Completion of the Filing Process · Accuracy
Reliance on software
tax year · reviewed 2026-08-19 · I. Ohu
The rule
No provision of the Code, the regulations or Circular 230 permits a practitioner to rely on tax preparation software as a defence. The reliance rules that do exist are addressed to people — the taxpayer, another advisor, another preparer, a party — and to their advice and information. Read carefully, that is the answer to this outline item: software is a tool the preparer uses, and the output of a tool is the preparer’s own work.
What the rules do permit is instructive by contrast. A preparer generally may rely in good faith without verification upon information furnished by the taxpayer, and upon information and advice furnished by another advisor, another preparer or other party, including one at the same firm (Reg. § 1.6694-1(e)(1)). The preparer is not required to audit, examine or review books and records, business operations, documents or other evidence to verify that information independently. Circular 230 § 10.34(d) says the same in the practitioner’s own rules.
But the same paragraph sets three limits that apply whatever the source. The preparer may not ignore the implications of information furnished to or actually known by the preparer. The preparer must make reasonable inquiries if the information as furnished appears incorrect or incomplete — Circular 230 § 10.34(d) adds “inconsistent with an important fact or another factual assumption.” And where a Code section or regulation conditions a deduction or credit on specific facts and circumstances existing, such as the taxpayer maintaining specific documents, the preparer must make appropriate inquiries to determine that those facts exist.
Circular 230 § 10.22(b) supplies the parallel rule for delegated work: a practitioner is presumed to have exercised due diligence if the practitioner relies on the work product of another person and used reasonable care in engaging, supervising, training and evaluating that person, taking proper account of the nature of the relationship. A software package is not a person who can be engaged, supervised, trained and evaluated, and the presumption does not extend to it.
Current figures
| Item | Content |
|---|---|
| Reasonable cause and good faith factors | 6 — the nature of the error causing the understatement, the frequency of errors, the materiality of errors, the preparer's normal office practice, reliance on the advice of others, and reliance on generally accepted administrative or industry practiceTY2026 |
| What a normal office practice must be | a system for promoting accuracy and consistency that, for a signing preparer, generally includes checklists, methods for obtaining necessary information from the taxpayer, a review of the prior year's return, and review proceduresTY2026 |
The fourth factor is the one this topic turns on. A normal office practice earns weight only where it is a system for promoting accuracy and consistency — and the regulation’s list of what such a system generally includes for a signing preparer is a description of reviewing output, not of buying software.
How it works in practice
Reliance on the person who wrote the schedule is available; reliance on the program is not. Where a bookkeeper, another preparer or an advisor produces a schedule, Reg. § 1.6694-2(e)(5) allows good faith reliance on that person’s advice or documents where the preparer had reason to believe the person was competent to render it, and it puts the burden of establishing that the advice was received on the preparer. It then names three situations in which reliance is not in good faith: the advice or information is unreasonable on its face; the preparer knew or should have known that the other party was not aware of all relevant facts; or the preparer knew or should have known, given the nature of the practice, that the advice was no longer reliable due to developments in the law. Each of those tests requires judgement that the preparer, not the source, must exercise.
Software errors are the preparer’s errors. When a package computes a limitation incorrectly, or carries a figure to the wrong line, or applies a superseded threshold because an update was not installed, the return is wrong and the signature on it is the preparer’s. The reasonable cause factors offer partial shelter — an error resulting from a complex, uncommon or highly technical provision that a competent preparer reasonably could have made counts in the preparer’s favour — but Reg. § 1.6694-2(e)(1) closes that door for anything that would have been apparent from a general review of the return. An impossible number on the face of the return is not a software problem the regulation forgives.
Review the result, not the input screen. The practical discipline that follows is to look at the finished return as a document, not merely to confirm that the data entry matched the source documents. Does the effective rate make sense for this income? Does the refund look like last year adjusted for what changed? Did a limitation phase out where it should have? Publication 1345 separately instructs a final review of return information — especially direct deposit details — before e-filing, which is the same discipline applied to the field that causes the most damage when wrong.
Keep the software current, and know what changed. A package running last season’s tables, or one whose update was deferred through a busy week, produces returns that are wrong in ways no data check will catch. Where a developer distributes a correction for an error causing rejects, Publication 3112 requires the developer to correct promptly and distribute the correction — but installing it is the firm’s act.
A normal office practice is evidence, and it has to be real. Reg. § 1.6694-2(e)(4) gives weight to a preparer’s normal office practice where, with the other facts, it indicates the error would occur rarely and the normal practice was followed on the return in question. It then withdraws the exception entirely where there is a flagrant error, a pattern of errors on a return, or a repetition of the same or similar errors on numerous returns. A checklist that exists but is not used proves the opposite of what it was meant to prove.
The credit the software allowed
Wilhelmina Osei-Fairhurst’s package computes a credit for a client whose income should have phased it out entirely. The preparer notices the credit looks generous, checks that every entry matches the source documents, finds no data error, and files.
