20.1.6  Preparer, Promoter, Material Advisor Penalties (Cont. 1)

20.1.6.5 
IRC 6695 Penalties That May Apply to a Tax Return Preparer

20.1.6.5.8  (05-16-2012)
Who Asserts the Penalties

  1. Revenue officers and examiners (e.g., tax auditors, tax compliance officers, estate and gift tax attorneys, and revenue agents) may assert IRC 6695(a), IRC 6695(b), and IRC 6695(c) penalties.

20.1.6.5.9  (05-16-2012)
Collection Procedures

  1. When Collection employees secure delinquent returns or claims for refund and determine that a preparer has not complied with the provisions of IRC 6695(a), (b), or (c), 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.

  2. Effective January 1, 2011, tax return preparers must have and use a PTIN to prepare returns. See the PTIN application website at - http://www.irs.gov/taxpros/article/0,,id=210909,00.html?banner=PTIN. If there is an employment arrangement or association, the related EIN must also be on the tax return.

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

  4. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is used to assert preparer penalties. Form 8278 will be forwarded to Collection Centralized Case Processing (CCP) function for input.

20.1.6.5.10  (09-17-2010)
Referrals to Office of Professional Responsibility

  1. See IRM 20.1.6.12, Office of Professional Responsibility (OPR).

20.1.6.5.11  (09-17-2010)
Statute of Limitations

  1. See IRM 20.1.6.21, Statute of Limitations.

20.1.6.5.12  (09-17-2010)
Appeals Procedures

  1. See IRM 20.1.6.19, Appeal Rights.

20.1.6.6  (09-10-2013)
Program Action Cases Overview

  1. Review IRM 20.1.6.22, Third Party Contacts—IRC 7602(c).

  2. A program action case (PAC) is a preparer investigation where clients of a questionable preparer are examined to determine whether preparer penalties and or injunctive actions against the preparer is warranted. See IRM 4.1.10.3, Program Actions Cases Overview (PAC).

  3. A PAC is selectively designed to concentrate enforcement activity on preparers who represent habitual noncompliance and lack of competence. Projected examination results are part of, but not the sole deciding factor for a PAC.

  4. A PAC can result in the assessment of IRC 6694 or IRC 6695 penalties which in turn might result in an injunction under IRC 7407, Action to Enjoin Tax Return Preparers. Alternatively, the government might seek an injunction under IRC 7407 without prior assessment of a penalty.

  5. The RPC maintains files containing information on return preparer activity and related Service actions. The file(s) may contain various information received from the Campuses, Examination, Collection, and other sources including some or all of the following:

    1. Copies of Form 5809, Preparer Penalty Case Control Card, showing penalties previously asserted against preparers and pending assertion,

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS. Visit TE/GE's RCCMS website at http://tege.web.irs.gov/templates/TEGEHOME.asp for preparer penalty investigation procedures.

    2. Information on representative bypass actions, or

    3. Information forwarded through the group manager on examiners’ recommendations for program action or no program action.

    When additional information is received indicating a pattern of noncompliance, consideration will be given to requesting a program action case on the preparer. The RPC should coordinate with the RPCs in other ODs and BUs for pattern of return preparer noncompliance in the other ODs and BUs.

  6. A return preparer can violate both IRC 6694 and IRC 6701 but both penalties may not be assessed with respect to the same document. See IRC 6701(f)(2). It is important that coordination between the RPCs and the Lead Development Center (LDC) occur at various stages of the PAC process.

  7. Before an RPC submits a PAC request, contact will be made with the LDC to determine if an IRC 6700 or IRC 6701 investigation has been considered.

    1. If an IRC 6700 or IRC 6701 investigation is already approved or approval is pending, the RPC will provide support (evidence) to the person conducting the investigation. A PAC will not be requested.

    2. If an IRC 6700 or IRC 6701 investigation on the preparer is not already approved or pending approval, the LDC will evaluate the lead. If there is no indication of promoter activity, the LDC will add the preparer's name to the database or update an existing record to reflect the preparer penalty investigation. The LDC will then place the RPC’s name in the database as the assigned person and the RPC will proceed with the PAC approval process.

    3. If an IRC 6700 or IRC 6701 investigation on the preparer is not already approved or pending approval, but there is indication of promoter activity, the LDC will review the lead on an expedited basis to determine if an IRC 6700 promoter investigation is warranted. If so, then the LDC will notify the RPC that the promoter will be approved for an IRC 6700 or IRC 6701 investigation and the RPC will not proceed with the PAC.

  8. The RPC will contact the local Criminal Investigation (CI) return preparer coordinator to avoid any conflict.

  9. RPCs secure listings of returns prepared by preparers using IDRS command code RPVUE. Both individual and business returns can be identified through RPVUE. See IRM 2.3.63.3, Command Code RPVUE, for further information.

  10. Visit http://sbse.web.irs.gov/EPD/PSP/Preparer/RPClist.htm for a listing of SB/SE's RPCs.

20.1.6.6.1  (09-17-2010)
Operating Divisions / Business Units (OD/BU) PAC Functional Procedures

  1. IRM 20.1.6.6, Program Action Case Overview, guidance is applicable to all OD/BU PAC.

  2. However, an OD/BU may have additional guidance it requires for its functional coordinators and it should also be followed.

