We’ve all heard complaints from disgruntled taxpayers about tax preparers that they claim did a lousy job. A Connecticut state senator believes 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. S.B. 814 would require that “where a taxpayer underpaid income tax due to tax preparer error, the tax preparer shall file an amended return at no cost to the taxpayer and be liable for any additional tax, penalties or interest owed.”
The bill is currently reserved for a subject matter public hearing. There will likely be a lot of questions about the proposal—I know that I have several.
Questions Raised
Tops on my list is how tax preparer error would be defined—so many things can go wrong when preparing and filing a tax return, and not all of them are under the control of the preparer.
While we can agree on some kinds of errors—like bad math or failing to include taxpayer information that was timely and properly provided—others are not so obvious. What happens if there’s a software failure? What if the tax authority bounces a return because of a technical problem? What if there’s a question about whether data was timely delivered to the tax preparer? What if records were provided to the preparer through a means, like text, outside 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 allegations. Considering the volume of returns prepared, that could introduce real financial and time-consuming obstacles for tax preparers who might be on the receiving end of angry taxpayers—even if the fault is not so clearly theirs.
I also had concerns about time restrictions and notice to the preparer. For example, if a taxpayer received notice on Jan. 1, 2023, that there was an error on the return but waited until Dec. 31, 2023, to advise the preparer, would the preparer still be responsible for any related penalty and interest? What is the obligation of the taxpayer to mitigate damages?
Assuming that those details could be worked out, there’s another issue—holding the tax preparer responsible for any additional tax due. Interest and penalty may be assessed solely due to error, but the additional tax would have been payable by the taxpayer with or without the error. Here’s an example. Let’s assume that a tax preparer forgot to include a Form 1099 on the return, resulting in an assessment for an underpayment of tax of $1,000 plus penalty and interest of $300. It may be the case that the tax preparer should be on the hook for the $300 in penalty and interest since that would not have been assessed to the taxpayer without the tax preparer’s mistake—but the $1,000 in tax would have been payable whether or not the tax preparer made a mistake. Holding the tax preparer for someone else’s tax bill feels onerous.
I get 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 reputations and businesses and want to keep clients compliant and content. And when alerted to a mistake, most would appreciate the opportunity to make it right.
Fixes Already Exist
It’s also worth noting that there are existing mechanisms to resolve these issues.
If you have a financial loss due to a tax preparer’s actions, and they won’t help you resolve it, you can typically file a claim against their firm. This is why professionals of all stripes have insurance.
If the tax preparer is unprofessional, you can report them to the IRS. To make a report, fill out a Return Preparer Complaint (Form 14157, available on the IRS website).
Depending on the tax preparer’s credentials, you may also want to report them to their professional licensing and/or disciplinary boards:
- To find out how to report an attorney, 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 CPAs in your state. The AICPA maintains a list of state agencies here.
- Because enrolled agents are federally licensed, Form 14157 is sufficient.
The Best Solution?
With so many processes already in place, I’m not sure that more legislation is the best solution. I wanted to understand the reasons for the bill and reached out to Ms. Miller’s office, but she did not respond to my request for comment.