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Tax Preparer Penalties

Many times folks ask us why we ask so many questions or require so much documentation.  Of course, the biggest reason is that we want to be sure to prepare a totally accurate tax return.  But we’re also wanting to make sure we don’t incur any of the many penalties that we could get hit with if we accidentally omit something.  Take a look at what potential penalties we could face.

IRC § 6694 – Understatement of taxpayer’s liability by tax return preparer.

IRC § 6694(a) – Understatement due to unreasonable positions.  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.

IRC § 6694(b) – Understatement due to willful or reckless conduct.  The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

IRC § 6695 – Other assessable penalties with respect to the preparation of tax returns for other persons.

IRC § 6695(a) – Failure to furnish copy to taxpayer.  The penalty is $50 for each failure to comply with IRC § 6107 regarding furnishing a copy of a return or claim to a taxpayer. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.

IRC § 6695(b) – Failure to sign return.  The penalty is $50 for each failure to sign a return or claim for refund as required by regulations.  The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.

IRC § 6695(c) – Failure to furnish identifying number.  The penalty is $50 for each failure to comply with IRC § 6109(a)(4) regarding furnishing an identifying number on a return or claim.  The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.

IRC § 6695(d) – Failure to retain copy or list.  The penalty is $50 for each failure to comply with IRC § 6107(b) regarding retaining a copy or list of a return or claim.  The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a return period.

IRC § 6695(e) – Failure to file correct information returns.  The penalty is $50 for each failure to comply with IRC § 6060.  The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a return period.

IRC § 6695(f) – Negotiation of check.  The penalty is $510 for a tax return preparer who endorses or negotiates any check made in respect of taxes imposed by Title 26 which is issued to a taxpayer.

IRC § 6695(g) – Failure to be diligent in determining eligibility for earned income credit.  The penalty is $510 for each failure to comply with the EIC due diligence requirements imposed in regulations.

IRC § 6700 – 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  (or, if lesser, 100 percent of the income derived from the activity).

IRC § 6701 – Penalties for aiding and abetting understatement of tax liability.

The penalty is $1000 ($10,000 if the conduct relates to a corporation’s tax return) for aiding and abetting in an understatement of a tax liability.  Any person subject to the penalty shall be penalized only once for documents relating to the same taxpayer for a single tax period or event.

IRC § 6713 – 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.

IRC § 7206 – Fraud and false statements.

Guilty of a felony and, upon conviction, a fine of not more than $100,000 ($500,000 in the case of a corporation), imprisonment of not more than three years, or both (together with the costs of prosecution).

IRC § 7207 – 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.

IRC § 7216 – Disclosure or use of information by preparers of returns.

Guilty of a misdemeanor for knowingly or recklessly disclosing information furnished in connection with a tax return or using such information for any purpose other than preparing or assisting in the preparation of such return.  Upon conviction, a fine of not more than $1,000, imprisonment for not more than 1 year, or both (together with the costs of prosecution).

IRC § 7407 – Action to enjoin tax return preparers.

A federal district court may enjoin a tax return preparer from engaging in certain proscribed conduct, or in extreme cases, from continuing to act as a tax return preparer altogether.  (My added comment – “In other words, we lose our livelihood since we lose our ability to prepare tax returns altogether.”)

IRC § 7408 – Action to enjoin specified conduct related to tax shelters and reportable transactions

A federal district court may enjoin a person from engaging in certain proscribed conduct (including any action, or failure to take action, which is in violation of Circular 230).  (My added comment – “In other words, we lose our livelihood since we lose our ability to prepare tax returns altogether.”)

Note:  Please see the Internal Revenue Code, corresponding Treasury Regulations, and other related published guidance for additional information on each penalty section.

Reminder for those of you who use your vehicle for business use

Reminder for those of you who use your vehicle for business use.  It is always a good idea to write down your mileage for the end of the year. And the beginning of the new year.  Then save the numbers with your other tax papers.

Important update related to new tax law





The House and Senate just passed the biggest change in tax laws since the Tax Reform Act of 1986.  The president has already said he will sign it.  We’ll not discuss the politics of whether it is good or bad here but will explore a possible benefit for us on our 2017 tax return.

You may have already heard that these new tax laws for tax years 2018 and beyond will increase the standard deduction to $12,000 for a single person and $24,000 for a married couple filing jointly. This is approximately double the current levels. In addition to this, some itemized deductions that were available in previous years will no longer be deductible.  These two changes may mean that many people who have always itemized their deductions may find that they will no longer need to do so.  While they may have had enough deductions to reach the old lower threshold, they may not have enough to reach the new $12,000 / $24,000 threshold.

With that in mind, let’s talk to those who make sizable charitable contribution on a yearly basis.  While they will still benefit you in 2017, they may not benefit you in 2018 since you may not reach the new larger standard deduction levels.

Here is something you may wish to consider to save you some tax dollars in 2017 while not losing anything in 2018.

If you have access to the funds to do so, you might want to consider doubling your contributions in 2017 and then NOT making any contributions in 2018 (unless you wish to do so).  You still get to take the new larger standard deduction in 2018 while having gotten the benefit of the donation in 2017.

