20.1.6  Preparer, Promoter, Material Advisor Penalties (Cont. 2)

20.1.6.14 
Penalties for Aiding and Abetting—IRC 6701

20.1.6.14.4  (09-17-2010)
Coordination With Other Penalties

  1. The penalty under IRC 6701 is not imposed on a person with respect to a federal tax document if a penalty with respect to such document has been assessed on such person under IRC 6694, relating to tax return preparers. The penalty may be imposed, however, with respect to any other federal tax document for which the penalty under IRC 6694 has not been assessed, even though the document relates to the same taxpayer and taxable year as a document with respect to which the penalty under IRC 6694 has been assessed.

  2. A penalty under IRC 6701 may not be applied to the same activities that result in the application of a penalty under IRC 6700. Therefore, if a promoter develops promotional materials such as a prospectus and other documents which explain the promotion and those documents are used as the evidence supporting a penalty under IRC 6700 for organizing and promoting an abusive tax shelter, a penalty under IRC 6701 will not be assessed for those same documents. However, if the same promoter prepares a partnership tax return relating to the same tax plan or arrangement, a penalty can be assessed under IRC 6701 for each Schedule K-1 if an understatement of tax liability is reported on the investor’s federal tax returns.

20.1.6.14.5  (09-17-2010)
Examples of IRC 6701 Activity

  1. Example 1: A tax advisor would not be subject to the penalty for suggesting an aggressive but supportable filing position to a client even though that position was later rejected by the courts and even though the client was subjected to the substantial understatement penalty.

  2. Example 2: However, if the tax advisor suggested a position which he or she knew could not be reasonably supported by statute or regulation, and the advisor prepared (or assisted in the preparation of) a document for the underlying tax return reflecting that insupportable position, the penalty could apply.

    1. Thus, if a person prepares a return (or a schedule or other portion of a return) for a client reflecting a deduction of an amount the preparer knows is not deductible, the preparer could be subject to the penalty.

    2. However, if a person prepares a schedule or other portion of a return that reflects positions which are reasonably supported by rules or regulations, the person will not be subject to an IRC 6701 penalty even if other portions of the return are erroneous or fraudulent.

  3. Example 3: Taxpayer B was given a winning horse race ticket at a race course by Taxpayer A, the ticket owner. The race course, using information supplied by Taxpayer B, prepared a Form W-2G, Certain Gambling Winnings, in Taxpayer B's name. Taxpayer B received the proceeds from the winning ticket and returned the proceeds to Taxpayer A for a 6 percent fee.

    1. Taxpayer B is a person who has aided, assisted in the preparation of, or procured a document (the Form W-2G) that Taxpayer B knows, or has reason to know, will be used in connection with material matters under the Internal Revenue laws.

    2. Taxpayer B knows that, if used, the document would result in an understatement of Taxpayer A's income tax liability. Thus, Taxpayer B is liable for the IRC 6701 penalty.

  4. Example 4: Mr. C, an accountant, prepared a 2011 return for Taxpayer D, a client. Mr. C knowingly overstated D's expenses on the return, thereby creating a net operating loss (NOL) for the year. Mr. C prepared amended returns for Taxpayer D for 2009 and 2010, claiming refunds for those years based on the 2011 NOL carryback. The carryback was not exhausted in 2010. Mr. E, another accountant, prepared Taxpayer D's 2012 return using the information presented to Mr. E by Taxpayer D, including copies of the document prepared by Mr. C. Mr. E is unaware of the overstatement of expenses by Mr. C and deducted the remaining unused NOL on Taxpayer D's 2012 return.

    1. Mr. C is liable for three separate IRC 6701 penalties for his role in preparing Taxpayer D's 2009, 2010, and 2011 returns, which Mr. C knew, or had reason to know would result in understatements of Taxpayer's D's 2009, 2010, and 2011 federal income tax liabilities.

    2. Mr. E, however, was unaware of the overstatement of expenses on the 2011 return and is unaware of the understatement of tax liability on the 2012 return. Thus, Mr. E is not liable for an IRC 6701 penalty.

  5. Example 5: On January 15, 2012, A, an individual, offers to donate a painting to museum X. B, the curator of the museum, agrees to accept the painting. B offers to backdate a receipt for the donation to December 30, 2011. B knows that the receipt will be used to substantiate A's charitable deduction. A uses the backdated receipt to claim a charitable deduction for 2011.

    1. B has aided in the preparation of a federal tax document knowing that it will be used in connection with a material tax matter and that it will result in an understatement of tax.

    2. Thus, B is liable for the IRC 6701 penalty.

  6. Example 6: Taxpayer F retains Mr. G., an appraiser, to appraise rare books that she wishes to donate to a university. Mrs. F tells Mr. G. that she needs the appraisal to substantiate a charitable contribution deduction for federal income tax purposes. Mr. G. knows that the fair market value of the books may be any amount between $50,000 and $75,000. Mr. G. offers to provide Mrs. F an appraisal, for a fee, indicating the books are worth $100,000. Mr. G. indicates to Mrs. F that if the IRS challenges the valuation, the appraisal of $100,000 can be used to negotiate a fair market value of $75,000.

    1. Mrs. F agrees to pay the fee for the appraisal indicating the books are worth $100,000, and Mr. G. prepares the appraisal.

