AccessibilitySkip to Top NavigationSkip to Main ContentHome  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 6. Preparer, Promoter Penalties

20.1.6  Preparer, Promoter Penalties

20.1.6.1  (02-08-2008)
Overview of the Return Preparer, Promoter, and Material Advisor Penalties

  1. This IRM provides guidelines to be followed by all operational and processing functions.

  2. The IRS has penalty and injunctive authority to address improper income tax return preparation. The Internal Revenue Code (IRC) provides the following penalties to stop fraudulent, unscrupulous and/or incompetent tax return preparers and abusive transaction promoters. Penalty assertion is the key enforcement vehicle for noncompliant preparers and promoters.

  3. Income tax return preparer penalties under:

    1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

    2. IRC section 6694, Understatement of Taxpayer's Liability by Income Tax Return Preparer

    3. IRC section 6695, Other Assessable Penalties With Respect to the Preparation of Income Tax Returns for Other Persons

    4. IRC section 6713, Disclosure or Use of Information by Preparers of Returns

  4. Tax shelter promoter penalties under:

    1. IRC section 6700, Promoting Abusive Tax Shelters, Etc.

    2. IRC section 6701, Penalties for Aiding and Abetting Understatement of Tax Liability

  5. Material advisor penalties under:

    1. IRC section 6707, Failure to Furnish Information Regarding Reportable Transactions

    2. IRC section 6708, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions

  6. The Service may also pursue injunctions under:

    1. IRC section 7407, Action to Enjoin Income Tax Return Preparers

    2. IRC section 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions

  7. Preparer, promoter and material advisor penalties are important tools for the IRS to collect the proper amount of tax revenue at the least cost. These penalties support the IRS's policy only if their application enhances voluntary compliance. See Policy Statement P-20-1, IRM 1.2.20, Penalties Enhance Voluntary Compliance.

  8. Each Division has developed programs to administer preparer, promoter and material advisor penalties. See IRM 4.32, Abusive Tax Avoidance Transactions (ATAT), for procedures involving ATAT issues for SB/SE and LMSB. The Return Preparer Penalty program addresses return preparer penalties, and electronic filing requirements. See IRM 20.1.6.1.2, Program Coordination Responsibilities,for procedures involving preparer issues, and IRM 4.11.51, Return Preparer Program.

20.1.6.1.1  (02-08-2008)
Definitions

  1. The definitions used in this IRM relate to Preparer, Promoter, or Material Advisor Penalties.

20.1.6.1.1.1  (02-08-2008)
Adequate Disclosure

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. Disclosure is made on a Form 8275, Disclosure Statement , or Form 8275-R Regulation Disclosure Statement, as appropriate, or per the annual revenue procedure issued for the purposes of the substantial understatement penalty. A preparer is not subject to a civil penalty for an unrealistic position under IRC section 6694(a) if the position is not frivolous and is adequately disclosed. Different disclosure rules apply to signing and nonsigning preparers (see Treas. Reg. 1.66942(c)(3)(i) and (ii), and Treas. Reg. 1.66943(e)(1) and (2)).

    1. Signing preparers.The disclosure must be made on a properly completed and filed Form 8275, Disclosure Statement , or 8275-R, Regulation Disclosure Statement, as appropriate, or on the return per an annual revenue procedure. (Treas. Reg. 1.66942(c)(3)(i).

    2. Nonsigning preparers.The disclosure may be made in the manner prescribed above for signing preparers or by including in the advice to the taxpayer (or to another preparer) a statement that contains the information required by Treas. Reg. 1.66942(c)(3)(ii).

20.1.6.1.1.2  (02-08-2008)
Frivolous Position

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. A position that is patently improper. See Treas. Reg. 1.66942(c)(2).

20.1.6.1.1.3  (02-08-2008)
Gross Valuation Overstatement

  1. A statement as to the value of any property or services if the stated value exceeds 200 percent of the amount determined to be the correct value, and the value of the property or service is directly related to the amount of any allowable deduction or credit. See IRC section 6700(b).

