The Effect of Magnitude of IRS Assessment and Engagement Letters on Tax Preparer Liability.

Abstract An experiment was conducted to explore the effects of the magnitude of assessments by the IRS and engagement letters that clarify tax preparer or taxpayer responsibilities or limit claims against tax preparers on tax preparer liability. One hundred seventeen members of civic organizations received two hypothetical scenarios in which the magnitude of IRS assessment and the type of engagement letter were varied. Tax preparer liability was measured by the likelihood that subjects would hold a tax preparer responsible for an adverse IRS determination, whether they would bring suit against the tax preparer, and how much they would try to collect from the tax preparer Overall, the magnitude of IRS assessment influenced the percentage of tax-payers bringing suit against a tax preparer and the dollar amount requested in the suit. Adding statements about client or tax preparer responsibilities to engagement letters also reduced the dollar amount of lawsuits brought against the tax preparer. White the tax preparer's use of language limiting the client's claim to the fees charged in the engagement reduced the dollar amount of lawsuits, it resulted in the surprising effect of increasing the likelihood of holding the tax preparer responsible.