    2. Mr. G. has aided in the preparation of a document knowing that it will be used in connection with a material tax matter and that it will result in the understatement of tax liability. Thus, Mr. G. is liable for the IRC 6701 penalty.

  7. Example 7: Mrs. H, an accountant, overstates the value of depreciable property on an estate tax return. Mrs. H knows there is no reasonable basis for the valuation. Mrs. H also knows that the valuation claimed on the estate tax return will not understate the tax liability of the estate because of the application of the unified credit. Mrs. H, however, intends that the value claimed on the return will be used by the beneficiary of the estate in computing depreciation deductions. Mrs. H has aided in the preparation of a tax document and knows that the estate tax return will result in an understatement of the tax liability of the beneficiary. The IRC 6701 penalty therefore applies.

  8. Example 8: Mr. A, an attorney, knowingly understates an item of partnership income in preparing a partnership return for calendar year 2011. Mr. A prepares and transmits to the partners Schedules K-1 for the 10 individual partners for the same calendar year reflecting the understated income. Mr. A is subject to ten separate $1,000 IRC 6701 penalties for his preparation of ten Schedules K-1 which Mr. A knew would, if used, result in understatements of the federal tax liabilities of the ten partners on their federal income tax returns. Mr. A will not be subject to an eleventh penalty in connection with the partnership return itself, since the partnership itself is not liable for income tax and the only understatements of tax liability are the understatements of tax liability on the ten partners' individual returns.

  9. Example 9: Mrs. B, an officer of an S corporation under IRC 1361(a)(1), S Corporation Defined, prepares the corporation's tax return for calendar year 2011. Mrs. B intentionally understates the corporation's net capital gain for the taxable year, resulting in an understatement of the corporation's tax liability under IRC 1374, Tax Imposed on Certain Built-in Gains. Mrs. B also prepares Schedules K-1 for the individual shareholders for the same calendar year reflecting the understated capital gain. Mrs. B is subject to a $10,000 penalty for her aid in the preparation of the small business corporation return and a $1,000 penalty for each Schedule K-1 prepared.

    Note:

    If Mrs. B intentionally understated operating income rather than net capital gains, Mrs. B is subject to a $1,000 penalty for each Schedule K-1 prepared, but is not subject to a penalty for the S corporation return since under these facts the S corporation is not subject to tax.

  10. Example 10: Mrs. C, an accountant, prepares false income and gift tax returns for client Mr. D. Each of the returns is prepared for calendar year 2011. The calendar year 2011, however, relates to a period for which different taxes are imposed. Thus, there are two taxable periods for purposes of application of the penalty under IRC 6701 the calendar year 2011 which is the period for which the income tax is imposed, and the calendar year 2011 which is the period for which the gift tax is imposed. Mrs. C is subject to a penalty of $2,000.

20.1.6.14.6  (05-16-2012)
Appeal Rights

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

20.1.6.14.7  (05-16-2012)
Special Claim Procedures

  1. See IRM 4.32.2.11.7.1.1, Special Claim Procedures, applicable per IRC 6701(c).

20.1.6.14.8  (09-17-2010)
Statute of Limitations on Assessment

  1. There is no statute of limitation on assessment of penalties under IRC 6701 because the penalty does not depend on the filing of a return.

20.1.6.14.9  (09-17-2010)
Office of Professional Responsibility

  1. When the IRC 6701 penalty is asserted against a practitioner or an appraiser, an information referral to OPR is mandatory. See IRM 20.1.6.12, Office of Professional Responsibility.

20.1.6.15  (09-17-2010)
Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions—IRC 7408

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

  2. Review IRM 20.1.6.20, Affidavits Overview.

  3. A civil action may be brought under IRC 7408 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.

  4. If any citizen or resident of the United States does not reside in, and does not have his principal place of business in, any United States judicial district, such citizen or resident shall be treated for purposes of this as residing in the District of Columbia.

  5. 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 Circular 230.

  6. 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.

20.1.6.15.1  (09-17-2010)
Action on Injunctions—Seeking an Injunction

  1. Any examiner conducting an investigation under IRC 6700, IRC 6707, or IRC 6708 will consider whether an injunction should be sought under IRC 7408.

  2. An injunction may be sought by an examiner to whom an investigation is assigned for activities specified in IRC 7407.

20.1.6.15.2  (09-17-2010)
Initiating an IRC 7408 Investigation

  1. An investigation under IRC 7408, will be conducted in the same fashion as an investigation under IRC 6700 and IRC 6701.

20.1.6.15.3  (09-17-2010)
Procedural Guidance

  1. See IRM 4.32.2.9, Injunctive Actions, and IRM 4.32.3.7.1, Steps in an Injunctive Case, for procedural guidance.

20.1.6.15.4  (09-17-2010)
Coordination With Other Penalties

  1. The injunction authorized under IRC 7408 is coordinated with civil penalties under IRC 6700, IRC 6701, IRC 6707, and IRC 6708.