    1. If a promoter provides a gross valuation overstatement in connection with the organization or sale of an interest in an entity, the IRC section 6700 penalty applies regardless of whether the promoter knows or has reason to know of the overvaluation.

    2. The gross valuation overstatement must be directly related to a material matter.

    3. Reasonable Basis/Good Faith Exception. When an IRC section 6700 penalty is based on a gross valuation overstatement, the Service may waive the penalty if the valuation had a reasonable basis and was made in good faith. This exception does not apply to penalties based on making or furnishing a false or fraudulent statement as to the tax benefits to be derived from participating in the arrangement.

20.1.6.1.1.4  (02-08-2008)
Income Tax Return Preparer

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. Any person (including a partnership or corporation) who prepares for compensation all or a substantial portion of a tax return or claim for refund under the income tax provisions of the Code.

20.1.6.1.1.4.1  (02-08-2008)
Persons Who Are Income Tax Return Preparers

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. The IRC section 7701(a)(36), Income Tax Return Preparer , definition of a tax return preparer has been interpreted by Treas. Reg. 301.770115 and various revenue rulings to include persons (including nonsigning preparers) who:

    1. Furnish sufficient advice or information so that the completion of the return by another individual is a mechanical process. (Treas . Reg. 301.770115(a)(1))

    2. Supply computerized tax return preparation services to tax practitioners, or offers services or programs that make substantive tax determinations. (Rev. Rul . 85187, 19852 C.B. 338, Rev. Rul. 85188, 19852 C.B. 339, , and Rev. Rul. 85189, 19852 C.B . 341)

    3. Software companies or other persons that prepare computer programs and sell them to taxpayers for use in preparing their returns, may also be an income tax return preparer for purposes of the return preparer penalties. (Rev. Rul. 85-189)

    4. For the purposes of IRC section 6694(a) or (b) penalties, no more than one individual associated with a firm (i.e., an employee or partner) is treated as a preparer of the same return or claim (one-preparer-per-firm rule). See Treas. Reg. 1.66941(b)(1). NOTE: The one-preparer-per-firm rule does not mean that an IRC section 6694 penalty cannot also be asserted against the firm, as an employer. It also does not mean that there can never be more than one preparer per return. For example, if a CPA receives advice from an attorney (who is not associated with the same firm) and the advice constitutes a substantial portion of the return, both the CPA and the attorney are income tax return preparers with respect to that return.

    5. A nonsigning preparer who prepares a schedule or entry that constitutes a substantial portion of the return may be considered a tax return preparer. In making the decision as to what constitutes a substantial portion, examiners should consider the relation of the entry or schedule to the tax liability, the complexity of the return as a whole, and the relative time involved in preparing it.

    6. An electronic return originator may be a return preparer under IRC section 7701(a)(36) and Treas. Reg. 301.770115, and who could be liable for these penalties. However, an electronic filer who is primarily a transmitter with services limited to typing, reproduction or other mechanical assistance in the preparation of a return or claim for refund is not an income tax preparer for purposes for these penalties. See Rev. Proc. 200560, 200535 I.R.B. 449.

    7. A general partner who prepares a partnership return can be an income tax return preparer of a limited partner's return in certain situations. (Rev. Rul. 81270, 19812 C.B. 250).

    8. A preparer (1st preparer) can be a preparer of a return prepared by another preparer (2nd preparer) if the 2nd preparer relied on information contained on the return prepared by the 1st preparer. This occurs, for example, when the 1st preparer negligently overstates the expenses on a prior year's return, thus creating an NOL, and the 2nd preparer, in good faith, applies the NOL carryover in preparing the subsequent year's return. (Rev. Rul. 81171, 19811 C.B. 589)

    9. The definition of income tax preparer is slightly altered for purposes of IRC section 6695(g), Failure to be Diligent in Determining Eligibility For Earned Income Credit . Preparers who merely give advice or prepare another return that affects the EITC return or refund claim are not considered preparers. The due diligence standards are imposed only on paid preparers who prepare the EITC return or claim. (Treas. Reg. 1.66952(a))

