Mitigating Tax Return Preparer’s Risk

As someone who prepares tax returns or owner of a small tax preparation firm, it may feel as though you’re taking a huge risk with every return you prepare. This is one form in which mistakes are not lightly tolerated—even honest ones, which is why it’s important to do everything in your power to mitigate your risk. Of course, the prudent thing to do, whenever you have questions regarding your role and/or responsibility as a tax preparer, is to consult your attorney and/or insurance provider. They are the best source of the most current and up-to-date laws as well as your responsibilities and, in the case of insurance agents, what specific situations you’re covered for.


What are the Responsibilities of the Tax Preparer?


The person or business whose taxes you’re preparing is entrusting his or her tax information and status with the IRS to your capable professional hands. That’s a huge responsibility not only for the person whom you’re preparing taxes for, but also to the Internal Revenue Service (IRS) where the tax documents and dollars initially go.


What about Due Diligence?


While you can only work with the information and documentation that has been provided to you by your client, there is a series of questions you should ask clients as well as certain actions you should take before accepting answers in good faith. This is a practice that’s referred to as due diligence.


According to theAmerican Institute of CPAs, “The IRS has occasionally announced actions against tax preparers, including CPAs, for failing to exercise due diligence.” What this essentially does, is shift some of the responsibility for, at the very least, perfunctorily verifying conflicting or incomplete information to the shoulders of the tax preparer.


Avoiding Problems


Trust, but verify. It’s an old adage that proves relevant still today. To some degree, you have to trust that your clients are giving you the correct documentation and all of their documentation. However, it’s important to ask questions to verify the accuracy of the information you’re receiving. You don’t have to go digging through piles of long lost tax information to find the answers but there are certain questions you should ask and actions you should take in order to get to the heart of the matter and satisfy the IRS.


1)   Plan ahead. Educate your staff members and your client about the information that is needed in order to properly prepare tax returns.

2)   Send out newsletters or engagement letters to clients to remind them about rule changes, qualifying deductions, and necessary documentation.

3)   Ask questions and dig deeper whenever information seems incomplete or inaccurate.

4)   Show evidence that you have gone the extra mile in an attempt to gather all the facts during the tax preparation process.


Despite your best efforts, there may be times when you miss the mark, make mistakes, or even find yourself accused of doing so when you’ve done nothing wrong. When those moments occur, you need to have adequate professional liability insurance, also known as errors and omissions insurance, to help protect you while everything gets sorted out.