  2. In addition, IRC 7408 can be used in conjunction with IRC 7404, if appropriate.

20.1.6.15.5  (09-17-2010)
Statute of Limitations

  1. The Code does not provide any limitation period for seeking an injunction under IRC 7408.

20.1.6.16  (09-17-2010)
Failure to Furnish Information Regarding Reportable Transactions—IRC 6707

  1. Material advisors, with respect to any reportable transaction as defined in IRC 6707A(c) and Treas. Reg. 1.6011-4(b)(1), are required to timely file an information return under IRC 6111(a), Disclosure of Reportable Transactions, with the Secretary in the manner and on such date as prescribed by the Secretary.

  2. Under IRC 6111(a) the return must include the following:

    1. Information identifying and describing the transaction,

    2. Information describing any potential tax benefits expected to result from the transaction, and

    3. Such other information as the Secretary may prescribe.

  3. Under IRC 6111(b) a material advisor is any person:

    1. Who provides material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and

    2. Who directly or indirectly derives gross income in excess of $250,000 ($50,000 in the case of an individual), or such other amount as may be prescribed by the Secretary, for such advice or assistance.

20.1.6.16.1  (09-17-2010)
LB&I and SB/SE Functional Guidance

  1. Under no circumstances should an examiner start a material advisor examination without documented approval from the LDC for SB/SE and TE/GE and TTSPC for LB&I.

  2. IRM 4.32.2, 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/Penalties.aspOffice of Tax Shelter Analysis (OTSA)—Penalties.

    2. SB/SE: http://mysbse.web.irs.gov/AboutSBSE/Exam/at/default.aspxAbout Abusive Transactions and Technical Issues.

    3. TE/GE; http://tege.web.irs.gov/article.asp?category=job&title=atat-ep-promoter-investigations&path=/my-job, EP Promoter Investigations. This site includes a link to the MOU between TE/GE and SB/SE dated February 25, 2009 outlining the Abusive Promoter Investigation Procedures to be followed by TE/GE and SB/SE with respect to investigations involving TE/GE taxpayers or issues.

  5. The SB/SE LDC processes referrals concerning material advisors. The LDC evaluates referrals based on established criteria and authorizes IRC 6707 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP unit for assignment to the field.

  6. LB&I functional guidance and procedures for IRC 6707 and IRC 6708, material advisor investigations are as follows:

    1. OTSA has responsibility for making referrals of suspected promoters of abusive tax avoidance transactions and material advisors to the LB&I TTSPC (formerly known as the 6700 committee).

    2. TTSPC considers these referrals and may authorize a promoter and or material advisor examination, as appropriate.

    3. Revenue agents must report suspected cases of material advisor and or promoter activity to OTSA. They forward their findings, along with supporting documentation, to the OTSA designated senior analyst

    4. OTSA reviews and develops these referrals; and those that meet the criteria set forth by the TTSPC will be recommended to TTSPC for audit consideration.

    5. Please note that only the TTSPC may authorize a material advisor examination.

    6. Under no circumstances should an examiner start a material advisor and or promoter examination without sanction from the TTSPC. Please review guidance concerning the type of information that should be gathered before referring an entity or individual for a material advisor and or promoter examination.

    7. The LB&I OTSA link is http://lmsb.irs.gov/hq/pftg/OTSA/ResourcesInfo/Penalties.asp.

20.1.6.16.2  (09-17-2010)
Penalty Computation

  1. The amount of the penalty under IRC 6707 for reportable transactions, other than listed transactions, is $50,000.

  2. If the penalty is with respect to a listed transaction, the amount of the penalty is the greater of the following:

    1. $200,000, or

    2. 50% of the gross income derived by the material advisor with respect to aid, assistance, or advice which is provided before the date the information return is filed.

  3. In the case of intentional failure or act, the penalty is 75% of the gross income derived by the material advisor with respect to aid, assistance, or advise which is provided before the date the information return is filed.

20.1.6.16.3  (09-17-2010)
Penalty Rescission IRC 6707

  1. The penalty cannot be rescinded (abated) with respect to a listed transaction.

  2. As to reportable transactions, the penalty can be rescinded only in exceptional circumstances where rescinding the penalty would promote compliance with the tax laws and effective tax administration.

  3. The authority to rescind the penalty can only be exercised by the Commissioner or his or her delegate.

  4. There is no right to appeal a refusal to rescind a penalty.

20.1.6.16.4  (09-17-2010)
Effective Date Under America Jobs Creation Act

  1. IRC 6707 was amended by the America Jobs Creation Act (AJCA) of 2004 and as amended is effective for returns with a due date of October 23, 2004 or after.

20.1.6.16.5  (05-16-2012)
Appeal Rights

  1. See IRM 4.32.2.11.7.2, Promoter Rights for IRC 6707 and IRC 6708.

20.1.6.16.6  (09-17-2010)
Office of Professional Responsibility

  1. See IRM 20.1.6.12, Office of Professional Responsibility.

20.1.6.17  (09-10-2013)
Failure to Include Reportable Transaction With Return—IRC 6707A

  1. IRC 6707A provides a monetary penalty for the failure to include on any return or statement any information required to be disclosed under IRC 6011, General Requirement of Return, Statement, or List, with respect to a reportable transaction. The IRC 6707A penalty is in addition to any other penalty that may be imposed, and applies without regard to whether the transaction ultimately results in an understatement. It is a stand-alone penalty; it does not require an associated income tax examination.