20.1.6.7  (09-17-2010)
Penalty for Unauthorized Preparer Disclosure or Use—IRC 6713

  1. Review IRM 20.1.6.22, Third Party Contacts—IRC 7602(c).

  2. IRC 6713 imposes a penalty for each unauthorized disclosure or use of information connected with an income tax return or the preparation of an income tax return. The penalty may be asserted against a preparer or any person providing services in connection with the preparation of an income tax return.

20.1.6.7.1  (09-17-2010)
Asserting the Penalty

  1. Examiners assert the penalty (e.g., tax auditors, tax compliance officers, estate and gift tax examiners, and revenue agents).

  2. If disclosure or use of return or return-related information was made pursuant to court order or one of the provisions of the Code that permits disclosure, then the penalty will not be asserted.

  3. Taxpayers, during examinations, may express their concern that their tax information was disclosed or used for a purpose other than to prepare, or assist in preparing, their income tax return.

  4. The procedures outlined in IRM 20.1.6.4 (4) and (5) provide guidance that may be applied to this penalty for managerial approval. The ERCS controls are established using Form 5809, Preparer Penalty Case Control Card, or functional equivalent. See IRM 20.1.6.8, Operating Division Business Unit Return Preparer Penalty Functional Procedures, for OD/BU functional procedure cites.

    Note:

    TE/GE penalty investigations will be controlled and established on RCCMS. Visit TE/GE's RCCMS website at http://tege.web.irs.gov/templates/TEGEHOME.asp for preparer penalty investigation procedures.

  5. If any person prepares a return for compensation or provides services in connection with the preparation of an income tax return, and knowingly or recklessly discloses or uses return information improperly, the examiner should consider making a criminal referral under IRC 7216, Disclosure or Use of Information by Preparers of Returns, to the Treasury Inspector General for Tax Administration (TIGTA). Visit TIGTA's website at http://www.treas.gov/tigta/contact_report.shtml#theform for further guidance for a criminal referral under IRC 7216.

20.1.6.7.2  (09-17-2010)
Computing the Penalty

  1. For each unauthorized disclosure or use of return information under IRC 6713, a penalty of $250 may be asserted. The total amount cannot exceed $10,000 per person per calendar year.

20.1.6.7.3  (09-17-2010)
Coordination With Other Penalties

  1. The IRC 6713 penalty can be asserted in conjunction with any other preparer penalty.

20.1.6.7.4  (09-17-2010)
Appeal Rights

  1. See IRM 20.1.6.19, Appeal Rights.

20.1.6.7.5  (09-17-2010)
Statute of Limitations

  1. There is no statute of limitations for this penalty.

20.1.6.7.6  (09-17-2010)
Referrals to Office of Professional Responsibility

  1. See IRM 20.1.6.12, Office of Professional Responsibility (OPR).

20.1.6.8  (09-17-2010)
Operating Division Business Unit Return Preparer Penalty Functional Procedures

  1. The OD/BU functional return preparer procedures provide guidance for its examiners respectively.

20.1.6.8.1  (09-17-2010)
Examiners Operating Division Business Unit Functional Guidance Topics

  1. The OD/BU functional guidance addresses:

    1. Auditing the taxpayer.

    2. Identifying preparer problems.

    3. Gathering pertinent information from audit of preparers' clients' tax return.

    4. Finishing preparer's client tax case.

    5. Establishing and working a preparer penalty.

    6. Contacting the return preparer coordinator (RPC).

    7. Preparing Form 5809, Preparer Penalty Case Control Card, to establish on ERCS.

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS. Visit TE/GE's RCCMS website at http://tege.web.irs.gov/templates/TEGEHOME.asp for preparer penalty investigation procedures.

    8. Determining the statute.

    9. Charging time to preparer penalty case.

    10. Determining when to forward a copy of the completed Form 5809 or the procedure for the functional equivalent of Form 5809 to the RPC.

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS. Visit TE/GE's RCCMS website at http://tege.web.irs.gov/templates/TEGEHOME.asp for preparer penalty investigation procedures.

    11. Contacting the preparer and conducting the interview.

    12. Determining if preparer penalties are warranted.

    13. Preparing Form 5816, Report of Tax Return Preparer Penalty Case.

    14. Closing procedures for agreed, unagreed, no-change, and prompt assessment cases.

    15. Providing guidelines for preparation of return preparer penalty and related forms:

      Form Title
      Form 872-D Consent to Extend the Time on Assessment of Tax Return Preparer Penalty
      Form 5816 Report of Tax Return Preparer Penalty Case
      Form 8278 Assessment and Abatement of Miscellaneous Civil Penalties
      Form 8484 Report of Suspected Practitioner Misconduct
      Form 4665 Report Transmittal
      Form 3244-A Payment Posting Voucher—Examination
      Form 2859 Request for Quick or Prompt Assessment
      Form 3198 Special Handling Notice for Examination Case Processing, or functional equivalent
      Form 5809 Preparer Penalty Case Control Card, or the functional equivalent

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS. Visit TE/GE's RCCMS website at http://tege.web.irs.gov/templates/TEGEHOME.asp for preparer penalty investigation procedures.

20.1.6.8.2  (09-17-2010)
Operating Division Business Unit (OD/BU) Functional Procedures

  1. The OD/BU functional procedures are found in these locations:

    • SB/SE, Examination: IRM 4.1.10, Return Preparer Program Coordinators, and SB/SE Return Preparer website found at http://mysbse.web.irs.gov/exam/tip/rp/jobaids/12289.aspx.