20.1.6.1.1.4.2  (02-08-2008)
Persons Who Are Not Income Tax Return Preparers

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. The following persons are not income tax return preparers:

    1. A person who prepares a return or claim for refund with no explicit or implicit agreement for compensation even though the person receives a gift or return service or favor. (Treas. Reg. 301.770115(a)(4))

    2. A person who only provides mechanical assistance in the preparation of an income tax return or claim for refund (e.g., provides typing and/or copying services). (Treas. Reg. 301.770115(d)(1))

    3. A person who prepares an income tax return or claim for refund of a person, or an officer, general partner, or employee of a person, by whom the individual is regularly and continuously employed or in which the individual is a general partner. (Treas. Reg. 301.770115(d)(2))

    4. A person who prepares an income tax return or claim for refund for an estate or a trust but only if such person is a fiduciary or is an officer, general partner, or employee of the fiduciary. (Treas. Reg. 301.770115(d)(3))

    5. A person who prepares a claim for refund for a taxpayer in response to a deficiency notice or a waiver of restriction after initiation of an examination of the taxpayer or another taxpayer (if a determination in the other taxpayer's examination affects, indirectly or directly, the taxpayer in question). (Treas. Reg. 301.770115(d)(4))

    6. Any person who provides tax assistance under the VITA program. (Treas. Reg. 301.770115(a)(7))

    7. Any person who provides tax assistance as part of a qualified Low-Income Taxpayer Clinic (LITC ) as defined in IRC section 7526. (Treas. Reg. 770115(a)(7). The assistance must be directly related to a controversy with the IRS or as part of an LITC's English as a Second Language (ESL) outreach program. The LITC cannot charge a separate fee or vary a fee based on whether the LITC provides assistance with a return or claim, and the LITC cannot charge more than a nominal fee for its service.

20.1.6.1.1.5  (02-08-2008)
Penalty Steering Committee (PSC)

  1. A multifunctional group that is established by the Area Planning and Special Programs (PSP) Territory Manager. The PSC members can include among others: the Electronic Filer Coordinator, Examination Return Preparer Coordinator, a representative designated by the Area Director and a Criminal Investigations representative. The PSC identifies patterns of preparer abuse, recommends the initiation of a project on potentially abusive return preparers, and reviews the appropriateness and accuracy of return preparer penalty assertion.

  2. Cross-reference IRM 20.1.6.1.2.3(3).

20.1.6.1.1.6  (02-08-2008)
Promoter for Purposes of IRC Section 6700 Penalty

  1. Any person who organizes, assists in the organization of, or participates (directly or indirectly) in the sale of any interest in a partnership or other entity, investment plan or arrangement, or plan or other arrangement. The class of persons covered by the IRC section 6700 penalty includes not only sellers, but also individuals who:

    1. Aid or assist sellers,

    2. Cause other persons to make or furnish statements, or

    3. Cause an appraiser to grossly overvalue property.

20.1.6.1.1.7  (02-08-2008)
Reason to Know Standard

  1. The IRC section 6700 penalty for making a statement about the allowability of any deduction or credit, the excludability of any income, or the securing of any tax benefit only applies when the individual knows or has reason to know that the statement is false or fraudulent. Whether a person knows or has reason to know that a statement is false or fraudulent depends on their role in the organization or sale, as well as their experience, knowledge, and education.

20.1.6.1.1.8  (02-08-2008)
Reasonable Cause/Good Faith

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. Penalties under IRC section 6694 and 6695 will not be imposed if, considering all the facts and circumstances, it is determined that the preparer had reasonable cause and acted in good faith. Factors to consider in making this determination include the nature of the error, the materiality of the error, the frequency of the error, the preparer's normal office practice, and the preparer's reliance on the advice of another preparer. (See IRM 20.1.1.3.1,Reasonable Cause.)