  2. See IRM 4.32.4,Abusive Transactions, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.

20.1.6.17.1  (05-16-2012)
Amount of penalty

  1. For each failure, the penalty is 75 percent of the decrease in tax shown on the return as a result of such transaction, or the decrease which would have resulted from such transaction if the transaction were allowed for federal tax purposes.

    1. The maximum penalty for failure to report a listed transaction is $200,000 for an entity or $100,000 for an individual.

    2. The maximum penalty for failure to report any other reportable transaction is $50,000 for an entity or $10,000 for an individual.

    3. The minimum penalty for failure to report any reportable transaction is $10,000 for an entity or $5,000 for an individual.

    Failure to disclosure a penalty under IRC 6707A(a) in a report required to be filed under section 13 or 15(d) of the Securities Exchange Act of 1934 is treated as a failure to which the penalty under IRC 6707A(b)(2) applies. See IRC 6707 A(e). See Rev. Proc. 2005–51 for additional information about the penalty under IRC 6707A(e).

    1. The maximum penalty is $200,000 if the penalty described above is for failure to disclose a listed transaction.

    2. The maximum penalty is $50,000 if the penalty described above is for failure to disclose any other reportable transaction.

    3. The minimum penalty is $10,000 for failure to disclose any reportable or listed transaction.

20.1.6.17.2  (05-16-2012)
Operating Division IRC 6707A Functional Procedures

  1. The operating division functional procedures are located at the following websites.

    1. SB/SE Examination: http://mysbse.web.irs.gov/exam/tip/ajca/default.aspxAJCA Penalties

    2. LB&I: http://lmsb.irs.gov/search/lmsbGoogleSearch.asp?site=lmsb.irs.gov&query=6707A IRC 6707APenalty Investigation—LBI

    3. TE/GE: http://tege.web.irs.gov/article.asp?category=job&title=atat-pocedures-and-guidance&path=/my-job, ATAT Procedures and Guidance

20.1.6.17.3  (05-16-2012)
Definitions

  1. Reportable transaction: The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under IRC 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

  2. Listed transaction: The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of IRC 6011.

20.1.6.17.4  (09-10-2013)
Rescission Request

  1. See IRM 4.32.4, IRC 6707A Penalty for Failure to Income Reportable Transaction Information With Return.

  2. There is no judicial appeal. Notwithstanding any other provision of law, any determination may not be reviewed in any judicial proceeding.

20.1.6.17.5  (05-16-2012)
Coordination With Other Penalties

  1. The IRC 6707A penalty is in addition to any other penalty that may be imposed, and applies without regard to whether the transaction ultimately results in an understatement.

20.1.6.17.6  (09-10-2013)
Appeal Rights

  1. See IRM 4.32.4, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.

20.1.6.17.7  (09-10-2013)
Statute of Limitations

  1. See IRM 4.32.4, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.

  2. The operating division's functional procedures should be reviewed for additional instructions regarding the statute of limitations. See IRM 20.1.6.17.2.

  3. See IRM 4.32.4.1.4, Statute of Limitations—General Information, for additional guidance.

20.1.6.18  (09-17-2010)
Failure to Maintain Lists of Advisees With Respect to Reportable Transactions—IRC 6708

  1. Under IRC 6112(a), Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc., each material advisor with respect to a reportable transaction shall (whether or not required to file a return under IRC 6111 with respect to such transaction) maintain a list that includes the following:

    1. Identifies each person with respect to whom the advisor acted as a material advisor with respect to the reportable transaction, non-listed transaction, and

    2. Contains other information as may be required by the Secretary.

  2. The Secretary may prescribe regulations which provide that, in cases in which two or more persons are required to maintain the same list, only one person would be required to do so.

20.1.6.18.1  (05-16-2012)
LB&I and SB/SE Functional Guidance

  1. Under no circumstances should an examiner start a material advisor examination without documented approval from the LDC for SB/SE and TE/GE and TTSPC for LB&I.

  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_Practitioners.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 This website, 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.

  5. The SB/SE LDC processes referrals concerning material advisors. The LDC evaluates referrals based on established criteria and authorizes IRC 6708 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP for assignment to the field.

  6. LB&I functional guidance and procedures for IRC 6707 and IRC 6708, material advisor investigations include the following:

    1. OTSA has responsibility for making referrals of suspected promoters of abusive tax avoidance transactions and material advisors to the LB&I TTSPC (formerly known as the 6700 committee).

    2. The committee considers these referrals and may authorize a promoter and or material advisor examination, as appropriate.

    3. Revenue agents must report suspected cases of material advisor and or promoter activity to OTSA. They forward their findings, along with supporting documentation, to the OTSA designated senior analyst.

    4. OTSA will review and develop these referrals; and those that meet the criteria set forth by the TTSPC will be recommended to the committee for audit consideration.

    5. Only the TTSPC may authorize a material advisor and or promoter examination.

    6. Under no circumstances should an examiner start a material advisor and or promoter examination without sanction from the TTSPC. Please review guidance concerning the type of information that should be gathered before referring an entity or individual for a material advisor and or promoter examination.

    7. The LB&I OTSA link is http://lmsb.irs.gov/hq/pftg/otsa/ResourcesInfo/Promoters_Practitioners.asp

20.1.6.18.2  (09-17-2010)
Penalty Computation

  1. IRC 6708 imposes a penalty on any person required to maintain a list under IRC 6112(a), Material Advisors of Reportable Transactions Must Keep List of Advisees, Etc., who fails to make such list available.