    • SB/SE, Excise Tax: http://mysbse.web.irs.gov/Specialty/excise/issues/pen/preppen/22967.aspx

    • SB/SE, Estate and Gift: http://sbseservicewide.web.irs.gov/penalty/news/188.aspx

    • SB/SE, Employment Tax: http://sbseservicewide.web.irs.gov/penalty/news/188.aspx

    • LB&I: http://lmsb.irs.gov/hq/pqa/Post-filing/preparers.asp

    • TE/GE: http://tege.web.irs.gov/templates/TEGEHome.asp?MWContent=../content/TEGEMainWindow/linkedHTMLDocuments/tege_preparer_program.htm

20.1.6.9  (09-17-2010)
Processing and Assessment of Return Preparer Penalties Overview

  1. The OD/BU functional procedures provide guidance for processing and assessment of return preparer penalties. See IRM 20.1.6.8 above.

  2. Return preparer penalties are assessed or abated on the Master File (MF) civil penalty module using Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. Check one box in Item 3, MFT, either IMF 55 for individual return preparers or BMF 13 for business return preparers.

    1. These procedures allow tracking of return preparer penalty assessments or abatements. The information must be input completely and correctly for data on the return preparer penalty program to be accurate.

    2. Form 8278 has important reminders and detailed instructions for completing the form.

20.1.6.9.1  (09-10-2013)
Centralized Case Processing Functional Procedures

  1. When multiple penalties apply to the same preparer for the same period:

    1. Input the first penalty to be assessed using Blocking Series 52X.

    2. Input subsequent penalties using Blocking Series 53X.

    3. Annotate Form 8278 with the correct blocking series opposite each penalty to facilitate terminal input.

    4. With Blocking Series 53X, CP Notice 55 will be generated to alert the Campus to associate Form 5147, IDRS Transaction Record, for subsequent penalty assessments with the penalty case file containing the input and source documents.

  2. Form 8278 instructions require that both the originator and manager sign and date the form.

    Note:

    SB/SE requires the PSP RPC's signature on Form 8278. See IRM 4.1.10.7.4(4)(g), Closing Return Preparer Penalty Cases Procedures for SB/SE only.


    A managerial signature, whether handwritten or a digital signature through Adobe PDF, which indicates the immediate supervisor’s approval of the penalty, is sufficient to meet the requirements of IRC 6751 and Form 8278. An acting manager with an approved designation to act is considered an immediate supervisor for the purpose of IRC 6751. Also see IRM 20.1.1.2.3, Managerial Approval for Penalty Assessments.

  3. Terminal operator should review Form 8278 for required signatures as follows:

    1. Verify originator's signature in Block 10a: If Block 1a does not contain an originator's signature, Form 8278 and the associated case file should be returned to the manager using Form 3210 procedures.

    2. Verify manager's signature in Block 11a: If Block 11a does not contain a manager's signature, the Form 8278 and the associated case file should be returned to the attention of the originator's manager using Form 3210 procedures.

    3. For SB/SE cases, verify the PSP RPC's signature is on the Form 8278: If Form 8278 does not contain the PSP RPC's signature, return the file to the PSP RPC using Form 3210 procedures. See IRM 4.1.10.7.4 (4)(g).

      Note:

      If the case has an imminent statue and it must be returned for a signature, ensure expedite handling.

  4. Once the terminal operator verifies the required signatures are present, he or she will enter his or her name and date the data is input in Block 12a.

20.1.6.10  (09-17-2010)
Action to Enjoin Preparers—IRC 7407

  1. Review IRM 20.1.6.22, Third Party Contacts-IRC 7602(c).

  2. Review IRM 20.1.6.20, Affidavits Overview.

  3. Under IRC 7407 the Service has the power to seek an injunction prohibiting a tax return preparer from engaging in certain practices. The United States may bring a civil action in the U.S. District Court for the district of one of the following:

    1. The return preparer's residence,

    2. The return preparer's principal place of business, or

    3. The residence of the taxpayer with respect to whose return the action is brought.

  4. Return preparer practices that may cause the Service to initiate injunctive action include the following:

    1. Conduct subject to IRC 6694 and IRC 6695 penalties.

    2. Conduct subject to criminal penalties.

    3. Misrepresentation of the return preparer's eligibility to practice before the Service, or his or her experience and education as an income tax return preparer.

    4. Guarantee of payment of a tax refund or of allowance of a tax credit.

    5. Other fraudulent or deceptive conduct that substantially interferes with proper administration of the Internal Revenue laws.

  5. If the court finds that the return preparer has engaged in one or more of the enumerated practices, it may enjoin him or her from further engaging in such conduct. If the court finds that the return preparer has continually or repeatedly engaged in those practices, it may enjoin him or her from acting as a tax return preparer.

  6. The Committee Reports for the Tax Reform Act of 1976 (which enacted IRC 7407) indicates that injunctive relief sought by the Service must be commensurate with the conduct which led to the seeking of the injunction. For example, if a tax return preparer, who is only experienced in preparing individual returns, overstates his qualifications as a preparer by claiming expertise in the preparation of corporate returns, it is anticipated that any injunction would be directed toward the misrepresentation itself or the preparation of corporate returns and not toward preventing the preparer from preparing any returns at all. Furthermore, if some of an employer's employee-preparers have engaged in conduct leading to a request for an injunction against the further preparation of returns, any injunction is to be sought only against those preparers and not the employer (or other employees), unless the employer (or other employees) is actively involved in the improper conduct.