20.1.6.1.1.9  (02-08-2008)
Reckless or Intentional Disregard

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. In general, a preparer is considered to have recklessly or intentionally disregarded a rule or regulation if the preparer takes a position on the return or claim that is contrary to a rule or regulation and the preparer knows of, or is reckless in not knowing of, the rule or regulation.

    1. A preparer who makes little or no effort to determine if a rule or regulation exists may be subject to an IRC section 6694(b) penalty if such conduct substantially deviates from a reasonable preparer standard. Diligence is implicitly a part of the standard for a reasonable preparer.

    2. An IRC section 6694(b) penalty predicated on reckless or intentional disregard would not be imposed if there is adequate disclosure of a nonfrivolous position and, in the case of a regulation, the position represents a good faith challenge to the regulation's validity.

20.1.6.1.1.10  (02-08-2008)
Rules and Regulations

  1. Provisions of the Internal Revenue Code, temporary or final regulations, revenue rulings, or notices (other than notices of proposed rules making) that are published in the Internal Revenue Bulletin. Revenue procedures are not included in this definition. (Treas. Reg. 1.6694-3(f))

20.1.6.1.1.11  (02-08-2008)
Understatement of Liability

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. Any understatement of the net amount payable for any tax due under Subtitle A of the Code (income taxes) or any overstatement of the net amount creditable or refundable for any such tax may subject a preparer to an IRC section 6694 penalty.

    1. A final administrative or judicial determination concerning the taxpayer's return is not required in order to assert return preparer penalties. However, the penalties must be abated if a subsequent judicial or administrative determination concludes that no understatement exists (IRC section 6694(d)).

    2. For purposes of the return preparer penalties, the net amount payable is not reduced by any carryback.

    3. For further guidance on the meaning of this term, see IRM 20.1.6.3.3, Asserting the IRC Section 6694 Penalties, below.

20.1.6.1.1.12  (02-08-2008)
Unrealistic Position

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. A position for which there was not a realistic possibility of being sustained on its merits (realistic possibility standard). The preparer must have known or reasonably should have known of such position.

    1. A position has a realistic possibility of being sustained if a reasonable and well-informed analysis by a person knowledgeable in tax law would lead such a person to conclude that the position has approximately a one-in-three, or greater, likelihood of being sustained on its merits.

    2. For signing preparers, the relevant date for determining realistic possibility is generally the date the preparer signs and dates the return. The relevant date for nonsigning preparers is generally the date, based on all the facts and circumstances, that the preparer provides the advice.

    3. The analysis used for determining whether substantial authority is present for purposes of the accuracy-related penalty under IRC section 6662 also applies in making a determination concerning the realistic possibility standard. Only the authorities specified in Treas. Reg. 1.66624(d)(3)(iii) are considered. Also, see Examples (1), (2), (3) and (5) in IRM 20.1.6.3.5, Examples of IRC 6694(a) Penalty Application, below.

    4. Positions contrary to a revenue ruling or a notice but which satisfy the realistic possibility standard - A preparer will not be considered to have recklessly or intentionally disregarded a revenue ruling or a notice if the position contrary to the revenue ruling or notice satisfies the realistic possibility standard. This rule also does not apply to a position contrary to a regulation. (Treas. Reg. 1.66943(c)

20.1.6.1.1.13  (02-08-2008)
Willful Conduct

  1. Knowing and intentional conduct. Preparers are considered to have acted willfully if they disregard information provided (or add information not provided) by the taxpayer or other persons in an attempt to wrongfully reduce tax. It is not necessary to prove that the preparer acted with a bad purpose or evil motive in order to establish willfulness.

20.1.6.1.2  (02-08-2008)
Return Preparer Program (RPP) Coordination Responsibilities

  1. There are specific RPP coordination responsibilities assigned to Headquarters, Area, and Area PSP offices as noted below.

20.1.6.1.2.1  (02-08-2008)
National Headquarters

  1. The Director, SB/SE Examination, will designate a staff member to functionally supervise, on a nationwide basis, all Examination aspects of the program.