  2. A material advisor who fails to make the list available upon written request by the Secretary within 20 business days after the request will be subject to a penalty of $10,000 for each day of such failure after the 20th business day.

20.1.6.18.3  (09-17-2010)
Penalty Relief

  1. The penalty does not apply for any day where the failure to comply is due to reasonable cause.

20.1.6.18.4  (09-17-2010)
Effective Date

  1. IRC 6112, as amended by the American Jobs Creation Act of 2004 (AJCA), requires a material advisor to maintain a list identifying each person with respect to whom the advisor acted as a material advisor with respect to a transaction (and such other information as required by regulations) and applies to transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004.

  2. IRC 6708, as amended by the AJCA, imposes a penalty for a material advisor's failure to maintain a list under IRC 6112 and applies to requests for such lists made after October 22, 2004.

20.1.6.18.5  (09-17-2010)
Statute of Limitations

  1. IRC 6708 penalties are not subject to a statutory period of limitation. Sage v. United States, 908 F.2d.18 (5th Cir. 1990); Mullikin v. United States, 952 F.2d. 920 (6th Cir. 1991), cert. denied 506 U.S. 827 (1992); Capozzi v. United States, 980 F.2d. 872 (2d. Cir.1992).

20.1.6.18.6  (05-16-2012)
Appeals

  1. See IRM 4.32.2.11.7.2, Promoter Rights for IRC 6707 and IRC 6708.

20.1.6.18.7  (09-17-2010)
Referrals to Office of Professional Responsibility

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

20.1.6.19  (09-10-2013)
Appeal Rights

  1. Material advisor penalties (IRC 6707 and IRC 6708) have been designated as appeals coordinated issues (ACI). In general, taxpayers and tax return preparers are entitled to one administrative appeal with Appeals. See Treas. Reg. 601.106, Appeals Function. The appeal process differs depending on the penalty involved.

  2. IRC 6694 and IRC 6695 preparer penalties were redesignated, on August 28, 2011, to Appeals Coordination Issue Category of Case (ACIcc) from ACI. Appeals officers are no longer required to obtain review and concurrence by a technical guidance coordinator prior to making a determination of the amount of the penalty.

  3. Preparer and material advisor penalties may be the subject to Rev. Proc. 2003-40, LMSB Appeals Fast Track Settlement Procedure Mediation, and Rev. Proc. 2003-41, SB/SE–Appeals Fast Track Mediation Procedure. Also, Announcement 2011–5, Extension of Fast Track Settlement for SB/SE Taxpayers Pilot Program, procedures may be considered by Appeals during the course of a Collection Due Process hearing. See IRC 6320, Notice and Opportunity for Hearing Upon Filing of Notice of Lien, and IRC 6330, Notice and Opportunity for Hearing Before Levy.

  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.

20.1.6.19.1  (05-16-2012)
Pre-Assessment Appeal Rights—IRC 6694, IRC 6695, IRC 6707A, and IRC 6713

  1. Treas. Reg. 1.6694-4(a)(1) allows for pre-assessment appeal rights of IRC 6694 penalties. Although the regulation only relates to IRC 6694 penalties, examiners will follow the same guidelines for IRC 6695 penalties. IRC 6694, IRC 6695, and IRC 6713 penalties will have pre-assessment appeal rights.

  2. Examination sends the return preparer a 30-day letter, Letter 1125, Transmittal of Examination Report, with an examination report and Pub 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 6694, IRC 6695, and IRC 6713 penalties.

  3. Short statute cases

    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 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 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 20.1.6.21, Statute Of Limitations.

  4. See IRM 20.1.6.17.2, Operating Division IRC 6707A Functional Procedures.

  5. See IRM 20.1.6.17.6, Appeal Rights.

20.1.6.19.2  (05-16-2012)
Post-Assessment Appeal Procedures

  1. There are post-assessment appeal rights for IRC 6707 and IRC 6708 penalties.

  2. In cases where there has not been a prior hearing with Appeals, 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 6694(c) is not extended by a post-assessment appeal.

20.1.6.19.3  (05-16-2012)
Denial of Claim No Prior Appeals Hearing

  1. If a return preparer or promoter has not had a hearing with Appeals and files a claim for refund of assessed penalties, the return preparer or promoter may request, and will be granted, an appeals hearing after the proposed denial of the claim.

20.1.6.19.4  (05-16-2012)
Denial of Claim Prior Appeals Hearing

  1. Return preparers for IRC 6694, IRC 6695, and IRC 6713 penalties are currently permitted to request an appeals hearing if they file a claim and the claim is disallowed, even if the case was previously considered by Appeals in pre-assessment status.

20.1.6.19.5  (05-16-2012)
Appeals for Special Claims

  1. 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 procedural rules set forth in Treas. Reg. 601.106(b) of the statement of procedural rules. An appeal should not be based on moral, political, constitutional, religious, or similar arguments.

  2. See IRM 20.1.6.23.1, Special Claim—IRC 6694, IRC 6700 and IRC 6701.

20.1.6.20  (09-17-2010)
Affidavits Overview

  1. An affidavit is a person's written declaration or statement of facts voluntarily made and confirmed by oath or affirmation before a person with authority for administering it. Affidavits relating to the return preparer program will usually be taken from taxpayers.