  7. Actions to Enjoin Specific Conduct Related to Tax Shelters and Reportable Transactions. A civil action may be brought under IRC 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions, to enjoin specified conduct. The action may be brought in the U.S. District Court for the district in which the individual resides, has his principal place of business, or has engaged in specified conduct. See IRM 20.1.6.15 for additional information.

  8. The term "specified conduct" means any action, or failure to take action, that is one of the following:

    1. Subject to penalty under IRC 6700, IRC 6701, IRC 6707, or IRC 6708; or

    2. In violation of Treasury Department Circular No. 230, Regulations Governing Practice Before the Internal Revenue Service (Circular 230).

  9. The court may grant injunctive relief against any person if it finds the following:

    1. That the person has engaged in any specified conduct, and

    2. That injunctive relief is appropriate to prevent recurrence of such conduct.

  10. See IRM 4.32.2.9, Injunctive Action, and IRM 4.32.3.7.1, Steps in an Injunctive Case, for additional information.

20.1.6.10.1  (09-17-2010)
Action on Injunctions: Seeking an Injunction

  1. Any examiner conducting an investigation under IRC 6694, IRC 6695, IRC 6700, IRC 6701, IRC 6707, or IRC 6708 will consider whether an injunction should be sought under IRC 7407 or IRC 7408. In addition, an injunction may be sought by an examiner to whom an investigation is assigned for activities specified in IRC 7407 or other specified conduct under IRC 7408.

20.1.6.10.1.1  (09-17-2010)
Identifying Persons Subject to an Injunction

  1. Service personnel who become aware of income tax return preparers engaged in activities identified in IRC 7407(b)(1)(A) through (D), Action to Enjoin Tax Return Preparers, will notify in writing the LDC or Office of Tax Shelter Analysis (OTSA) of the facts and circumstances.

20.1.6.10.1.2  (09-17-2010)
Initiating an Investigation Under IRC 7407

  1. An investigation under IRC 7407 will be conducted in the same fashion as an investigation under IRC 6700 and IRC 6701.

20.1.6.10.2  (09-17-2010)
Coordination With Other Penalties

  1. The injunction authorized under IRC 7407 is coordinated with civil penalties under IRC 6694 and IRC 6695 and criminal tax provisions. In addition, IRC 7407 can be used in conjunction with IRC 7408, if appropriate.

  2. An injunction may be sought without regard to whether penalties have been or may be assessed against any return preparer.

20.1.6.10.3  (09-17-2010)
Statute of Limitations

  1. The IRC does not explicitly provide any limitation period for seeking an injunction under IRC 7407.

20.1.6.10.4  (09-17-2010)
Office of Professional Responsibility

  1. See IRM 20.1.6.12, Office of Professional Responsibility.

20.1.6.11  (09-17-2010)
E-file Program

  1. Return preparers may participate in the IRS e-file program.

20.1.6.11.1  (05-16-2012)
Standards for Return Preparer

  1. Preparers in the IRS e-file program must meet standards reflected in Rev. Proc. 2007–40, Pub 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns. Penalties asserted against preparers are a factor in determining suitability for the IRS e-file program. RPCs will notify electronic filing coordinators (EFCs) of all penalties asserted on return preparers.

  2. Section 6 of Rev. Proc. 2007-40 broadly defines the applicability of return preparer penalties for those participating in the IRS e-file program. The Service may assert all appropriate preparer, non-preparer, and disclosure penalties against an authorized IRS e-file provider as warranted under the circumstances.

  3. SB/SE area offices may establish multi-functional teams to visit electronic filers to determine their compliance with the IRS e-file program procedures. A team approach is preferred if resources are available. A team consists of two (2) representatives who may be from examination. Examiners who participate on these teams charge their time to Activity Code 522.

  4. See IRM 4.21.1, Monitoring the IRS e-file Program, for more information.

  5. See IRM 3.42.4, Electronic Tax Administration—IRS e-file for Business Tax Returns, and IRM 3.42.5, Electronic Tax Administration—IRS e-file for Individual Income Tax Returns, for more information on the e-file program.

20.1.6.11.2  (05-16-2012)
Individual Income Tax Return Preparer's—E-file Rules

  1. The Workers, Homeownership, and Business Assistance Act of 2009 added a special rule for preparers of individual income tax returns. See IRC 6011(e)(3), Special Rule for Tax Return Preparers.

  2. The provision generally requires that any individual income tax return prepared and filed by a tax return preparer be filed on magnetic media when such return preparer is a specified tax return preparer for the calendar year during which such return is filed.

  3. "Specified tax return preparer" means, with respect to any calendar year, any tax return preparer, as defined in IRC 7701(a)(36) and Treas. Reg. 301.7701-15, unless such preparer reasonably expects to file 10 or fewer individual income tax returns during such calendar year. If a person who is a tax return preparer is a member of a firm, that person is a specified tax return preparer unless the firm members in the aggregate reasonably expect to file 10 or fewer individual income returns in a calendar year.