I know this may sound confusing so here is an example:

Let’s say a person normally gives $10,000 per year to charity.  (You can substitute whatever number you normally give to charity here.)  They have already done that throughout 2017. Now, right here at the end of the year, they decide to go ahead and donate another $10,000 which is what they normally would give in 2018. That would mean that they would not make any charitable contribution in 2018 because they already pre-gave it in 2017.  They could still give for something special in 2018 if they wished to. Their total contributions for 2017 would end up being $20,000 which they can fully deduct (in most cases) on their 2017 tax return. For 2018, they would still be able to take the $12,000 / $24,000 standard deduction which means they will still be getting a huge deduction, in many cases more than ever before.

Allow me to make two points related to this:

  1. This only works for those who have free funds available to do this.
  2. The contributor / taxpayer tax savings can be significant.  Using the example above of donating $20,000 instead of $10,000 in 2017, the additional $10,000 in contributions could mean the following savings.
    1. 20% tax bracket – $2000 savings
    2. 30% tax bracket – $3000 savings
    3. If they gave half that, the savings would be half.  If they gave twice that, the savings would be twice also.
    4. Please note that we have used round numbers here for illustration purposes, that every situation is different, and that there may be exceptions in certain situations.

Since your donations must be completed by December 31, 2017 and we are almost already there, it is important to move quickly on this if you desire to take advantage of this situation.

IRS Criminal Prosecutions Climbed 23% under Obama

IRS Criminal Prosecutions Climbed 23% under Obama

The number of criminal prosecutions referred by the Internal Revenue Service to the Justice Department has increased 23.4 percent during the Obama administration.

Prosecutions in fiscal year 2013 alone jumped 30.6 percent from the previous year, according to a new report by Syracuse University’s Transactional Records Access Clearinghouse.

Convictions for tax crimes under the Obama administration are also drawing slightly longer average prison terms, 27 months under Obama, compared to 25 months during the George W. Bush administration, according to information obtained by TRAC under the Freedom of Information Act from the Executive Office for United States Attorneys.

Read the full article by clicking on this line.




(Disclaimer:  I wrote this a couple of year ago and the numbers have changed since then, “but NOT for the better!”)


I wonder how many people are aware of how much money a low income person can get from their income tax return this year.


As an example. We’ll say a person earns between $12,750 and $21, 800 and is married filing jointly and has 3 dependent children.  That person is truly worthy of some assistance but how much assistance should other taxpayers have to bear for that individual and at what point do we remove the incentive to work?


In the example above, the taxpayer can receive $5751 in Earned Income Credit, up to $3000 in Additional Child Tax Credit.  Specifically, at between $12, 750 and $21,800 of income, the taxpayer would have ZERO tax withheld, pay ZERO taxes and yet still receive a Federal Refund of $8751.  THAT’S $8751 THAT COMES ENTIRELY OUT OF THE POCKET OF OTHER TAXPAYERS!


On top of this, the low income would qualify the taxpayer for around $300+ per month in Food Stamps as well as Housing Assistance of up to $700 per month and either free or low cost health care through Medicaid.  The kids can also get FREE breakfasts and/or lunches if they are in public schools.  On the lower end, they would also qualify for SSI or up to $300+ per month.


I honestly am all for helping low income people who cannot help themselves or who are the victim our recent terrible economy.  But consider the following.  The low income person can literally DOUBLE their income 100% TAX FREE though all of these welfare programs (and YES, the Earned Income Credit IS a welfare program!).  They have ZERO incentive to work harder or for the second spouse to get a job when they can take your tax dollars and my tax dollars instead.


I am convinced that most Americans do not really know how much money is being paid out for these welfare programs and thought this information might be of interest.



A couple can have a million dollars in IRA’s and not take any income out of it.  They also own a home worth a half million dollars and they drive two brand new Mercedes.  They are debt free and basicly retired.  They are legal guardians of their three grandchildren.  While most welfare is “means” tested for not only income but for assets as well, the Earned Income Credit is only tested for income.  Therefore, if either or both of these two spouses were to go out and get part time jobs making a total of $12,750 to $21,800 per year, they too would qualify for the maximum earned income credit of $5751 and could get the child tax credit of $3000.  That works out to $8751 to be paid by the taxpayers to someone who is a millionaire.


Both of the above scenarios need to be corrected.

IRS to Increase Audits of Prior- and Subsequent-Year Tax Returns

e Internal Revenue Service needs to strengthen its correspondence audit selection process by auditing more of the prior- and subsequent-year tax returns of noncompliant income tax filers, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that the IRS relies heavily on the correspondence audit process to examine individuals who are suspected of underreporting their tax liabilities.

The correspondence audits often result in significant additional tax assessments, and the IRS has found audits conducted by correspondence to be more economical than other types of audits, such as face-to-face audits in IRS offices or out in the field meeting with taxpayers. Statistics indicate that in fiscal year 2012, the IRS conducted 1.1 million correspondence audits and recommended approximately $9.2 billion in additional taxes.

