For unagreed cases, Form 5816, Report of Income Tax Return Preparer Penalty Case, and a statement of reasons for asserting the penalty will accompany Letter 1125 (DO), Transmittal of Examination Report

For all unagreed cases, Letter 1125 (DO) will advise the preparer of his/her appeal rights. The preparer has 30 days to ask for Appeals consideration and to file any protest required.

Upon receipt of a protest, the case will be reviewed for adequacy of the protest, development of the issue, and managerial involvement.

If the related income tax case is unagreed, the preparer penalty case may not be submitted to Appeals before the income tax case is submitted to Appeals. An unagreed preparer penalty case may not be submitted to Appeals if there are less than 180 days remaining on the statute of limitations, when received by Appeals. In these instances, for IRC section 6694(a) and 6695 penalties, examiners will first solicit an extension on Form 872D, Consent to Extend the Time On Assessment of Tax Return Preparer Penalty.

In agreed and unagreed cases, Form 5808, Return Preparer Penalty Follow-up, and Copy D of Form 5809, Preparer Penalty Case Control Card, will be forwarded by the examiner to the local RPC.

If an examiner determines that no penalty is warranted, the no-change Letter 1120 will be prepared at the group level and left undated in the file. Technical Services will date and issue the letter if the case is selected for sample review, otherwise the letter will be issued according to Area policy.

After mailing Letter 1120, no-change case files will be forwarded to the local RPC. Pertinent information from the file will be recorded on Form 5808 and retained by the local RPC for not less than one year. The balance of a no-change case file is not retained.

Preparer penalty cases are not subject to mandatory review. Groups will close cases through the RPC to Centralized Case Processing (CCP) for processing using Form 3198, following Area guidelines. In the special feature section of Form 3198, notate that the case is a preparer penalty case. The group clerk will update the return preparer case on ERCS (Examination Returns Control System) to status 41 and use Form 3210 to mail the case file to the respective RPC in Planning & Special Programs (PSP).

See IRM 20.1.6.1.4 above.

The statute of limitations on assessment for IRC section 6694(a) penalties expires three years from the due date of the related return or the date the return is filed, whichever is later. See IRM 20.1.6.1.8, Statute of Limitations.

There is no statute of limitations on assessment for IRC section 6694(b) penalties.

See IRM 20.1.6.2.1, Referral to the Office of Professional Responsibility

The IRC section 6695(a) penalty applies if the preparer fails to comply with IRC section 6107(a), Furnishing Copy to Taxpayer. Under IRC section 6107(a), a preparer is required to furnish a completed copy of the return or claim for refund to the taxpayer before (or at the same time) the return or claim for refund is presented to the taxpayer for signature.

If there is an employment arrangement between two or more preparers, the requirement to furnish a copy only applies to the person who employs (or engages) one or more other preparers. Similarly, if there is a partnership arrangement, the requirement to furnish a copy only applies to the partnership. Treas. Reg. 1.61071(c).

The IRC section 6695(a) penalties do not apply if the failure is due to reasonable cause and not due to willful neglect. Thus, the penalty for failure to furnish a copy to the taxpayer will not be imposed solely because:

The IRC section 6695(a) penalty will also not be imposed where a preparer deletes certain information from the copy furnished to the taxpayer if the taxpayer holds an elected or politically appointed position with the government of the United States or a State or political subdivision thereof and who in order to carry out their official duties, has arranged their affairs so that they have less than full knowledge of the property they hold or of the debts for which they are responsible. (See Treas. Reg. 1.66951(a)(2))

The IRC section 6695(b) penalty applies if the preparer, who is required by regulations to sign the taxpayer's return or claim for refund, fails to sign the return or claim for refund. Preparers must sign the return/claim for refund using the appropriate method prescribed by the Secretary after it is completed and before it is presented to the taxpayer for signature. See IRM 3.42.5.16.1.2, for signatures on electronically filed returns.