  2. Affidavits are not used routinely in return preparer cases; however, affidavits are recommended in all cases where the Service may ask the Department of Justice to seek an injunction. The affidavit will facilitate the filing of a suit, obtaining a preliminary injunction, and an early hearing. Form 2311, Affidavit, can be used for this purpose. See also IRM 4.16.1.3.2.1, Securing Affidavits.

  3. The affidavit should identify and incorporate the following:

    1. The judicial district involved.

    2. The name, TIN, business and home address, and business and home telephone numbers of the witness.

    3. Persons present during the interview and their relation to the investigation.

    4. Tax periods involved.

    5. Specific portions of the return that are false or fabricated, if any.

  4. The affidavit should include other relevant information pertaining to the preparer including the following:

    1. Actions taken by the preparer when informed of the client's examination (e.g., preparer offered to supply false documents to support false deductions, the preparer told the client to ignore the IRS, etc.).

    2. Experience of the preparer in preparing returns.

    3. Education of the preparer.

    4. Where the preparer is or was working.

    5. How the preparer solicits clients and whether the preparer is currently soliciting clients.

  5. Examiners should make the following determinations and include them in the affidavit.

    1. How and when the taxpayer met the person under investigation.

    2. The specific information that the taxpayer gave to the person under investigation, and how and when that information was given.

    3. Whether the taxpayer signed the return, has seen the return, was provided a copy of the return, and had the return explained to them.

    4. If the person under investigation was paid and how the fee was determined (e.g., a set fee, percent of the refund, etc.).

    5. How the fee was paid (e.g., cash, check, money order, barter, etc.).

    6. When the fee was paid (e.g., when the information was provided, after the return was completed, after the refund was received, etc.).

    7. Whether the taxpayer asked the preparer to put false items on the return or claim.

20.1.6.21  (09-10-2013)
Statute of Limitations

  1. The statute of limitations on assessment of penalties depends on the affected code section.

    1. IRC 6694(a) and IRC 6695 expire three years from the later of the due date of the underlying related return or the date the return was filed.

    2. There is no statute of limitations on assessment for IRC 6694(b), IRC 6700, IRC 6701, IRC 6708, and IRC 6713 penalties.

    3. If a person required to register a tax shelter failed to file the Form 8264, Application for Registration of a Tax Shelter, or its successor (Form 8918, Material Advisor Disclosure Statement), IRC 6707(a)(1)(A) penalties may be assessed at any time.

    4. Former IRC 6707(b)(2) penalties for failing to include a tax shelter registration number on a return must be assessed within 3 years of filing the return with the missing identification number.

    5. IRC 6707 penalties (as amended effective 10/22/04) must be assessed within 3 years of the filing of the Form 8264, Application For Registration of a Tax Shelter, or its successor (Form 8918).

    6. IRM 20.1.6.17.7 for IRC 6707A statute of limitations guidance.

    7. There is no statute of limitations on actions to enjoin preparers or promoters under IRC 7407 or IRC 7408.

  2. CAUTION: Extending the statute using Form 872, Consent to Extend the Time to Assess Tax, on a taxpayer's return does not extend the statute for the return preparer penalty case.

  3. The statute on a return preparer penalty case under IRC 6694(a) and IRC 6695 can be extended using Form 872-D, Consent to Extend the Time on Assessment of Tax Return Preparer Penalty. See Rev. Rul. 78-245, IRB 1978-1 C.B. 35.

  4. A transcript of the underlying return that the preparer penalty is based upon should be included in the preparer penalty case file for accurate monitoring of the statute expiration date.

  5. Consents should be obtained when the statute of limitations for assessing the preparer penalty will expire within 180 days and there is insufficient time to complete the examination. Also, the statute for assessment must be extended if the preparer requests to go to Appeals and there is less than 180 days remaining on the statute for assessment, when received by Appeals. Ample time for processing is important because deficiency procedures do not apply to preparer and promoter penalties.

  6. A separate consent should generally be obtained for each taxable period under consideration, but the related taxpayer returns for which the penalties are applicable can be included on each consent.

  7. See IRM 25.6.22.6.15, Preparer Penalty, and IRM 25.6.1.9.13.3, The Period of Assessment, for further information.

  8. See IRM 4.4.25.7, Quick Assessments on Civil Penalties, Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, Area Office Group Procedures, for procedures when the ASED is less than 60 days. Per IRM 4.4.25.8, Quick Assessments on Civil Penalties, Form 8278, CCP Procedures, CCP prepares Form 2859, Request for Quick or Prompt Assessment.

20.1.6.22  (05-16-2012)
Third Party Contacts—IRC 7602(c)

  1. IRC 7602(c), Notice of Contact of Third Parties, requires that before Service employees initiate contact with third parties for the determination or collection of a taxpayer's tax liability, the taxpayer must be given reasonable notice in advance that third parties may be contacted. IRC 7602(c) also requires the Service to make a record of persons contacted and provide that record to the taxpayer both periodically and upon the taxpayer's request. See third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx for general examination procedures on third party contacts. In certain situations the notice and recordkeeping requirements of IRC 7602(c) may apply to contacts made to determine the applicability of return preparer penalties because these penalties are treated as a tax under IRC 6671, Rules for Application of Assessable Penalties. When IRC 7602(c) applies it is indicated below with reference to specific Code provisions.

