My Accountant Made a Mistake and I Got an IRS Penalty — What to Do

The First Thing to Understand: The Tax Liability Is Yours

This is the hardest part to accept. Under US tax law, you — the taxpayer — are responsible for the accuracy of your return, even when a licensed CPA prepared and signed it. The IRS will pursue you for unpaid tax, penalties, and interest. They have no direct enforcement relationship with your accountant.

This does not mean your accountant faces no consequences. If they acted negligently — made an error a competent professional would not make — you may be able to recover the penalty amount from them or their professional liability insurer. But that is a civil matter between you and them. The IRS will not wait for that to resolve.

The practical priority is this: address the IRS first, pursue recovery from your accountant second. Trying to fight the IRS by blaming your CPA rarely works and wastes time while penalties and interest compound at 0.5% per month.

Common Accountant Errors That Trigger IRS Penalties

Not every IRS notice is the accountant's fault — sometimes the underlying numbers were wrong or information was not provided. But the following errors are squarely on the preparer:

• Late filing: The accountant missed the deadline without requesting an extension. Failure-to-file penalty is 5% of unpaid tax per month, up to 25%.
• Incorrect income reporting: Income coded incorrectly in the books — misclassified, omitted, or duplicated — leading to an underreported return.
• Missed 1099 income: Third-party income reported to the IRS on 1099s that was not included in the return. The IRS matches these automatically.
• Wrong deduction categorisation: Personal expenses coded as business expenses, or non-deductible items claimed — triggering accuracy-related penalties of 20% of the underpayment.
• Payroll tax errors: Incorrect Form 941 filings, missed payroll tax deposits, or wrong W-2 figures. Payroll penalties are some of the harshest the IRS issues.
• Missed S-corp reasonable salary: Failing to pay and report a reasonable salary to an S-corp owner, triggering IRS reclassification and back payroll taxes.

IRS Penalty Types and What They Cost You

How to Request IRS Penalty Abatement

The IRS has two primary abatement routes, and most business owners with a single penalty event qualify for at least one:

First-Time Abatement (FTA): This is the fastest and simplest route. If you have had no penalties in the prior three tax years and are otherwise in compliance — returns filed, prior tax paid — the IRS will waive the penalty without requiring any explanation. You do not need to prove your accountant made an error. Call the IRS at 1-800-829-1040 and request FTA by phone, or file Form 843. FTA is granted in the majority of first-time cases.

Reasonable Cause Abatement: If FTA is not available — because you have had a prior penalty in the last three years — you can argue Reasonable Cause. Reliance on a tax professional is a recognised Reasonable Cause defence under IRS guidelines. You need to show: you provided accurate, complete information to your accountant; you had no reason to believe the return was wrong; and you acted promptly once you discovered the error. Submit Form 843 with a written explanation and attach supporting documentation — the original engagement letter, evidence of information provided, and correspondence showing you did not know about the error until the IRS contacted you.

Do not accept a penalty notice as final. The IRS abatement process exists precisely because errors happen, and a well-drafted abatement request with clear documentation has a strong success rate for first-time and reasonable-cause scenarios.

Fixing the Underlying Error — Amended Returns

If the accountant's mistake resulted in incorrect figures on your tax return — wrong income, wrong deductions, missed credits — you should file an amended return even if the penalty is abated. An uncorrected return leaves you exposed to a future audit of the same issues.

• Individual returns (Form 1040): File Form 1040-X. You have three years from the original due date or two years from when tax was paid, whichever is later.
• C-Corp returns (Form 1120): File Form 1120-X within the same limitation period.
• S-Corp returns (Form 1120-S): File an amended 1120-S. Note that if the S-corp correction affects shareholder K-1s, the shareholders may also need to amend their individual returns.
• Partnership returns (Form 1065): The Bipartisan Budget Act rules now apply for most partnerships — amended returns are handled through the BBA centralized audit regime. Consult a CPA before filing.

Get a second CPA to review the error before filing the amendment. The accountant who made the original mistake is not the right person to prepare the correction.

Can You Recover the Penalty From Your Accountant?

Possibly — depending on the size of the penalty and how clear the negligence is. Most licensed CPA firms carry Errors and Omissions (E&O) professional liability insurance for exactly this situation. If the error was a straightforward professional mistake — missed deadline, obvious miscoding — it is worth raising a formal claim.

Steps to pursue recovery:

• Send a written demand letter to the accountant specifying the error, the IRS notice received, the penalty amount, and requesting reimbursement within 30 days.
• Ask for the name of their E&O insurer and their policy number. They are not required to provide it voluntarily, but a formal demand often prompts a response.
• For penalties under $10,000, small claims court is a realistic option in most states — no attorney required.
• For larger amounts, consult an attorney who handles professional malpractice. Many work on contingency for clear-cut negligence cases.

Filing a complaint with your state Board of Accountancy simultaneously is worth doing — not primarily for financial recovery, but because a board investigation makes the accountant far more motivated to settle directly.

How Sharma Jyoti and Co Can Step In

Once the IRS matter is in hand, the priority is making sure your books are clean going forward — and that the conditions that led to the error do not repeat. Sharma Jyoti and Co is an ICAI-registered Chartered Accountant firm that works with US small businesses remotely, handling the bookkeeping and workpaper preparation that your US CPA signs off on.

Here is how we help after an accountant error situation:

• Books review and correction: We review your existing QuickBooks Online or Xero file, identify where transactions were miscoded or missed, and correct the underlying bookkeeping. This gives your new CPA clean records to work from — whether for the amendment or for the current year.
• Catch-up bookkeeping: If months have been missed or the books are in disarray, we reconstruct them from bank statement exports and receipts. Most clients have fully corrected books within two to three weeks.
• Ongoing monthly bookkeeping: We maintain your books on a monthly basis — reconciling every account, categorising transactions correctly, and delivering a clean P&L and balance sheet. Your US CPA reviews, signs, and files. The split of roles removes the single-point-of-failure risk that comes from one person handling both bookkeeping and filing.
• Clean workpapers for your CPA: We format year-end workpapers to match what Drake, UltraTax, Lacerte, and ProSeries expect. Your CPA imports and reviews — no reconstruction needed.
• NDA and data processing agreement signed first. Your financial records are protected before any files are shared.

Our rate is $6–$15/hr — compared to $35–$65/hr for a US bookkeeper. The separation of bookkeeping (handled by us) and tax filing (handled by your US CPA) also means each professional is accountable only for their own scope — a cleaner arrangement than having one person do both. Book a free discovery call to discuss your situation.

Frequently Asked Questions