A preparer imports a client's brokerage 1099-B, keys a corrected W-2c on top of the original W-2, and clicks e-file before noticing wages doubled. The software flagged nothing. Three Circular 230 lines and four statute-of-limitations buckets decide what happens next.
Software speed creates a complacency trap. Circular 230 §10.22(a) requires a practitioner to exercise due diligence in preparing returns and determining the correctness of representations made to the IRS. §10.22(b) permits reliance on another's work product only if reasonable care was used in engaging and supervising that source. Software is "another" for this purpose.
KEY: The preparer signs the return, not the software vendor. IRC §6694(a) imposes a penalty equal to the greater of $1,000 or 50% of the preparer's fee for an unreasonable position. §6694(b) raises that to the greater of $5,000 or 75% of fee for willful or reckless conduct. Software bugs are not a defense.
Reviewing software output. Before signing, the preparer must:
- Reconcile every input field to source documents (W-2, 1099, K-1, brokerage consolidated statements)
- Cross-check computed totals against rough estimates (line 11 AGI, line 16 tax, line 24 total tax)
Common mistakes
- Treating software output as automatically correct. Software cannot detect a missing W-2 or a duplicated 1099. §10.22 due diligence applies whether the return is hand-prepared or software-prepared. Trap answer: "rely on the software."
- Citing 3 years as the universal retention rule. §6501 sets 3 years for the normal case but 6 years for greater-than-25% gross-income omissions, indefinite for no return or fraud, and 7 years for bad-debt or worthless-security claims. Trap answer: "3 years for everything."
- Confusing preparer retention with taxpayer retention. The preparer keeps a copy or list for 3 years under §6107(b). The taxpayer follows the §6501 statute-of-limitations rules. Trap answer: "preparer keeps records as long as the taxpayer does."
Bottom line
- Software reliance does not shield the preparer. §10.22 due diligence and §6694 penalties still apply when you sign.
- Reconcile every input to source documents and resolve every diagnostic before signing.
- §6107(b) preparer retention is 3 years (copy or list); the §6695(d) penalty is $65 per failure, capped at $32,500.
- Taxpayer retention follows §6501: 3 years normal, 6 years for greater-than-25% omission, indefinite for no return or fraud, 7 years for bad-debt or worthless-security claims.
Exam shortcut
"Software" plus "rely" equals trap. The correct answer always preserves preparer responsibility under §10.22 and §6694. Software is a tool, not a shield. Retention defaults: 3 normal, 6 for big omission, 7 for bad debt, 4 for employment tax, indefinite for fraud or non-filing. Pick 3 years only when the facts strictly match the normal case. Data security signal words.
The full lesson (about 2,343 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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