  2. During a routine examination, mandatory pro forma inquiries addressed to the taxpayer regarding the preparer's compliance with IRC 6695(a) and IRC 6695(f) are not third party contacts.

    1. The notice requirements of IRC 7602(c) are not immediately triggered if the taxpayer's response to pro forma questions asked as part of a routine examination provides a basis for conducting a preparer penalty investigation.

    2. If the taxpayer indicates that the preparer did not provide a copy of the return and or the preparer negotiated the refund check, examiners should briefly confirm and record the response, discontinue inquiry on the issue, and continue with the examination of the return. Contact the preparer to determine if IRC 6695(a), and or IRC 6695(f), penalties apply. If further contact with the taxpayer regarding the determination of a preparer penalty is necessary, review the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx,. Notification is now required since contact with the taxpayer is a third party contact with respect to a determination of the preparer's liability for a penalty.

  3. IRC 6695(g) compliance visits with preparers to determine the due diligence requirement for the earned income credit are not third party contacts.

  4. During routine examinations, the preparer penalty issue under IRC 6694 is usually not subject to third party notification and recordkeeping requirements. See IRM 4.11.57 , Third Party Contacts, for general guidelines for Examination cases.

    1. Criteria for applying IRC 6694 penalties unreasonable positions, willful attempts to understate the liability, reckless or intentional disregard of rules and regulations are decided by the character of the adjusted return positions and the preparer's part in the noncompliance.

    2. Information on the applicability of preparer penalties is often a by-product of an examination and does not always require examiners to directly address the taxpayer as a third party for information on the preparer's conduct. The notice requirements of IRC 7602(c) are not immediately triggered by a taxpayer's response that provides a basis for conducting a preparer penalty investigation. For example, in order to account for an erroneous return position and determine if an IRC 6662, Imposition of Accuracy-related Penalty on Understatements, penalty applies against the taxpayer, examiners may ask taxpayers what information was given to the preparer and to what extent the preparer was informed of all relevant, underlying facts.

    3. Information from the taxpayer in response to a proposed IRC 6662 penalty may indicate that the advice exception applies. See Treas. Reg.1.6664-4(c), Reliance on Opinion or Advice and IRM 20.1.5.6.2, Taxpayer's Effort to Report the Proper Tax Liability. Any contact with preparers to determine the applicability of the taxpayer's penalty is a third party contact. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx, for the procedures prior to any additional contacts with the preparer and record the contact.

    4. The notice and recordkeeping requirements come into effect whenever examiners address taxpayers as a third party (e.g., whenever the examiner directly asks the taxpayer for information needed for making a determination on the preparer's liability for a penalty). Before an inquiry of that nature is initiated, examiners must follow the third party contact procedures. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx and then re-contact the taxpayer.

  5. Program Action Cases—Examination contacts with program action taxpayers are considered third party contacts for purposes of making penalty determinations for the related preparer, see IRM 4.1.10.5, Third Party Notification in PACs, for the procedures. The contacts are third party contacts after the return preparer project is approved and before the related taxpayers are first contacted for examinations. Contacts with each related taxpayer must be documented.

  6. Criminal Investigations—

    1. Examiners may conduct examinations of program action taxpayers (following third party contact procedures), see IRM 4.1.10.5(6), PAC Requested in Conjunction With an Ongoing Criminal Investigation, for the procedures to follow regarding civil issues at the same time that special agents are independently conducting a criminal investigation of the related preparer.

    2. The pending criminal investigation exception under IRC 7602(c)(3)(C), Exceptions, applies to third party contacts made by special agents in CI. It also applies to examiners or other Service personnel while working under CI and assisting in a criminal investigation.

  7. IRC 6700 and IRC 6701—Contact with third parties for the purpose of the following:

    1. Investigating persons described in IRC 6700(a), Imposition of Penalty, who may be subject to a tax shelter promoter penalty, and

    2. Investigating IRC 6701 are third party contacts and are subject to IRC 7602(c) requirements. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx, for the procedures.

  8. IRC 6713—A violation regarding the prohibition on a preparer's disclosure or use of tax return information is almost always brought to the attention of the Service by the affected taxpayer. The unsolicited receipt of information from a third party is not initiated by the IRS and is not subject to IRC 7602(c) notification or reporting requirements.

  9. IRC 7407 and IRC 7408 are legal proceedings to prohibit certain conduct and are not to determine or collect tax liabilities. Therefore, IRC 7602(c) does not apply to the action to enjoin nor to referrals to Area Counsel or the Department of Justice. However, the underlying investigative actions requiring third party contacts, such as certain contacts under paragraphs (2), (4), (5), and (7) above, are subject to IRC 7602(c) requirements. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx for the procedures.

20.1.6.23  (05-16-2012)
Claims for Refund—IRC 6694, IRC 6700, and IRC 6701

  1. Preparers use Form 6118, Claim for Refund of Tax Return Preparer Penalties and Promoter Penalties, for penalties under IRC 6694 and IRC 6695.