IRC section 6695(b) no longer requires a manual signature. The signature requirement may be satisfied if the preparer used a computer program to sign the return or claim for refund, or if the preparer signs the completed return, makes a photocopy of the return, and the taxpayer signs and files the photocopy. (Rev. Rul. 78370, 19782 C.B. 336)

If a preparer is physically unable to sign a return because of a temporary or permanent disability, the IRC section 6695(b) penalty should not be imposed if the words "Unable to Sign" are printed, typed, or stamped on the preparer signature line. Also, the preparer's name should be printed, typed, or stamped under the signature line after the return is completed, and before it is presented to the taxpayer for signature. (Rev. Proc. 797, Forms and Instructions,19791 C.B. 486)

In general, a facsimile signature stamp or signed gummed label will not be acceptable. The exceptions to this rule are:

If the preparer required to sign the return/claim for refund is unavailable to sign, another preparer must review the return/claim for refund and then manually sign the return/claim for refund.

If more than one preparer is involved in the preparation of the return/claim for refund, the preparer with primary responsibility for the overall substantive accuracy of the return/claim for refund is the preparer who must sign the return/claim for refund. Treas. Reg. 1.66951(b)(2), (Rev. Rul. 81246, 1981-2 C.B. 249.)

If the mechanical preparation of the return/claim for refund is done by a computer not under the control of the individual preparer, the signature requirement may be satisfied by a signed attestation by the individual preparer that all the information in the return was obtained from the taxpayer and is true and correct to the best of the preparer's knowledge. The attestation must be attached to the return/claim for refund and the information contained in the return or claim for refund must not be altered by another person.

A preparer is not required to sign and affix an identification number to the taxpayer's copy of the return. (Rev. Rul. 78317, 1978-2 C.B. 335,

The IRC section 6695(b) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect. If a preparer asserts reasonable cause, the preparer should provide a written statement in substantiation of the preparer's claim of reasonable cause. The penalty for failure to sign will not be imposed solely because:

The IRC section 6695(c) penalty applies if the preparer fails to comply with IRC section 6109(a)(4), Furnishing identifying number of income return preparer. Under IRC section 6109(a)(4) and the regulations thereunder, the return/claim for refund must contain:

The IRC section 6695(c) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect. Thus, the penalty will not be imposed solely because:

IRC section 6695(c) penalties will not be imposed against:

No more than one penalty of $50 may be imposed with respect to a single return/claim for refund.

The IRC section 6695(d) penalty applies if the preparer fails to comply with IRC section 6107(b), Copy or List to Be Retained by Income Tax Return Preparer. Under IRC section 6107(b) and the regulations thereunder, a preparer must:

If there is an employment arrangement between two or more preparers, the requirement to retain a copy or list only applies to the person who employs (or engages) one or more other preparers. Similarly, if there is a partnership arrangement, the requirement to retain a copy or list only applies to the partnership. Treas. Reg. 1.61071(c).

The IRC section 6695(d) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect. Thus, the penalty for failure to retain a copy or list will not be imposed solely because:

The IRC section 6695(e) penalty applies if the preparer fails to comply with IRC section 6060, Information Returns of Income Tax Return Preparers. Under IRC section 6060(a) and the regulations thereunder, each person who employs (or engages) one or more income tax return preparers must retain a record of the name, taxpayer identification number and place of work of each income tax return preparer employed (or engaged) by him. For purposes of IRC section 6060, a partnership is treated as the employer of the partners.

The record may be in any form of documentation so long as it discloses on its face which individuals were employed (or engaged) as income tax return preparers during that period.

The record must be retained and made available for inspection for a 3-year period following the close of the return period to which it relates. The term "return period" means the 12-month period beginning on July 1st of each year.

If an income tax return preparer is not employed by another preparer, such preparer is treated as his own employer for purposes of this penalty. Therefore, if a preparer is a sole proprietor, he/she must retain and make available a record with respect to himself/herself.

The IRC section 6695(e) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect.

The IRC section 6695(e) penalty must be assessed within 3 years after the return of claim for refund was filed.

The penalty is $50 for each failure to file a return as required by IRC section 6060 and $50 for each failure to include a required item in the return. The maximum amount of the penalty imposed on any person for any calendar year is $25,000.

The IRC section 6695(f) penalty generally applies if the preparer endorses or otherwise negotiates (directly or through an agent) a refund check issued to a taxpayer (other than the preparer). For certain limited exceptions see (3) below.

