Substantial Portion

1. Who is a Tax Return Preparer?

• A person who prepares for compensation (or employs someone who does) a substantial portion of a tax return.

• Includes preparation done outside the U.S.

• Not considered a preparer if only giving advice on specific issues.

2. What is a "Substantial Portion"?

• A portion (or schedule) of a return is substantial if it includes:

  • Gross income, deductions, or credit-related amounts of:

    • $10,000 or more, OR

    • $400,000 or more AND 20% or more of AGI (or Gross Income for non-individuals).

• Example:

  • A tax preparer completes Schedule C for a sole proprietor with $15,000 in business income.

  • Since $15,000 > $10,000, this is a substantial portion, making the preparer a "tax return preparer."

3. What is an "Insubstantial Portion"?

• A portion is not substantial if it involves:

  • Less than $10,000, AND

  • Less than $400,000 (or <20% of AGI/Gross Income).

• Example:

  • A preparer only fills out a $5,000 charitable deduction on a return with $100,000 AGI.

  • Since $5,000 < $10,000, it’s insubstantial, and the preparer is not considered a "tax return preparer."

4. Preparer Liability for Linked Returns

• A preparer of one return (e.g., a partnership return) is not automatically the preparer of another linked return (e.g., a partner’s individual return) unless:

  • The entry is directly reflected on the second return (e.g., partnership income flowing to the partner’s return), AND

  • The entry is a substantial portion of the second return.

• Example:

  • A preparer completes a partnership return with $500,000 in gross income.

  • A partner’s individual return reports $150,000 from the partnership.

  • Since $150,000 < $400,000, but if it’s >20% of the partner’s AGI, the preparer may be considered the preparer of the partner’s return.

Summary Table

This helps determine whether someone is legally considered a "tax return preparer" under IRS rules, triggering potential penalties for errors.