  2. Promoters use Form 6118 to submit claims for penalties under IRC 6700 and IRC 6701.

  3. The preparer has three years from the date of payment to file a claim for preparer penalties under IRC 6694(a) and IRC 6695. See IRC 6696(d)(2), Claim for Refund, and Treas. Reg.1.6696-1(g).

  4. For IRC 6700 and IRC 6701, a claim for refund of penalties paid timely must be made within 2 years of the date paid. Preparers use Form 6118 to submit claims.

  5. When Form 6118 is submitted for IRC 6694, IRC 6695, IRC 6700, IRC 6701 claims, see IRM 21.5.3, General Claims Procedures, for processing these claims for refund.

  6. The IRC 6694 and IRC 6695 claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim. The RPC sends the claim to the examiner or the office of the examiner that asserted the return preparer penalty. Claims for other OD/BUs are sent to the RPC for the OD/BU.

  7. IRC 6700 and IRC 6701 claims for refund are sent by campus examination classification to the LDC in Laguna Niguel, CA. The SB/SE LDC will ensure the claims are reviewed by the appropriate examination personnel.

20.1.6.23.1  (09-17-2010)
Special Claim—IRC 6694, 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 for IRC 6694, IRC 6700, and IRC 6701 penalties.

    1. IRC 6694(c), Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty, and IRC 6703(c), Extension of Period of Collection Where Person Pays 15 Percent of Penalty, provide special claim for refund procedures for preparers/promoters assessed penalties under IRC 6694, IRC 6700, and IRC 6701. Form 6118 becomes a special claim when, within 30 days after the day that notice and demand is made, preparers/promoters pay 15 percent of the penalty.

    2. Under IRC 6694(c) and IRC 6703(c) collection action and the running of the statute of limitation on collection are suspended until the special claim is finally resolved administratively or judicially (e.g., 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. The examiner that receives the claim will request a transcript to validate that TC 470 CC 95 was input to stay collection activity, see IRC 6694(c) and IRC 6703(c) special claims for refund. When TC 470 CC 95 is not on the MFT 55 module for IMF or MFT 13 module for BMF for these special claims Form 3177, Notice of Action for Entry on Master File, should be completed and emailed to Collection Centralized Case Processing (CCP) for the input of the TC 470 CC 95. Use the Collection CCP electronic mailing links at the following website: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/ccpcoll/mailingprocedures/21080.aspx

      Note:

      Select the email link that corresponds to and includes the name of the Area in which you work.

      The examiner will verify the TC 470 CC 95 on the MFT 55 module for IMF or MFT 13 module for BMF special claims, and document actions taken on the case activity record.

    5. For agreed special claims the examiner completes and faxes Form 3177 for the input by collection of TC 472 CC 95, for the reversal of TC 470 CC 95. Email Form 3177 to Collection CCP using one of the electronic mailing links at the following website: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/ccpcoll/mailingprocedures/21080.aspx. The examiner should document the action taken on the case activity record.

    6. For unagreed special claims the examiner uses Form 3198, Special Handling Notice for Examination Case Processing, to flag the special claim case for the reversal of the TC 470 CC 95. The Other Instructions item will be checked in the Special Features section. The explanation is Form 3177, Notice of Action for Entry on Master File, with TC 472 CC 95 is completed by the function concluding the special claim. Email Form 3177 to Collection CCP using one of the electronic mailing links at the following website: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/ccpcoll/mailingprocedures/21080.aspx

  2. The IRC 6694 special claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim.

  3. The IRC 6700 and IRC 6701 special claims for refund are sent by campus examination classification to the SB/SE LDC in Laguna Niguel, CA. The LDC will ensure the claim is reviewed by the appropriate examination personnel.

  4. Also see IRM 4.32.2.11.8.3.2.5, Claims for Refund Procedures—SB/SE.

20.1.6.23.2  (05-16-2012)
IRC 6694(d), Abatement of Penalty Where Taxpayer's Liability Not Understated

  1. If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under IRC 6694(a) or IRC 6694(b) has been assessed, such assessment shall be abated.

  2. If any portion of such penalty has been paid, the amount so paid shall be refunded to the person who made such payment as an overpayment of tax without regard to any period of limitations.

  3. Form 6118 is used by the return preparer for IRC 6694(d), Abatement of Penalty Where Taxpayer's Liability Not Understated, claims.

    1. The examiner verifies the final administrative determination or a final judicial decision cited by the return preparer for the client’s return that the penalty was based upon and that there is currently no understatement of liability that the penalty was based upon.

    2. There is no statute of limitations for these claims.

20.1.6.23.3  (05-16-2012)
Campus Claim Processing

  1. When Form 6118 is submitted for IRC 6694, IRC 6695, IRC 6700, or IRC 6701 claims, see IRM 21.5.3 for processing of these claims for refund.

  2. The IRC 6694 and IRC 6695 claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim.

  3. The IRC 6700 and IRC 6701 claims for refund are sent by campus examination classification to the SB/SE LDC in Laguna Niguel, CA.

  4. Two attempts by campus examination classification are made to request the administrative file before forwarding the claim to the appropriate office above.

  5. Campus examination classification coordinates with Accounts Management for the input of TC 470 to stay collection activity for IRC 6694(c) and IRC 6703(c) special claims for refund.


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