  4. Solely for the 2011 calendar year, a tax return preparer will not be considered a specified tax return preparer if the preparer reasonably expects, or if the preparer is a member of a firm, the firm's members in the aggregate reasonably expect, to file fewer than 100 individual income tax returns in the 2011 calendar year. See Treas. Reg. 301.6011-7.

  5. The term "individual income tax return" means any return of the tax imposed by subtitle A on individuals, estates, or trusts.

  6. The effective date is for returns filed after March 18, 2010.

20.1.6.12  (09-10-2013)
Office of Professional Responsibility (OPR)

  1. The Office of Professional Responsibility (OPR) supports the IRS’s strategy to enhance enforcement of the tax law by ensuring that tax practitioners adhere to professional standards and follow the law. OPR is the governing body authorized to interpret and apply Circular 230 and is generally responsible for matters related to practitioner conduct and discipline.

  2. OPR attorneys are responsible for reviewing, investigating, and resolving alleged ethical violations of the professional standards of competence, integrity, and conduct by tax practitioners who represent taxpayers before the IRS, and for identifying and resolving alleged violations of the applicable professional standards enumerated by Circular 230.

  3. Individuals who may practice before the IRS pursuant to the provisions of Circular 230 include but are not limited to the following:

    • Attorneys

    • Certified public accountants

    • Registered tax return preparer

    • Enrolled retirement plan agents

    • Enrolled actuaries

    • Appraisers

    • Enrolled agents

20.1.6.12.1  (09-10-2013)
Practice Before the IRS

  1. Practice before the IRS encompasses all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the IRS.

  2. Such presentations include, but are not limited to the following:

    1. Preparing documents;

    2. Filing documents;

    3. Corresponding and communicating on behalf of a client with the IRS;

    4. Rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and

    5. Representing a client before the IRS at conferences, hearings and meetings.

  3. Practice also may consist of providing written advice based on an unreasonable factual or legal assumption as well as giving a false opinion, knowingly, recklessly or through gross incompetence.

    Note:

    Enrolled actuaries are limited to representation with respect to issues involving specific employee and annuity plans as defined in section 10.3(2) of Circular 230. Similarly, enrolled retirement plan agents are limited to representation with respect to issues involving certain employee plans and forms under the 5300 and 5500 series which are filed by retirement plans and plan sponsors, but not with respect to actuarial forms or schedules. See section 10.3(e)(2) of Circular 230.

  4. A registered tax return preparer who prepares and signs a taxpayer's tax return as the preparer may represent the taxpayer before examiners, customer service representatives, or similar officers and employees of the IRS during an examination of the taxable year or period covered by that tax return. This right does not permit these individuals to represent the taxpayer, regardless of the circumstances requiring representation, before appeals officers, revenue officers, counsel, or similar officers or employees.

20.1.6.12.2  (09-10-2013)
Sanctions for Violation of the Regulations

  1. OPR may sanction a practitioner, after notice and an opportunity for a hearing, who is shown to be incompetent or disreputable (within the meaning of section 10.51 of Circular 230) or who fails to comply with and or knowingly and willfully violates any regulation enumerated by Circular 230 or, who with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client.

  2. Sanctions available to OPR include issuing a censure (a public reprimand), and suspending or disbarring the practitioner's privilege to practice before the IRS.

  3. In certain situations, OPR may impose a monetary penalty on a representative who engages in conduct subject to sanction. If the representative was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the monetary penalty may be imposed on such employer, firm, or entity if it knew, or reasonably should have known, of such conduct. The amount of the penalty may not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to, or in lieu of, any suspension, disbarment or censure and may be in addition to a penalty imposed on an employer.

  4. OPR may also seek Department of Justice assistance in obtaining an injunction.

  5. OPR may also disqualify any appraiser for a violation of the rules applicable to appraisers.

20.1.6.12.3  (09-10-2013)
Referral to the Office of Professional Responsibility

  1. Circular 230 section 10.53 specifies that if an officer or employee of the IRS has reason to believe that a practitioner, as described above, has violated any provision of Circular 230, the officer or employee must promptly make a written report to the Director of OPR of the suspected violation.

  2. Based on the above, the decision to refer a particular matter to OPR is not an issue for negotiation with a taxpayer or practitioner. OPR referrals may not be negotiated as a settlement item with respect to any IRS or Title 26 tax matter.

  3. The potential that a matter may be referred to OPR should never be discussed with a taxpayer or a representative in a manner that may be perceived in any way as a threat. In certain situations, it is acceptable to remind a practitioner of his or her duties relative to Circular 230; however, IRS employees should never imply or infer that a referral to OPR will result in disciplinary action against a practitioner.

  4. Each referral to OPR should describe and document the practitioner's actions that support disciplinary action. Include a summary of the suspected misconduct providing as much detail as possible regarding the alleged misconduct along with supporting documentation.

  5. Once an IRS employee makes a referral, OPR will contact the employee within 30 days to acknowledge the referral and may request additional information.

  6. Examiners should exercise discretion in making referrals of asserted IRC 6694(a) penalties to OPR. Referrals of asserted IRC 6694(a) penalties to OPR should be based on a pattern of failing to meet the required penalty standards under IRC 6694(a).

  7. When preparer penalties are asserted under IRC 6694(b) for willful or reckless conduct pertaining to an examination case closed agreed or unagreed, a referral to OPR is mandatory.