20.1.6.1.2.2  (02-08-2008)
Area Office

  1. Field Territory Managers may assign one or more examiners to the Return Preparer Specialist (optional at the discretion of the Area). The examiners can be assigned to office or field groups. Responsibilities of the position will include:

    1. Reviewing completed case files to ensure the facts and circumstances regarding the preparation of the return are fully developed; the preparer's position is fairly and carefully considered and clearly reflected in the penalty case workpapers; and the appropriate copies of the income tax examination workpapers, return and tax change reports (Form 4549) are included in the file.

    2. Contacting the preparer for a closing conference. If the case is unagreed, the group manager or a manager in a local POD will be requested to attend the closing conference.

    Additional assignments for the specialist may include:

    1. Conducting and documenting interviews with noncompliant preparers to discuss problem areas in an effort to curb future noncompliance by the return preparer;

    2. Referring information on return preparers suspected of involvement in questionable practices to the Return Preparer Coordinator (RPC). This information will be obtained by working examiners.

20.1.6.1.2.3  (02-08-2008)
Planning and Special Programs (PSP)

  1. Each Area Planning and Special Programs (PSP) Territory Manager will designate a staff member to coordinate on an Area basis all Examination aspects of the program. Area Return Preparer Coordinators (RPC) will be responsible for:

    1. Planning and coordinating Examination activities related to return preparer activities with other functions, Areas, and Campuses.

    2. Orienting appropriate Area and Campus Examination personnel.

    3. Developing additional guidelines and procedures as necessary.

    4. Maintaining the quality of determinations and uniformity in applying return preparer provisions throughout the Area.

    5. Monitoring program progress and the application of return preparer penalties, identifying problem areas, and notifying Area offices and National Headquarters of appropriate solutions.

  2. PSP Territory Managers will establish multifunctional Penalty Steering Committees (PSC). The PSC members can include among others: the Electronic Filing Coordinator, Examination Return Preparer Coordinator (RPC), a representative designated by the Area Director and a Criminal Investigation (CI) representative. Contact will be made with Campus representatives from CI and Examination as needed.

  3. PSCs will be responsible for:

    1. Planning and coordinating the implementation of Area and National Headquarter Return Preparer strategies.

    2. Establishing viable communication lines between PSP, Area e-file Program Coordinators, CI Questionable Refund Program Coordinators (QRPC), Campus Examination RPCs, and CI RPCs. The major goals of PSCs are to more effectively identify patterns of preparer abuse and prevent duplication of efforts within the Areas and Campuses.

    3. Holding quarterly meetings (monthly during the filing season). These meetings will focus on monitoring program results, analyzing methods, and making recommendations to Area Directors concerning changes to the program.

    4. Reviewing all preparer case files from whatever source, including recommendations to initiate projects on identified preparers and reports provided by site visitation teams.

    5. Receiving information referred from Area Office functions, Electronic Return Originator (ERO) site visits, Campus reports, including Campus CI and Correspondence Examination.

    6. Coordinating site visitation teams who will assert IRC section 6695 penalties, if warranted, recommend initiation of Program Action Cases (PAC) or no action. Examiners charge time for site visits to Activity Code 522/500.

    7. Recommending approval of PACs to the Area Director.

    8. Determining the number of teams needed to conduct visitations.

    9. Selecting and determining the formation of teams.

    10. Conducting orientation for team members on e-file Program requirements, return preparer provisions, authority to conduct visits, penalty assertions and referrals to the PSC.

  4. Each PSP Territory Manager will designate an RPC who will be responsible for:

    1. Accumulating all types of referrals including those forwarded by Campus Examination, and Forms 5808,Return Preparer - Penalty Follow-up.

    2. Working closely with, and making recommendations to, the PSC including preparing a summarization of referrals to the Area PSC.

