Reasonable Compensation Creates Risk for Tax Preparers Too

Tax preparers can be hit a return-preparer understatement penalties when they underestimate a Reasonable Compensation position under IRC § 6694(a). The IRS will likely be able to argue that the preparer should have known about this requirement.

There is even a more serious risk of falling under IRC § 6694(b) if the attempt is deemed willfully in understate a Reasonable Compensation position.

The penalties are significantly different but both carry risk especially if represent more than one client.

• § 6694(a): Greater of $1,000 or 50% of the preparer’s income from preparing the return or claim.
• § 6694(b): Greater of $5,000 or 75% of that income. Any § 6694(a) penalty paid for the same return reduces the § 6694(b) penalty rather than stacking fully on top of it.

A lack of reasonable compensation documentation does not automatically prove willful or reckless conduct. However, it raises an important question: How will a preparer demonstrate that a reasonable, informed position was taken if no analysis was performed or retained?

Most clients hire a tax preparer to reduce their risk of not complying with the law. Letting Reasonable Compensation documentation slide puts you and your clients at higher risk. We've taken almost all the time out of preparing this documentation so be your client's hero and consider partnering with us to deliver regionally and skill based adjusted compensation reports that will hold up to IRS examinations.

Blessings,
Andrew

Disclaimer: This article is provided for general informational and educational purposes only and does not constitute legal, tax, accounting, or professional advice. Tax laws and regulations are complex and may change, and their application depends on the specific facts and circumstances involved. Readers should consult a qualified tax professional or attorney before taking action based on this information.