THE CHARACTERISTICS OF INDIVIDUALS WHO UNDERESTIMATE TAX LIABILITY

Tax Reform Act of 1976 imposes penalties on commercial preparers of tax returns if the tax liability on documents is understated because of negligence or fraudulent preparation. It is difficult to prove either negligence or fraud unless the tax return preparer offers to misstate information of the return in order to underreport his client's tax liability. Therefore, the Internal Revenue Service (IRS) now uses statistical analysis of the returns in an attempt to enforce this new section of the law. Promoting such analyses is the main function of the Preparer Inventory File.A study was conducted which indicates that large underestimations of taxable incomes often occur, even with responsible tax return preparers. In addition, it is not easy to recognize the characteristics of individuals who honestly underestimate taxable income. Therefore, even if a preparer can be identified because of consistent understatement, it is very difficult to determine whether the error was an honest one or caused by fraudulent intent. Appendices.