    3. Ordering return preparer information. See IRM 20.1.6.1.6(9).

    4. Ordering and screening returns.

    5. Coordinating all Examination activity of income tax returns prepared by return preparers approved for program action by the Area Director.

    6. Communicating with examiners when a fraud referral is pending on a particular preparer whose penalty case investigation has begun.

    7. Forwarding copies of completed Forms 5809, Preparer Penalty Case Control Card, to the Area or Campus Electronic Filing Coordinator. This information is needed for the suitability checks required in IRM 3.42,Electronic Tax Administration - Overview of the Electronic Tax Administration (ETA) Programs.

    8. Working with the Disclosure Office and/or Governmental Liaisons to obtain leads from local state tax agencies on abusive preparers.

    9. Releasing Freeze Code 570 with TC 571 for those returns received from Campus Classification, through the PSC, that will not be examined; and releasing frozen refunds, at the direction of the PSC, (either partially or in full) on cases being held for examination.

    Note: In all situations in which refunds are held during an examination the Area Director's approval is required.

20.1.6.1.3  (02-08-2008)
Penalty Examination Guidelines

  1. Note: IRC 6694 was amended by The Small Business and Work Opportunity Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns prepared after May 25, 2007. SBWOA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct, and increased applicable penalties. This IRM was written prior to the release of the related Regulations; therefore, this IRM does not include information on IRC section 6694 pertaining to returns filed after May 25, 2007.

  2. Return Preparer Penalties:

    IRC section 6694, Understatement of Taxpayer's Liability by Income Tax Return Preparer, and

    IRC section 6695, Other Assessable Penalties With Respect to the Preparation of Income Tax Returns for Other Persons

    1. Examiners will determine if return preparer violations exist. The determination will be made for every examination and recorded on Form 4318, Examination Workpapers, or Form 4700-A, Supplement. Examiners will only propose opening a penalty case when sanctions are warranted. When facts and circumstances in the examination do not give rise to the development of a penalty issue, a simple statement to that effect in the workpapers is sufficient.

    2. During income tax examinations, all discussions relating to return preparer penalties with any party will be limited to the development of facts to determine the applicability of a penalty. Penalties will not be proposed against a return preparer in the presence of the underlying taxpayer.

    3. A determination on a return preparer case is conducted independently of, and without regard to, the determination on the underlying income tax case. The income tax case has bearing on the return preparer case only insofar as assertion of a penalty may require an understatement of tax or other item on the related tax return.

    4. Generally, no return preparer penalty will be proposed until the underlying income tax examination is completed at the group level. However, if the return preparer case is inseparable from the income tax examination, both cases may be completed simultaneously.

    5. Examiners must contact their local RPC when they have concluded and obtained managerial approval to start a Return Preparer Investigation. A list of RPCs can be found at http: //sbse.web.irs.gov/EPD/PSP/Preparer/RPClist.htm .

    6. Comments made by examiners proposing or discussing penalties against return preparers may not be appropriate when a related criminal case is under consideration against the underlying taxpayer. These cases should be discussed with CI.

  3. Promoter Penalties - Civil promoter investigations conducted under the following code sections are discussed in IRM 4.32.2.11.1, Penalty Overview:

    IRC section 6700, Promoting Abusive Tax Shelters, Etc.,

    IRC section 6701, Penalties for Aiding and Abetting Understatement of Tax Liability,

    IRC section 6707, Failure to Furnish Information Regarding Reportable Transactions,and

    IRC section 6708, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions.

20.1.6.1.4  (02-08-2008)
Appeal Rights

  1. Promoter Rights Relating to IRC sections 6700 and 6701: There are no pre-assessment appeal rights - see IRM 4.32.2.11.11.1(1). After the Service assesses the penalty and issues a notice and demand:

    1. The penalties may be appealed post-assessment if the special claim for refund procedures of IRC section 6703 are followed and the claim is disallowed. See IRM 4.32.2.11.11.1(2). Collection activity is suspended when a person pays at least 15 percent of the penalty and files a claim for refund within 30 days after the date of notice and demand. Late filed claims and claims based on moral, political, constitutional, religious, or similar arguments are disallowed. See IRM 4.32.2.11.11.1(3) and (4).