The return is wrong and the reliance argument is unavailable. There is no provision permitting reliance on the software’s computation, and the reasonable cause exception does not apply to an error that would have been apparent from a general review of the return — a credit surviving at an income level where it should be gone is exactly that. The check that was needed was not another pass over the input screens but a moment testing the output against the statute: at this income, should this credit exist at all? The answer took thirty seconds and was available before filing.
The bookkeeper's schedule, and the reliance that held
Cassius Nwachukwu-Berglund prepares a business return from a depreciation schedule produced by the client’s bookkeeper, whom he has worked with for six years and whose work has been consistently sound. One asset is misclassified, and the error is not visible on the face of the schedule.
Here reliance is available and it holds. Reg. § 1.6694-2(e)(5) permits good faith reliance on schedules or other documents prepared by another party whom the preparer had reason to believe was competent, and none of the three disqualifiers applies: the schedule was not unreasonable on its face, there is no indication the bookkeeper lacked relevant facts, and no change in law made it unreliable. Nwachukwu-Berglund’s file should record that he received the schedule and from whom, because the burden of establishing that the information was received is on him. Note what makes this different from the software case: a person was engaged, and a person can be evaluated.
The update that was not installed
A firm defers a mid-season software update during its busiest fortnight. The update corrected a threshold changed by legislation enacted the previous summer. Forty returns go out computed on the old figure.
This is not an isolated error. Reg. § 1.6694-2(e)(2) applies the reasonable cause exception to an isolated error rather than a number of errors, and expressly withholds it where there is a repetition of the same or similar errors on numerous returns. Forty returns carrying the same wrong threshold is a pattern by any reading. The firm’s exposure is not merely forty amended returns; it is that the normal office practice factor now cuts against it, because whatever the practice said about applying updates was not followed.
How this has changed
The reliance framework took its present shape in the 2008 regulations under IRC § 6694, rewritten after the Small Business and Work Opportunity Tax Act of 2007 raised the preparer standard and extended § 6694 beyond income tax returns. Those regulations added the detail that matters here: the express permission to rely on another advisor or preparer including one at the same firm, the three disqualifiers in § 1.6694-2(e)(5), and the six reasonable cause factors with their exclusions for apparent errors, patterns and repeated errors across returns.
What has not changed, through every generation of preparation software, is that none of it addresses software at all. The regulation was drafted when the tools were already ubiquitous, and it still frames reliance in terms of persons and their advice. The most reasonable reading is the plain one: the profession’s obligation to review its own output was not displaced by the arrival of a program that produces it faster.
The forward-looking version of the same question — reliance on automated research or drafting tools — is governed by the same sentences, and reaches the same answer.
Exam focus
Know that a preparer may rely in good faith without verification on information furnished by the taxpayer and on information and advice furnished by another advisor or preparer, but may not ignore implications, must make reasonable inquiries where information appears incorrect or incomplete, and must inquire where a Code provision conditions a deduction or credit on specific facts. Know that the reasonable cause exception does not apply to an error apparent from a general review of the return, nor where there is a pattern of errors or a repetition across numerous returns. Know that the Circular 230 § 10.22(b) presumption applies to reliance on the work product of a person who was engaged, supervised, trained and evaluated.
Check yourself
1. A preparer’s software miscomputes a limitation and the resulting error is visible on the face of the return. Is the reasonable cause and good faith exception available?
A. Yes, because the error originated in the software B. Yes, if the software vendor confirms the defect C. No; the exception does not apply to an error that would have been apparent from a general review of the return D. Yes, provided the preparer installs the vendor’s correction
Answer: C.
2. On what may a preparer rely in good faith without verification?
A. The output of tax preparation software B. Information furnished by the taxpayer, and information and advice furnished by another advisor or preparer C. Any figure appearing on a prior year return, without qualification D. Nothing; every item must be independently verified
Answer: B. The preparer is not required to audit or examine books and records to verify it.
3. When is reliance on another party’s advice not in good faith?
A. Whenever the advice was given orally B. Where the advice is unreasonable on its face, where the preparer knew or should have known the party lacked relevant facts, or where developments in the law made it unreliable C. Whenever the party works at the same firm as the preparer D. Only where the party is not a credentialed practitioner
Answer: B. Advice may be written or oral, though the burden of establishing it was received falls on the preparer.
4. What does Circular 230 § 10.22(b) presume?
A. That software output is accurate B. That due diligence was exercised where the practitioner relied on the work product of another person and used reasonable care in engaging, supervising, training and evaluating them C. That an isolated error is excusable D. That a client’s information is complete
Answer: B. The presumption is about a person’s work product, not a program’s.
5. A firm makes the same computational error on numerous returns because an update was not installed. How does the reasonable cause exception apply?
A. It applies, because each error is individually minor B. It applies, because the cause was external to the firm C. It does not apply; the exception is withheld where the same or similar error is repeated on numerous returns D. It applies to the first ten returns only
Answer: C.
Change log
- Initial draft.