For its report, TIGTA set out to determine the effectiveness of the filing checks made during the correspondence audit process in the IRS’s Small Business/Self-Employed Division. Filing checks are used, in part, by the SB/SE Division to determine whether the same pattern of noncompliance identified on an audited tax return is present on the prior- and subsequent-year tax returns, and if those tax returns also warrant an audit. When they are properly completed, filing checks enable the IRS to better leverage its auditing resources by increasing the overall compliance coverage of every audit.

TIGTA evaluated a statistical sample of 102 out of 7,470 single-year correspondence audits in which the taxpayers involved agreed that they understated their tax liabilities by at least $4,000. Similar tax issues also existed on the prior- and/or subsequent-year tax returns for 43 of the 102 taxpayers. TIGTA found that 32 of the 43 individuals did not have those tax returns audited and, as a result, may have avoided additional assessments ranging from $2,343 to $18,874.

TIGTA pointed out in its report that one factor that may have contributed to the limited number of prior- and/or subsequent-year tax audits in the sample it examined is the emphasis the IRS places on keeping its audit inventories free of older tax years so there is enough time to complete audits and assess any resulting taxes within the three-year statute of limitations for assessments. There are also some control issues involving how current-year audit results are used to decide whether to audit any prior- and subsequent-year tax returns.

TIGTA recommended that the IRS develop and implement procedures that instruct its auditors how they should use current-year correspondence audit results when deciding whether the prior- or subsequent-year tax returns also warrant an audit. To ensure that the instructions are followed, TIGTA also recommended that the procedures should include instructions for monitoring how well current-year correspondence audit results are used in deciding to audit prior- and/or subsequent-year tax returns.

The IRS agreed with TIGTA’s recommendation and plans to develop an Internal Revenue Manual section to address the case selection and delivery process, in addition to the duties and roles of IRS analysts and examiners.


Consumers could be surprised at tax time due to federal health law

Some families may end up owing Uncle Sam a sizable refund if they accept government help on buying health insurance next year under President Obama’s Affordable Care Act.

A study published Monday in Health Affairs estimates that 38% of families that qualify for federal premium subsidies might have to repay some portion if changes in their household income aren’t reported to the government.

These subsidies are a crucial part of the federal healthcare law intended to help make insurance more affordable for lower- and middle-income people. Individuals earning less than $46,000 a year, and families below $94,000 annually may qualify for these premium tax credits.

But a raise, bonus or other unexpected income during the year could alter a person’s eligibility and subsidy amount, triggering a repayment when the person files income tax forms for 2014. Some policy experts worry that experience could sour people on the healthcare expansion.

“There’s the potential for some sizable repayments,” said Ken Jacobs, the study’s lead author and chairman of the UC Berkeley Center for Labor Research and Education.


Migration of Personal Income

This week, our Monday Map draws data from our interactive State Migration Calculator, and illustrates the interstate movement of income over the past decade (from 2000 to 2010). When a person moves to a new state, their income is added to the total of all other incomes in that state. This positively affects the total taxable income in his or her new state, and negatively affects the income in the state he or she left.

All maps and other graphics may be published and re-posted with credit to the Tax Foundation.



Things to Do When You Buy a Home

  • Review wage withholding and estimated taxes. You may be able to reduce withholding and increase your take-home pay because of deducting mortgage interest and real estate taxes if you haven’t been deducting these items before (i.e., this is your first home).
  • Decide whether to make energy improvements. You may qualify for a tax credit of up to $500 for adding insulation and other energy-saving items to your home.
  • Keep track of expenses related to a home office if you use part of your home for business. You can deduct your actual expenses or use an IRS simplified method for figuring the home office deduction.
  • Begin a record of home improvements. These add to the basis of your home and reduce the amount of gain when you eventually sell.
  • Notify the IRS of your new address. This is one using Form 8822.


This article is from www.jklasser.com


Sixth Circuit Highlights S Corporation Perils In Broz Decision

Business owners and their advisers often fail to recognize how perilous S corporations can be.  The Sixth Circuit decision in the case of Robert and Kimberly Broz upholding an $18 million deficiency for the years 1996 to 2001 provides some useful lessons.

Journal Entries Are Not All They Are Cracked Up To Be

The lesson for business owners is that it is a very bad idea to use multiple entities without respecting the implications of each entity.  Don’t rely on your accountant to straighten every thing out with journal entries.  I spent much of the early part of my career making journal entries to move tax effects around among multiple related entities.  For the last decade or so, I have at least looked at every federal tax decision and have reached a painful conclusion.  The only people who think accountant’s journal entries mean anything are other accountants.  Listen to the Sixth Circuit:


2002-2017 Best of Portsmouth

Heritage Income Tax Service, Inc. | 4303 Portsmouth Blvd., Portsmouth, VA 23701
(757) 488-7232 | Fax (877) 488-7232

Heritage Income Tax offers a full range of tax preparation services. Located in Portsmouth, Virginia, we serve the entire Hampton Roads area including the cities of Chesapeake, Virginia Beach, Norfolk, Suffolk, Newport News and Hampton.