over-claiming credits, or filing inaccurate returns, they will come knocking.
Imagine this: you’ve filed hundreds of returns over the past few years, but a few clients keep coming back with outrageous refund claims that seem too good to be true. You think, “Hey, if that’s what the client is telling me, who am I to argue?” But guess what? Those returns get flagged, and suddenly you find yourself under audit. The IRS will pull those returns, scrutinize them, and if they find evidence that you were negligent or didn’t exercise due diligence, you could be facing some serious consequences.
Penalties for Non-Compliance
So, what happens if you’re found out of compliance? The IRS doesn’t play around. Here are some of the penalties you could face:
- $545 Penalty Per Violation: For each instance where you fail to comply with due diligence requirements, the IRS can slap you with a penalty of $545 (as of the latest update). If you have multiple violations across multiple returns, those penalties add up fast.
- Suspension or Revocation of Your PTIN: The IRS can suspend or revoke your PTIN (Preparer Tax Identification Number), essentially taking away your ability to prepare returns legally.
- Criminal Charges: In extreme cases of fraud or intentional misconduct, preparers can face criminal charges, including fines and imprisonment.
Now that’s the reality of an IRS audit. It’s not just about the fines; it’s about protecting your career, your reputation, and your business.
How to Ensure Compliance and Protect Your Business
The good news is that you can avoid these issues altogether by following a few critical compliance steps. Let’s dive into some practical ways to make sure you stay in compliance and keep your business running smoothly:
1. Exercise Due Diligence—Always
Tax preparers are required by law to exercise due diligence when preparing returns. This means that you need to make every reasonable effort to ensure that the information you enter is accurate and that the credits and deductions claimed are legitimate.
Example: A client comes in and tells you they have three kids, and they’re claiming the Earned Income Tax Credit (EITC). You can’t just take their word for it. You need to verify that the children qualify and that the client meets all eligibility requirements. If you don’t, you’re setting yourself up for a penalty.
To help, the IRS provides a Form 8867, Paid Preparer’s Due Diligence Checklist, which you must fill out and keep on file for every client claiming EITC, Child Tax Credit, American Opportunity Tax Credit, or Head of Household status. This checklist helps document your compliance efforts and can be your lifeline if you’re ever audited.
2. Verify and Document Client Information
It’s essential to double-check the documents your clients provide and keep thorough records for every return you file. Make it a habit to:
- Request Documentation: Ask for proof of income, dependents, and expenses. If a client is claiming deductions for business expenses, make sure they provide receipts and that those expenses are legitimate.
- Keep Copies of Key Documents: Store copies of the client’s W-2s, 1099s, and other relevant documents securely for at least three years. This shows you’re not just taking information at face value but are actually verifying and documenting it.
- Review Prior Year Returns: Checking previous returns for consistency can help you catch potential red flags early. If something looks off, it probably is.
Tip: Consider using secure document management software to keep everything organized and easily accessible if the IRS ever comes calling.
3. Stay Up-to-Date with Tax Law Changes
Tax law changes every year, and failing to keep up with these changes can lead to compliance issues. The IRS expects preparers to know the latest laws and regulations, so it’s up to you to stay informed. Here’s how:
- Attend Continuing Education Courses: Take advantage of courses that focus on updates to the tax code, IRS compliance guidelines, and best practices for preparers. It’s worth the investment.
- Use Up-to-Date Software: Make sure the tax software you use is compliant and updated regularly to reflect the most current tax laws. At NTO Software Solutions, we pride ourselves on providing the #1 Rated Professional Tax Software, which is always updated with the latest tax laws and IRS compliance requirements.
4. Implement Internal Compliance Checks
Don’t leave compliance to chance. Setting up internal compliance checks can save you from costly mistakes. Here’s what you can do:
- Review Returns Before Filing: Establish a process where another experienced preparer or supervisor reviews each return for accuracy and compliance before it’s submitted.
- Train Your Team: Ensure that every preparer in your office knows the importance of due diligence and compliance. Regular training sessions, especially during tax season, can make all the difference.
- Create Checklists for Common Compliance Risks: For example, have a checklist for all returns claiming the EITC or Child Tax Credit to make sure nothing is missed.
- Take Notes: Writing notes on each taxpayer during the interview process is essential to proving that you asked the hard questions and that the answers given to you by the taxpayer were how you determined how to prepare their tax return. These notes could be the saving grace when an auditor is determining whether proper due diligence was exercised.
Real Talk: Many preparers think they can skip these steps because they’ve “never had an issue before.” But the reality is that the IRS is cracking down harder than ever. Don’t wait until you’re under audit to start caring about compliance—it’s too late then.
5. Use IRS Resources and Stay in Communication
The IRS actually provides several resources that can help you stay compliant. Make it a habit to check their website for updates, alerts, and guidance documents that pertain to preparers. And if you ever have a question about a return, reach out to the IRS Preparer Hotline. It’s better to ask questions upfront than to fix mistakes later when the penalties have already stacked up.
Conclusion: Compliance Is Non-Negotiable—Protect Yourself and Your Business
IRS audits are serious, and the penalties for non-compliance are no joke. But the good news is that with the right knowledge, tools, and processes, you can protect your business and your reputation. At NTO Software Solutions, we’ve been in the industry long enough to know what works and what doesn’t. We’ve built our software and our programs with compliance in mind, so you have everything you need to stay protected and succeed.
Remember: Compliance isn’t just about avoiding penalties; it’s about building trust with your clients and creating a reputable, sustainable business. Take the necessary steps today—because in the tax world, staying compliant is the only option.
If you’d like any more information or a personalized compliance checklist for your tax business, reach out to us. At NTO, we’ve got your back—because we know what it takes to win in this industry.