A person in a business other than tax return preparation who fills out or reviews returns for its customers may be a preparer and, thus, subject to the IRC section 6695(f) penalty if such person endorses or otherwise negotiates the customer's refund check. (Rev. Rul. 8655, 19861 C.B. 373)

In certain circumstances, a preparer-bank may cash a refund check and remit the cash to the taxpayer or may accept a refund check for deposit to the taxpayer's account. A preparer-bank may:

There is no reasonable cause exception to this penalty.

The IRC section 6695(g) penalty applies if an income tax return preparer fails to comply with due diligence requirements with respect to determining eligibility for, or the amount of, the earned income tax credit (EIC).

Under Treas. Reg. 1.66952(b), the preparer must comply with the following due diligence requirements:

Any return preparer who fails to comply with the requirement of IRC section 6695(g) will be charged a $100 penalty for each failure.

The penalty will not apply if the preparer can show that their normal office procedures are developed and followed to ensure compliance with IRC section 6695(g) and that the failure to comply with respect to a particular return or claim for refund was isolated and inadvertent.

Refer to IRM 22.21.1.2.3, Earned Income Tax Credit (EITC) Preparer Outreach Program, for more information.

Examination. Revenue Agents and Tax Auditors in the Area.

Collection. Revenue Officers may assert only IRC section 6695(a), (b), and (c) penalties.

Of the seven identification penalties listed under IRC section 6695, (a), (b), (c), and (f) may be discovered by the examiner during an examination interview or site visitation. These Code sections all relate to questions examiners ask in initial interviews under required filling checks or during a site visit.

The penalties under IRC section 6695(d), (e)(1), and (e)(2) would arise if a project were being done on a preparer. These penalties generally would not be discovered during an income tax examination of a taxpayer.

To assert this penalty the examiner should prepare Form 6459, Return Preparer's Checksheet, and secure the group manager's approval. Once managerial approval is secured, examiners should refer to the procedures in IRM 20.1.6.3.3, Asserting the IRC 6694 Penalties , above.

Examiners may charge time to the penalty case using Activity Code 503500 for IRC section 6695(f) penalties, and Activity Code 504500 for IRC section 6695(a) through (e) and 6695(g) penalties.

When Collection employees secure delinquent returns or claims, and determine that a preparer has not complied with the provisions of IRC section 6695 for signing a prepared income tax return or claim, for placing his/her Taxpayer Identification Number (TIN) or Preparer Tax Identification Number (PTIN) on the prepared return or claim, or for providing the taxpayer with a completed copy of the prepared return or claim, a penalty will be asserted. The Collection employee who secures the delinquent return or claim will be responsible for requesting the assertion of these penalties.

The return preparer may be contacted if relevant information is needed.

Form 8278, Computation and Assessment of Miscellaneous Penalties, is used to assert preparer penalties. Form 8278 will be forwarded to Collection Support function for input.

Except for the IRC section 6695(f) and 6695(g) penalties, all of the IRC section 6695 penalties provide that the penalty will not be imposed if the failure is due to reasonable cause and not due to willful neglect.

An example of what constitutes reasonable cause is when the preparer claims substantial compliance (i.e., despite exercising reasonable precautions, certain required preparer data were omitted because of human error).

For other examples, see the IRM section on the specific IRC section 6695 penalties above.

IRC section 6695 identification penalties may be asserted with any other penalties including, but not limited to, IRC section 6694, IRC section 6701, and IRC section 6662 asserted against the taxpayer.

See IRM 20.1.6.1.5, Claims for Refund,and 20.1.6.1.5.1, Campus Claim Processing,above.

See IRM 20.1.6.3.3.6, Assembly of Case File,and 20.1.6.3.4, Group Processing,above.

Prompt assessment procedures apply, when applicable, to IRC section 6695. The preparer will have post-assessment appeal rights.

See IRM 4.4.25.1, Quick Assessments, and IRM 5.1.4.12,Prompt Assessments, for further information on quick/prompt assessments.

See IRM 20.1.6.1.4, Appeal Rights,above.

The statute of limitations on assessment for IRC 6695 penalties expires three years from the due date of the related return or the date filed, whichever is later. (See IRM 20.1.6.1.8, Statute of Limitations.)

A referral to the Office of Professional Responsibility must be made when an IRC section 6695(f) penalty is assessed against an attorney, CPA, enrolled agent or enrolled actuary. (See IRM 20.1.6.2.1, Referral to the Office of Professional Responsibility.)

