Client Alert: Tax Preparer Audits and Investigations: How to Best Prepare and Respond to an Inquiry
Date: November 18, 2025
By aggregating the data related to a specific PTIN, the Service can determine whether a certain preparer has statistically claimed a large quantity of credits, excessive business deductions, or regularly has clients with unreported income. The Service can use several mechanisms to prevent fraudulent preparer activity. This can include but is not limited to suspension of the preparer’s PTIN, fines and penalties, and the public reporting of infractions. In the most severe cases, the Service can refer the preparer to the Department of Justice (“DOJ”) for possible criminal prosecution or a civil injunction.
This article offers a step-by-step guide regarding how and why preparer investigations begin, the analysis the Service or DOJ will conduct and how to effectuate a parallel investigation, and the potential consequences of any government-led inquiries.
- How IRS Tax Preparer Investigations Begin
Today, you’re unlikely to receive an unannounced knock on your door from the IRS. Almost all investigations, whether civil or criminal in nature, start with data collection and reconciliation often through a filing made by a taxpayer. For example, the Service receives data regarding wages and fringe benefits reported on Forms W2 filed with the Social Security Administration, mortgage balances and amounts paid for interest as reported on Forms 1098, and credit card payments and third-party network transactions reported on Forms 1099K.
The IRS uses that self-reported data, including income tax return filings, and applies a discriminant index function (“DIF”) score to identify returns with a higher likelihood of adjustment. A DIF score is based on an algorithm that compares a taxpayer’s return to other returns filed with the same national American industry classification system (“NAICS”).
While a high DIF score does not automatically trigger an investigation, it may flag multiple taxpayers who utilize the same tax preparer and their PTIN. Therefore, the Service could audit the clients who were flagged and associated with that PTIN, administer interviews, and determine whether the PTIN and related tax preparer should be investigated. If the investigator is aggressive, they can also issue document requests and subpoenas to financial institutions and credit agencies before ever engaging with the preparer.
The IRS uses that self-reported data, including income tax return filings, and applies a discriminant index function (“DIF”) score to identify returns with a higher likelihood of adjustment. A DIF score is based on an algorithm that compares a taxpayer’s return to other returns filed with the same national American industry classification system (“NAICS”).
While a high DIF score does not automatically trigger an investigation, it may flag multiple taxpayers who utilize the same tax preparer and their PTIN. Therefore, the Service could audit the clients who were flagged and associated with that PTIN, administer interviews, and determine whether the PTIN and related tax preparer should be investigated. If the investigator is aggressive, they can also issue document requests and subpoenas to financial institutions and credit agencies before ever engaging with the preparer.
- Relevant Documentation
In both civil and criminal inquiries, investigators will scrutinize documents including but not limited to engagement letters, intake forms, and due-diligence checklists. They can also examine internal communications, client correspondence, fee arrangements, and bank account records.
By reconciling the information and documentation, the Service or DOJ can develop patterns and start to determine a preparer’s culpability or intent to file fraudulent returns and potential ways to stop any identified activity. In that regard, an accurate client intake form is one of the documents preparers should heavily scrutinize and rely upon as they provide evidence regarding what information and documentation the client provided, whether any issues were communicated or identified, and if any meetings occurred.
By reconciling the information and documentation, the Service or DOJ can develop patterns and start to determine a preparer’s culpability or intent to file fraudulent returns and potential ways to stop any identified activity. In that regard, an accurate client intake form is one of the documents preparers should heavily scrutinize and rely upon as they provide evidence regarding what information and documentation the client provided, whether any issues were communicated or identified, and if any meetings occurred.
- Defending Against a Preparer Investigation
Defending a tax preparer investigation begins with identification of areas of concern, the organization and review of relevant documentation needed to support a position, and to develop an understanding of the potential tax loss to the state or federal government, including any applicable penalty analysis.
Just as important, preparers should take special notice of who exactly is investigating them. If the notices are from an IRS criminal investigation (“CI”) special agent, the IRS and DOJ might be looking to prosecute the matter and hold the preparer criminally liable. In turn, if the notice is from an IRS revenue agent, the matter is most likely civil; however, the preparer should attempt to identify whether that agent is assigned to a specialized unit or task force within the IRS.
Preparers, and/or their representation, should complete a parallel investigation with specific emphasis on the documentation referenced above. Any notices from state or federal government agencies should be properly reviewed to help determine scope, the documents requested, and the potential time-period that is under review with special consideration of any statute of limitations analysis. Substantively, the investigation should identify and review any statistical aberrations and positions that could be scrutinized.
Just as important, preparers should take special notice of who exactly is investigating them. If the notices are from an IRS criminal investigation (“CI”) special agent, the IRS and DOJ might be looking to prosecute the matter and hold the preparer criminally liable. In turn, if the notice is from an IRS revenue agent, the matter is most likely civil; however, the preparer should attempt to identify whether that agent is assigned to a specialized unit or task force within the IRS.
Preparers, and/or their representation, should complete a parallel investigation with specific emphasis on the documentation referenced above. Any notices from state or federal government agencies should be properly reviewed to help determine scope, the documents requested, and the potential time-period that is under review with special consideration of any statute of limitations analysis. Substantively, the investigation should identify and review any statistical aberrations and positions that could be scrutinized.
- Potential Consequences for the Preparer and their Clients
- Civil penalties can be assessed per return for unreasonable positions, willful or reckless conduct, failure to sign returns or furnish copies, failure to retain records or lists, and failures to meet due diligence requirements for certain credits.
- Injunctive relief may be sought to limit or bar the preparer from preparing returns, advertising, or engaging in specified practices. Courts can impose compliance monitoring, reporting, or third-party review obligations.
- OPR discipline under Circular 230 can include censure, suspension, or disbarment from practice before the IRS, restricting the ability to represent clients in examinations, appeals, and collections.
- Criminal exposure exists in cases involving willful aiding and assisting in the preparation of false returns, conspiracy, false statements, or related fraud offenses, among others. Criminal cases may entail fines, restitution, and imprisonment, with collateral consequences for licensure and reputation.
- Civil suits by clients are common following adverse IRS action, alleging negligence, malpractice, or fraud. Professional liability insurance and engagement terms will matter, but defense costs and reputational harm can be significant.
- Clients whose returns were prepared by a targeted preparer may face audits, adjustments, and penalties. The IRS frequently selects a sample of returns associated with the preparer to evaluate patterns; if problems are found, exam scope may expand. Clients can be assessed with additional tax, accuracy-related penalties, and interest. In severe cases, the IRS may assert civil fraud penalties or refer matters for criminal investigation, especially where clients knowingly provided false information or participated in schemes.
- Final Thoughts
IRS tax preparer investigations are complicated matters that test the integrity of a preparer’s processes, the quality of documentation underlying client tax returns and the positions taken, and the preparer’s ability to effectively communicate specific facts and circumstances to the IRS and DOJ. A principled, well-organized defense that focuses on timely engagement and communications with the IRS, DOJ, and the client, as well as executing an effective parallel investigation can materially affect outcomes and put the preparer in the best position to resume normal business operations.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.