  8. For IRC 6695(a) through (g), examiners should exercise discretion in making referrals to OPR. However, in matters where preparer penalties are asserted when there is willful neglect, examiners should consider making a referral to OPR.

  9. The RPC, based on asserted IRC 6694(a) penalties, may identify a pattern of penalties pertinent to a particular examination or across multiple clients that warrant a referral to OPR and initiate that referral to OPR.

  10. IRC 6700 and IRC 6701 penalties when proposed, are mandatory referrals to OPR.

  11. Federal courts have the authority to permanently prohibit individuals from practicing before the IRS. This usually results from an IRC 6700 or IRC 6701 investigation. Examiners assigned promoter investigations should consider a referral to OPR where preparer misconduct is present and a complaint for injunction is not filed for the preparer misconduct.

  12. When making a return preparer referral to OPR involving a Circular 230 practitioner, examiners will do the following:

    1. Complete and forward Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, to the Director of OPR through the area RPC based on a preparer or promoter penalty(s).

    2. Review IRM 4.11.55.4.2, Referral to the Office of Professional Responsibility (OPR), for other civil penalty examinations, return examinations that are not civil penalty examinations, and practitioner actions that may warrant a referral to OPR.

      Note:

      OPR authorizing statute is Title 31 U.S.C. section 330. This statute gives OPR broad authority to regulate the practice of representatives before the Department of Treasury for violation of the regulations which are found at 31 CFR Title 10, commonly known as Circular 230.

  13. Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, is used for the referral to OPR. The referent must complete all parts of Form 8484 following the instructions attached to the form.

    Note:

    Provide a detailed explanation of the suspected misconduct. Attach all supporting documentation to the referral, including reports of penalty assertions against tax practitioners.

  14. Completing the Referral

    1. When a determination is made that a referral to OPR is warranted, follow procedures in IRM 4.11.55.4.2.3, Referral to the Office of Professional Responsibility (OPR)—Procedures.

    2. OPR requires management approval for misconduct reports. Management approval ensures that the misconduct reports are based on objective, generally understood standards of practitioner service, and professionalism. RPCs are a valuable resource and may assist with OPR referrals. In SB/SE Examination, area RPCs have been established and are listed at http://mysbse.web.irs.gov/exam/tip/rp/contacts/12293.aspx, Return Preparer Contacts. SB/SE Employment, Estate and Gift, and Excise each have an RPC. SB/SE Collection can contact SB/SE Examination area RPCs for OPR referral questions. LB&I and TE/GE also have an RPC.

  15. The referent will receive written acknowledgement from OPR. As the case progresses, OPR or a member of the Legal Analysis Branch of OPR may need additional information and cooperation from examiner, other field offices, or other parts of the Service.

20.1.6.13  (09-17-2010)
Penalty for Promoting Abusive Tax Shelters—IRC 6700

  1. Review IRM 20.1.6.22, Third Party Contacts—IRC 7602(c).

  2. The penalty for promoting abusive tax shelters, etc., is for any person who

    1. Organizes (or assists in the organization of) a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement; or

    2. Participates (directly or indirectly) in the sale of any interest in any entity or plan or arrangement in (a) above; and

    3. Makes or furnishes or causes another to make or furnish (in connection with such organization or sale)–
      (i) A statement with respect to 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 matter, or
      (ii) Gross valuation overstatement as to any material matter.

      Note:

      Abusive tax shelters are now also referred to as abusive tax avoidance transactions.

20.1.6.13.1  (09-17-2010)
LB&I, SB/SE, and TE/GE Functional Guidance

  1. Under no circumstances should an examiner start a promoter examination without documented approval from the LDC for SB/SE and TE/GE or Technical Tax Shelter Promoter Committee (TTSPC) for LB&I.

  2. IRM 4.32.2.1, Overview of Abusive Transaction (AT) Program, contains an overview of the IRC 6700 and IRC 6701 penalty program concerning the promoters of abusive tax avoidance transactions and the examination of taxpayer participants.

  3. IRM 4.32.2, Abusive Transactions (AT) Program, contains the administrative procedures.

  4. IRM 4.32.3, Coordination and Roles of Cross Functional Units, contains the cross functional guidance.

  5. The following websites contain functional procedures and guidance.

    1. LB&I: http://lmsb.irs.gov/hq/pftg/otsa/ResourcesInfo/Promoters_Practitioners.asp and http://lmsb.irs.gov/industries/fsh/tax%20shelter%20promoters/PromoterAdminGuidelines.asp.

    2. SB/SE: http://mysbse.web.irs.gov/AboutSBSE/Exam/at/default.aspx.

    3. TE/GE: http://tege.web.irs.gov/templates/STAHome.asp?MWContent=../content/STAMainWindow/contentMainWindow.htm for Tax Exempt and Government Entities (TE/GE) Referrals contains the administrative procedures. Examiners should contact the appropriate function through the links on TE/GE Emerging Issues Intranet page.

  6. The SB/SE LDC processes referrals concerning promoters of abusive tax avoidance transactions. The LDC evaluates referrals based on established criteria and authorizes IRC 6700 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP for assignment to the field.

  7. The LB&I OTSA processes all leads of potential promoters of tax shelters. LB&I Financial Services is responsible for the field assignments of all LB&I approved promoter investigations.