See IRM 20.1.6.1.1, Definitions, above for definition of terms.

IRM 4.32.2.1, Overview of Abusive Tax Avoidance Transaction (ATAT), contains an overview of the IRC section 6700/IRC section 6701 penalty program concerning the promoters of abusive tax avoidance transactions (ATAT), and the examination of taxpayer participants.

Currently, the Small Business/Self-Employed Division Lead Development Center (LDC) processes referrals concerning promoters of abusive tax avoidance transactions. The LDC evaluates referrals based on established criteria and authorizes IRC section 6700 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate Areas Planning and Special Procedures Programs (PSP) unit for assignment to the field.

In the Large and Mid-Sized Business (LMSB) Division, the Office of Tax Shelter Analysis (OTSA) processes all leads of potential promoters of tax shelters. LMSB Financial Services is responsible for the field assignments of all approved promoter investigations.

There are two types of conduct subject to the IRC section 6700 penalty.

The penalty may be asserted against a promoter who makes, furnishes or causes another to make or furnish a statement, in connection with the sale or organization of an entity, plan, or arrangement, when the statement relates to the allowability of any deduction or credit, the excludability of any income, or the securing of any tax benefit by reason of participating in the entity, plan or arrangement when the person knows or has reason to know that the statement is false or fraudulent as to any material matter.

The penalty may also be asserted when a promoter makes, furnishes or causes another to make or furnish a statement, in connection with the sale or organization of an entity, plan, or arrangement, when the statement contains a gross valuation overstatement as to any material matter.

Examiners assert the penalty. Also refer to IRM 4.32.2.11, Penalty Assessment.

See IRM 4.32.2.11.6, Computation of IRC 6700 Penalties.

Section 818 of The American Jobs Creation Act of 2004 amended the penalty amount to equal 50 percent of the gross income derived by the person from the activity for which the penalty is imposed. The new penalty rate applies to any activity, occurring after October 23, 2004, that involves a statement regarding the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows, or has reason to know, is false or fraudulent as to any material. The amount of the penalty remains unchanged for gross valuation overstatement violations under IRC section 6700(a)(2)(B) and equals $1,000 (or if the person established that it is less, 100 percent of the gross income derived or to be derived by the person from such activity).

This penalty is in addition to all other penalties that may be imposed under the Code. However, under IRC section 6701(f)(3), no penalty may be assessed under section 6700 on any person with respect to any document for which a penalty is assessed on such person under IRC section 6701. This provision allows the IRS to chose which penalty to assert if both apply to a set of facts, but prohibits the Service from assessing penalties under both sections for the same document. (See the discussion in IRM 20.1.6.6.4., Coordination with Other Penalties).

IRC section 6694(b), imposes a penalty if a return preparer understates a taxpayer's liability as a result of willful or reckless conduct. In some instances, a person who is subject to the penalty under IRC section 6700 may also be subject to the penalty under IRC section 6694(b).

IRC section 7206(2) relates to any person who willfully aids or assists in making fraudulent or false statements. In some cases, promoters might be criminally prosecuted under IRC section 7206(2) for assisting, procuring, or advising the preparation or presentation of a return or other document which is fraudulent or false.

IRC section 7408 authorizes the United States to commence a civil action at the request of the Secretary to enjoin any person from further engaging in conduct subject to the penalty under IRC section 6700. The promoter penalty under IRC section 6700 and the injunction actions under IRC section 7408 are more effective when applied prior to the time investors file their returns. Therefore, abusive tax avoidance transactions should be identified and IRC section 6700 penalty investigations that have been authorized by the Lead Development Center should be initiated promptly. Also refer to IRM 4.32.2.5, Case Control / Case Assignment Procedures.

After the SB/SE Lead Development Center (LDC) or LMSB Office of Tax Shelter Analysis (OTSA) for LMSB taxpayers authorizes an IRC section 6700 investigation and the case is assigned to the field, assigned examiners:

These penalty assertion procedures do not apply to grand jury investigations.

See IRM 20.1.6.1.4 Appeal Rightsabove.

See IRM 20.1.6.2.1, Referral to the Office of Professional Responsibility,above.