    2. However, when a person seeks refund of a partial payment, the person must then bring suit in Federal District Court within 30 days of receiving a Notice of Claim Disallowance, or 30 days after the expiration of six months from the filing of the claim, whichever is earlier; or

    3. The person may bring a refund suit in either the U.S. Court of Federal Claims or a district court within two years of the date of denial of the claim or upon the expiration of six months after the date of filing the claim, if the penalty has been paid in full.

  2. Preparer and material advisor penalties have been designated as Appeals Coordinated Issues. In general, taxpayers and tax return preparers are entitled to one administrative appeal with the Office of Appeals (see generally Treas. Reg. 601.106, Appeals Function). The appeal process differs depending on the penalty involved.

  3. Preparer and material advisor penalties may be the subject of Fast Track Settlement (see Rev. Proc. 2003-40,1 C.B. 1044), or Fast Track Mediation (see Rev. Proc. 2003-41, 20031 C.B. 1047) procedures and may also be considered by Appeals during the course of a Collection Due Process hearing (see IRC section 6320,Notice and Opportunity for Hearing Upon Filing of Notice of Lien, and IRC section 6330,Notice and Opportunity for Hearing Before Levy).

    Note:

    For reference purposes only - the 6707 penalty in the future may not be subject to fast track mediation pending further discussion with Appeals.

  4. ) Underlying Tax Cases - Unagreed Cases. Some penalties are related to positions taken or items reported on underlying tax returns (the related tax return). In general, an unagreed penalty case will not be sent to Appeals before the related tax return is submitted to Appeals. Examination will include in the preparer case file information on the current status and location of the related return.

20.1.6.1.4.1  (02-08-2008)
Pre-Assessment Appeals IRC Section 6694 and IRC Section 6695

  1. Treas. Reg.1.6694-4(a)(1) allows for pre-assessment appeal rights of IRC section 6694 penalties. Although the regulation only relates to IRC section 6694 penalties, Area and Campus examiners will follow the same guidelines for IRC section 6695 penalties. With the exception of IRC section 6695(f), all IRC section 6694 and IRC section 6695 penalties will have pre-assessment appeal rights. A return preparer may appeal IRC section 6695(f) and IRC section 6713, Disclosure or Use of Information by Preparers of Returns , penalties using the post-assessment penalty appeal procedures or the denial of a claim for refund procedures.

  2. Examination sends the return preparer a 30-day letter, Letter 1125 (DO), Transmittal of Examination Report, with an examination report and Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don't Agree, for appeal procedures. If there is no timely response to the letter, the penalty is assessed. Pre-assessment appeals consideration will be granted if requested for IRC section 6694 and IRC section 6695 penalties (except IRC section 6695(f)).

  3. Short Statute:

    1. If the statutory period for assessment is about to expire and the preparer will not agree to an extension, the penalty will be assessed. If the preparer has not previously had the opportunity to request a hearing with the Office of Appeals, the preparer, upon request, will be provided post-assessment appeal rights in the same way pre-assessment appeal rights would have been provided. Examiners will advise return preparers that the period for filing a claim for refund under IRC section 6694(c), Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty, is not extended by a post-assessment appeal.

    2. Examiners will not submit preparer penalty cases to Appeals if less than 180 days remain on the statute of limitations when received by Appeals. In these instances, examiners will first solicit an extension of the statutory period for assessment.

    3. See IRM 20.1.6.1.8.Statute of Limitations.

20.1.6.1.4.2  (02-08-2008)
Post-Assessment Appeal Procedures

  1. There are post-assessment appeals rights for IRC section 6695(f), IRC section 6707, IRC section 6708 and IRC section 6713 penalties. In cases where there has not been a prior hearing with the Appeals Office, the person may request, and will be granted, an appeals hearing after assessment. Advise tax return preparers that the period for filing a claim for refund under IRC section 6694(c) is not extended by a post-assessment appeal.

