Advising the Individual Taxpayer
Practice, penalties, and client advice
Advising starts with the rules that bind the preparer. Circular 230 requires due diligence, competence, and client consent before using taxpayer information for purposes other than preparing the return. A preparer may not sign a return with an unreasonable position or endorse frivolous arguments. Preparer penalties under section 6694 apply to understatements from unreasonable positions; section 6695 covers failure to furnish copies, sign, or retain records. Taxpayer penalties include failure to file (5% per month, up to 25%), failure to pay (0.5% per month), accuracy-related penalties (20%), and civil fraud (75%).
Statutory tools matter. Form 2848 authorizes representation; Form 8821 permits information disclosure only. Innocent spouse relief (Form 8857) separates a spouse from liability after a joint return; injured spouse relief (Form 8379) allocates a refund to protect one spouse's share from the other's debts. The assessment statute is three years, six for substantial omissions, and unlimited for fraud or failure to file.
Traps. An extension to file is not an extension to pay, so interest and penalties accrue. Estimated tax safe harbors: pay 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeded $150,000).
Worked example. A client with a $60,000 balance asks to file late to delay payment. Explain that the failure-to-pay penalty and interest continue regardless; a short-term installment agreement is a better tool.