IRS Gains Power to Suspend Tax Preparers Instantly, Plus Massive New Fines for Fraud

The aptly named Taxpayer Protection and Preparer Proficiency Act is a major overhaul of how the IRS regulates the people who file our tax returns. Think of it as the government finally deciding to give tax preparers a formal license, complete with federal education requirements, background checks, and significantly higher penalties for cutting corners or outright fraud. This is a big deal for the millions of people who rely on paid professionals, from CPAs to seasonal tax shops, to handle their money.

The New Bar for Tax Prep

Section 5 fundamentally changes who can legally prepare your taxes for compensation. Currently, if you have a Preparer Tax Identification Number (PTIN), you’re in business. This Act says, ‘Not so fast.’ To get or renew that PTIN, you’ll now have to meet federal suitability and education requirements, including background checks and personal tax compliance reviews. The IRS can require up to 18 hours of continuing education per year in ethics and tax law, and they can even demand more hours if they find a pattern of errors in your past returns. This means the person doing your taxes should, in theory, be better trained and less likely to make a costly mistake, which is a win for the average taxpayer.

Bigger Sticks for Bad Actors

If you thought the old penalties were high, Section 4 and Section 3 turn up the heat dramatically. For preparers, the fines for basic failures—like not signing a return or failing to give you a copy of your own paperwork—jump from $50 to $250 per failure, with the annual maximum penalty caps soaring to $50,000 or $75,000 depending on the violation. For a small operation that messes up the basics for a hundred clients, those fines could be crippling.

More critically, the Act creates a new criminal felony for a preparer who willfully misuses an identification number (Section 3). If a preparer uses a number assigned to someone else, or one that is expired or revoked, they could face up to two years in prison and a $50,000 fine. This is aimed squarely at the worst offenders who hide their identity to commit fraud.

Protecting Your Refund from Electronic Theft

One of the most welcome changes for taxpayers is the crackdown on refund theft. Section 4 establishes a severe new penalty for preparers who misappropriate an electronic tax refund. If your preparer diverts your direct-deposited refund, they face a penalty equal to the greater of $1,000 or the full amount of the misappropriated funds. This provision directly addresses the growing problem of preparers stealing money from clients who expect their refund to hit their bank account.

The IRS Gets the 'Preliminary Suspension' Hammer

While the increased standards and penalties are designed to protect taxpayers, Section 5 gives the IRS a significant new power that raises questions about due process for preparers. The IRS gains the authority to preliminarily suspend a preparer’s PTIN for up to 180 days without a full hearing. This can happen if the IRS finds the preparer engaged in sanctionable conduct and determines the suspension is necessary to prevent “serious economic harm to taxpayers or serious impairment of tax administration.”

For a preparer, a six-month suspension means their business is immediately shut down, potentially before they have a chance to formally defend themselves. While this power is meant to stop a fraudulent preparer in their tracks before they ruin dozens of lives during tax season, the standard for triggering this immediate shutdown—especially the definition of “serious economic harm”—is a point that will need careful watching. It’s a powerful tool for enforcement, but one that needs to be used precisely.

To balance this, the Act requires the IRS to establish a program within 18 months to help preparers avoid penalties for simple, inadvertent errors, like forgetting to include a valid identification number on an electronic filing. This program will let preparers correct the error before the penalty hammer drops, which is a practical nod to the reality of high-volume tax filing.