20.1.6.13.2  (09-17-2010)
Who Asserts the Penalty

  1. Examiners assert the penalty. Also refer to IRM 4.32.2.11.0, Approval of Penalties.

20.1.6.13.3  (09-17-2010)
Computing the Penalty

  1. See IRM 4.32.2.11.3.2, 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 any activity, occurring after October 22, 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 6700(a)(2)(B), Rules for Relating to Penalty for Gross Valuation Overstatements, 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).

20.1.6.13.4  (05-16-2012)
Coordination With Other Provisions

  1. This penalty is in addition to all other penalties that may be imposed under the Code. However, under IRC 6701(f)(3), Coordination With Section 6700, no penalty may be assessed under IRC 6700 on any person with respect to any document for which a penalty is assessed on such person under IRC 6701. This provision allows the IRS to choose 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.

  2. IRC 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 6700 may also be subject to the penalty under IRC 6694(b).

  3. IRC 7206(2), Aid or Assistance, 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 7206(2), for assisting, procuring, or advising the preparation or presentation of a return or other document which is fraudulent or false.

  4. IRC 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 6700, Promoting Abusive Tax Shelters, etc. The promoter penalty under IRC 6700 and the injunction actions under IRC 7408 are more effective when applied prior to the time investors file their returns. Therefore, abusive tax avoidance transactions should be identified and IRC 6700 penalty investigations that have been authorized by the LDC should be initiated promptly. Also refer to IRM 4.32.2.5, Case Control/Case Assignment Procedures.

20.1.6.13.5  (09-17-2010)
Referral to the Office of Professional Responsibility

  1. See IRM 20.1.6.12, Office of Professional Responsibility.

20.1.6.13.6  (05-16-2012)
Appeal Rights

  1. See IRM 4.32.2.11.7.1, Promoter Rights for IRC 6700 and IRC 6701.

20.1.6.13.7  (05-16-2012)
Special Claim Procedures

  1. See IRM 4.32.2.11.7.1.1, Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701, applicable per IRC 6701(c).

20.1.6.13.8  (05-16-2012)
Statute of Limitations

  1. There is no statute of limitations on assessment with respect to the promoter penalty imposed by IRC 6700.

20.1.6.14  (09-17-2010)
Penalties for Aiding and Abetting—IRC 6701

  1. Review IRM 20.1.6.22, Third Party Contacts—IRC 7602(c).

  2. Review IRM 20.1.6.20, Affidavits Overview.

  3. IRC 6701 is the penalty for aiding and abetting understatement of tax liability.

  4. The penalty is for any person who does the following:

    1. Aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document;

    2. Knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws; and

    3. Knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

  5. The burden of proof for this penalty lies with the government. Most court decisions hold that the government need only establish its proof by a preponderance of evidence rather than the clear and convincing evidence standard.

  6. Amount of Penalty—The penalty is $1,000, however, if the return, affidavit, claim or other document relates to a corporation; the penalty is $10,000.

20.1.6.14.1  (09-17-2010)
Activities Subject to the Penalty

  1. Key words in the penalty are "document," "knows," and "understatement." For the penalty to be imposed, the person penalized must be implicated in the preparation or presentation of a document some portion of which he or she knows or has reason to know, will be used in connection with a material matter arising under the tax laws and knows that such position would result in an understatement of tax liability if so used.

    1. In general, subject to the penalty are tax counselors who advise clients to take unsupported filing positions or to file false or fraudulent returns.

    2. The authors of legal opinions made available to promoters of tax shelters are another target of the penalty. A carefully fabricated legal opinion may lend credence to an abusive tax shelter. The penalty may be imposed even if the opinion does not contain any false advice if the writer knows that the opinion is based on inaccurate assumptions and or knows of other facts which render the legal advice false.

    3. The penalty can be imposed for gratuitous advice or assistance in preparing any document.

    4. In order to aid in the understatement of another’s tax, it is not necessary to actually prepare the tax return or document that leads to the understatement. A person who controls the activities of subordinates and either orders the subordinates to act, or does not prevent their participation in actions that person knows will produce an understatement, is subject to the penalty under IRC 6701.

  2. The definition of procures, subordinate, and advise are as follows:

    1. The term "procures" in the statute includes ordering (or otherwise causing) a subordinate to do an act subject to the penalty. It also includes knowing of, and not attempting to prevent, participation by a subordinate in such an act.

    2. The term "subordinate" means any other person (whether or not a director, officer, employee, or agent of the taxpayer involved) over whose activities the person has direction, supervision or control. Such direction must be direct and immediate. Where a subordinate is directed or expected, as a condition of retaining his position, to participate in the prohibited activity by a person who directs, supervises, or controls such subordinate, the latter person is the one potentially subject to the penalty.

    3. The term "advises" includes actions of independent contractors such as lawyers and accountants who counsel a particular course of action.

      Note:

      A person furnishing typing, reproduction, or other mechanical assistance with respect to a document is not to be considered as having aided or assisted in the preparation of the document for purposes of the statute solely by reason of such assistance.

  3. Congressional intent in enacting the provision.

    1. A tax advisor would not be subject to this penalty for suggesting to a client an aggressive but supportable filing position even though that position was later rejected by the courts and even though the client was subjected to the substantial understatement penalty. However, if the advisor suggested a position which he or she knew could not be supported on any reasonable basis under the law, the penalty would apply.