  2. There are no post-assessment appeal rights for IRC section 6700 and IRC section 6701 Penalties. See 20.1.6.1.4.3 below for IRC section 6703 Special Claim for Refund procedures, which apply only to IRC section 6700 and IRC section 6701.

  3. There are no post-assessment appeal rights for IRC section 6707A.

20.1.6.1.4.3  (02-08-2008)
Special Claim for Refund Procedures for IRC 6700 and IRC 6701

  1. Within 30 days after the day that notice and demand is made, preparers/promoters may pay 15 percent of the penalty and file a special claim for refund of IRC section 6700 and IRC section 6701 penalties.

    1. Form 843 is used to file claims for refund made under these conditions.

    2. Under IRC section 6703(c), collection action and the running of the statute of limitations on collection are suspended until the claim is finally resolved.

    3. Any claims filed using IRC 6703 special claims for refund procedures should be forwarded immediately to the SBSE Lead Development Center (LDC) in Laguna Niguel, CA. The SBSE LDC will ensure the claim is reviewed by the appropriate examination personnel.

  2. Denial of special claim for refund.

    1. If the claim is denied, collection continues to be suspended if the preparer/promoter brings suit in District Court within 30 days of receiving a Notice of Disallowance, or 30 days after the expiration of six months from the filing of the claim, whichever is earlier.

    2. Preparers and promoters may appeal the denial of a special claim for refund. Administrative appeal rights will be granted when the basis for the claim does not conflict with Appeals function procedural rules set forth in Regulation Section 601.106(b) of the Statement of Procedural Rules. An appeal should not be based on moral, political, constitutional, religious, or similar arguments.

20.1.6.1.5  (02-08-2008)
Claims for Refund

  1. If a return preparer has not had a hearing with the Appeals Office and files a claim for refund of assessed penalties, the return preparer may request, and will be granted, an appeals hearing after the proposed denial of the claim. Preparers use Form 6118, Claim for Refund of Income Tax Return Preparer Penalties, to submit claims. The preparer has three years from the date of payment to file a claim for preparer penalties under IRC section 6694. See IRC section 6696(d)(2), Claim for Refund , Treas. Reg.1.6696-1(g).

  2. For IRC section 6700 and IRC section 6701 promoter penalties, a claim for refund of penalties paid timely must be made within 6 years of the date paid using Form 6118.

  3. Any claims for refunds of IRC section 6700 and IRC section 6701 penalties should be forwarded immediately to the SBSE Lead Development Center (LDC) in Laguna Niguel, CA. The SBSE LDC will ensure the claim is reviewed by the appropriate examination personnel.

  4. IRC section 6694(c), IRC section 6700 and IRC section 6701.

    1. IRC section 6694(c) and IRC section 6703(c) provide special claim for refund procedures for preparers/promoters assessed penalties under IRC section 6694, IRC section 6700 and IRC section 6701. Within 30 days after the day that notice and demand is made, preparers/promoters may pay 15 percent of the penalty and file a claim for refund of IRC section 6694, IRC section 6700, and IRC section 6701 penalties. Form 6118 is used to file claims for refund of preparer/promoter penalties.

    2. Under IRC section 6694(c) and IRC section 6703(c) collection action and the running of the statute of limitation on collection are suspended until the claim is finally resolved administratively or judicially (i.e., by Appeals or by the Federal District Court).

    3. These special claims must be processed on an expedite basis, especially when Appeals consideration is warranted and will be granted.

    4. In any proceeding involving IRC section 6700 and IRC section 6701 penalties, the government has the burden of proof and deficiency procedures do not apply. See IRC section 6703,Rules Applicable to Penalties Under Sections 6700, 6701, and 6702.

    5. The U.S. may counterclaim for the balance of the IRC section 6700 or IRC section 6701 penalties when the taxpayer uses the special claim for refund procedures in IRC section 6703(c).