    2. No person will be subject to the penalty unless they are "directly involved in aiding or assisting in the preparation of a false or fraudulent document under the tax laws." Thus, the preparation of a correct schedule by a preparer to be incorporated in a return will not expose the preparer of the schedule to a penalty even though the preparer is aware other portions of the return may be fraudulent.

  4. Single penalty per taxpayer per period.

    1. If a penalty is imposed on a person with respect to a federal tax document, no penalty shall be imposed under IRC 6701 on such person with respect to any other federal tax document relating solely to the same taxpayer and the same taxable period, or, if there is no taxable period, the same taxable event. If, however, such other federal tax document also related to another taxpayer or another taxable period or taxable event, a second penalty may be imposed under IRC 6701 with respect to such other federal tax document.

    2. A husband and wife who make a joint return of income tax are considered to be the same taxpayer for the taxable year.

      Note:

      Someone who assists two taxpayers in preparing false documents would be liable for a $2,000 penalty whereas the penalty would be only $1,000 if he had advised in the preparation of two false documents for the same taxpayer. Similarly, an advisor who prepares a false partnership return and then false Schedules K-1 for 10 individual partners would be subject to a $10,000 penalty.

20.1.6.14.2  (05-16-2012)
LB&I and SB/SE Functional Guidance

  1. Under no circumstances should an IRC 6701 penalty examination be started without documented approval from one of the following:

    1. LDC for SB/SE,

    2. TTSPC for LB&I reportable transactions, or

    3. RPC for LB&I non-reportable transactions involving tax return preparers.

  2. IRM 4.32.2, The Abusive Transactions (AT) Process, contains the administrative procedures.

  3. IRM 4.32.3, Coordination and Roles of Cross Functional Units, contains the cross functional guidance.

  4. The following websites contain functional procedures and guidance.

    1. LB&I: http://lmsb.irs.gov/hq/pftg/otsa/ResourcesInfo/Promoters_Practioners.asp

    2. LB&I: http://lmsb.irs.gov/hq/pqa/Post-filing/preparers.asp

    3. SB/SE: http://mysbse.web.irs.gov/AboutSBSE/Exam/at/default.aspx

  5. The SB/SE LDC processes referrals for IRC 6701 penalty examination. The LDC evaluates referrals based on established criteria and authorizes IRC 6701 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP unit for assignment to the field.

  6. The LB&I OTSA evaluates referrals based on established criteria and presents the referral to the TTSPC. The TTSPC authorizes IRC 6701 investigations when warranted for reportable transactions. For tax return preparer investigations in LB&I which do not involve a reportable transaction, approval of the RPC is required and assistance of local counsel should be requested.

20.1.6.14.3  (05-16-2012)
Development of the Required Referral

  1. A person subject to penalty under IRC 6701 may be identified by one of the following:

    • Area field examiner

    • Campus correspondence examiner

    • IRS appraiser and or engineer

    • Any other IRS employee who determines that the penalty might apply

      Note:

      Many of these cases will be discovered during LB&I examinations. However, the referral should be based on the taxpayer under penalty investigation, in most cases, an SB/SE taxpayer.

20.1.6.14.3.1  (09-17-2010)
Evidence Supporting the Government's Burden of Proof

  1. The penalty under IRC 6701 may be imposed on a broad range of persons. When a tax return preparer is involved, either IRC 6694 or IRC 6701 could apply.

    1. The government’s burden of proof under IRC 6694(b) and IRC 6701 is not sustained by the mere presence of unreported income or overstated credits and deductions.

    2. The focus is on the information that establishes the knowledge, willfulness, or recklessness of the preparer (e.g., information conveyed by the taxpayer to the preparer, information known or reasonably known by the preparer, and or the inquiries or statements directed by the preparer to the taxpayer).

      Example:

      If the preparer fabricates deductions (without the taxpayer’s knowledge), the preparer could be liable for a penalty under IRC 6694(b) or IRC 6701 because of willfully attempting to understate the tax and because of preparing a return based on information which is known by the preparer to result in an understatement of the taxpayer’s tax liabilities.

  2. Even though a preparer may in good faith rely on the taxpayer to provide accurate information, the preparer may not ignore the implications of such information and must make reasonable inquiries when information furnished appears to be incorrect or incomplete. It must be shown that the preparer failed to make any reasonable inquiry under circumstances required by rule or regulation, and a deliberate act of omission prevails.

  3. The evidence should show the amount of understatement on each return related to IRC 6701 activity. Examples of evidence to be collected include, but are not limited to the following:

    1. Tax returns or other documents that were prepared by the person under investigation. Although copies may be used during the investigation, originals or certified copies will be needed for introduction in court.

    2. Affidavits taken from taxpayers whose federal tax returns were prepared by the person under investigation. These affidavits should define the items falsely reported on the filed return as well as any other preparer violations. The affidavits are used for report purposes, but the individuals must be available to testify if the case goes to court. Review IRM 20.1.6.20, Affidavits Overview.

    3. Computation of loss to the government due to the understatement of tax attributable to the return preparer.

    4. False receipts or other documents to establish the involvement of the individual under investigation in aiding or assisting in the filing of false documents specified in IRC 6701.

    5. Affidavits taken from third parties who can testify as to the preparer’s tax knowledge and personal responsibility in the preparation of the tax returns or other factors bearing on the investigation.

    6. Refer also to IRM 4.32.2.7.6, Evidence.


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