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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 6. Preparer, Promoter, Material Advisor Penalties (Cont. 2)

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

20.1.6.12 
Penalty for Promoting Abusive Tax Shelters - IRC 6700

20.1.6.12.6 
Appeal Rights

20.1.6.12.6.1  (09-17-2010)
Statute of Limitations

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

20.1.6.13  (09-17-2010)
Penalties for Aiding and Abetting - IRC 6701

  1. Review IRM 20.1.6.20, Third Party Contacts - IRC 7602(c).

  2. Review IRM 20.1.6.18, Affidavits Overview.

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

  4. The penalty is for any person who:

    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 is on 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

    1. If the return, affidavit, claim, or other document relates to the tax liability of the corporation the penalty is $10,000. Otherwise the penalty is $1,000.

20.1.6.13.1  (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, targets of 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 subordinate 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. Meaning of Aid, Assist, Procure, or Advise.

    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. "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. The Senate Report adds that such direction, etc., 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.

    4. Mechanical Assistance. 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. The Senate Report also states that 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.

20.1.6.13.2  (09-17-2010)
LB&I and SB/SE Functional Guidance

  1. Under no circumstances should an IRC 6701 penalty examination be started without documented approval from the LDC for SB/SE and in LB&I, OTSA for reportable transactions or the LB&I RPC for non-reportable transactions involving tax return preparers.

  2. IRM 4.32.2, The Abusive Tax Avoidance Transactions (ATAT) 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/PromoterProcedures/Promoter_Investigation_Guidelines.asp

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

    3. SB/SE - http://abusiveshelter.web.irs.gov/LDC/FAQ.htm

  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 Areas Planning and Special Procedures Programs (PSP) unit for assignment to the field.

  6. The LB&I Office of Tax Shelter Analysis (OTSA) evaluates referrals based on established criteria and presents the referral to the Technical Tax Shelter Promoter Committee (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.

20.1.6.13.3  (09-17-2010)
Development of the Required Referral

  1. Persons subject to penalty under IRC 6701 may be identified by the following IRS employees:

    1. Field examiners through the examination process,

    2. Campus correspondence examiners,

    3. Appraisers/engineers, or

    4. Any other IRS employee who determines that the penalty might apply.

      Note:

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

  2. The referral should be sent to the Appraisal Issues Professional Responsibility Committee if it concerns any appraisal or valuation issue. The 6701 Appraiser Committee will make a recommendation to OTSA or the LDC, as appropriate, as to whether the 6701 referral should be approved for investigation. After the referral is approved for investigation, the Appraisal Issues Professional Responsibility Committee will:

    1. Ensure that an appropriate IRS Field Specialist is assigned to each referral approved for investigation,

    2. Approve and monitor the investigatory procedures of the IRS Field Specialist,

    3. Consider retaining the services of an outside expert/consultant, and

    4. Recommend IRC 6701 penalty assessments for approval by OTSA or LDC, as appropriate. For tax return preparer investigations in LB&I which do not involve a reportable transaction, approval recommendation should be routed to the LB&I RPC.

20.1.6.13.3.1  (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 (i.e., information conveyed by the taxpayer to the preparer, information known or reasonably known by the preparer, the inquiries or statements directed by the preparer to the taxpayer).

      i) For 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 must prove each of the three elements defined in IRM 4.32.2.11.1(2), Promoter Penalty Overview. In addition, 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:

    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 20.1.6.18, 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.

20.1.6.13.4  (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 I 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.

20.1.6.13.5  (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 1099 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 1099) 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 2000 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 1998 and 1999, claiming refunds for those years based on the 2000 NOL carryback. The carryback was not exhausted in 1999. Mr. E, another accountant, prepared Taxpayer D's 2001 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 2001 return.

    1. Mr. C is liable for three separate IRC 6701 penalties for his role in preparing Taxpayer D's 1998, 1999, and 2000 returns, which Mr. C knew, or had reason to know would result in understatements of Taxpayer's D's 1998, 1999, and 2000 federal income tax liabilities.

    2. Mr. E, however, was unaware of the overstatement of expenses on the 2000 return and is unaware of the understatement of tax liability on the 2001 return. Thus, Mr. E is not liable for an IRC 6701 penalty.

  5. Example 5: On January 15, 2000, 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, 1999. 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 1999.

    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 2000. 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 2000. 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 2000. The calendar year 2000, 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 2000 which is the period for which the income tax is imposed, and the calendar year 2000 which is the period for which the gift tax is imposed. Mrs. C is subject to a penalty of $2,000.

20.1.6.13.6  (09-17-2010)
Appeal Rights

  1. See IRM 20.1.6.17, Appeal Rights,

20.1.6.13.7  (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.

20.1.6.13.8  (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 the Office of Professional Responsibility is mandatory. See IRM 20.1.6.11, Office of Professional Responsibility.

20.1.6.14  (09-17-2010)
Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions - IRC 7408

  1. Review IRM 20.1.6.20, Third Party Contacts - IRC 7602(c).

  2. Review IRM 20.1.6.18, 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. Citizens and residents outside the United States. 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:

    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:

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

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

20.1.6.14.1  (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.

20.1.6.14.2  (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.

20.1.6.14.3  (09-17-2010)
Procedural Guidance

  1. See IRM 4.32.2.9, Injunctive Action, and IRM 4.32.3.6.1, Steps in an Injunctive Case, for procedural guidance.

20.1.6.14.4  (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.

20.1.6.14.5  (09-17-2010)
Statute of Limitations

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

20.1.6.15  (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), Disclosure of reportable transactions, and Treas. Reg. 1.6011-4(b)(1) is required of 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. The transactions of interest are for those entered into as of November 2, 2007.

  2. Under IRC 6111(a), Disclosure of reportable transactions, 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), Definitions, 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.

20.1.6.15.1  (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 OTSA for LB&I.

  2. IRM 4.32.2, The Abusive Tax Avoidance Transactions (ATAT) 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. They are

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

    2. SB/SE - http://abusiveshelter.web.irs.gov/LDC/FAQ.htm

    3. TE/GE - http://abusiveshelter.web.irs.gov/LDC/TEGE%20SBSE%20MOU.pdf (i) The link is to the 3/17/09 MOU 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 Areas Planning and Special Procedures Programs (PSP) unit for assignment to the field.

  6. LB&I functional guidance and procedures for IRC 6707 and IRC 6708, Material Advisor Investigations are:

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

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

    3. Revenue Agents must report suspected cases of material advisor/promoter activity to OTSA.

    4. They may do so by forwarding their findings, along with supporting documentation, to the OTSA designated Senior Analyst.

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

    6. Please note that only the committee may authorize a material advisor examination.

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

    8. The LB&I OTSA link is http://lmsb.irs.gov/hq/pftg/otsa/ResourcesInfo/PromoterProcedures/Promoter_Investigation_Guideline.asp.

20.1.6.15.2  (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:

    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.

20.1.6.15.3  (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 the Commissioner’s delegate.

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

20.1.6.15.4  (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.

20.1.6.15.5  (09-17-2010)
Appeals Rights

  1. See IRM 20.1.6.17, Appeal Rights

20.1.6.15.6  (09-17-2010)
Office of Professional Responsibility

  1. See IRM 20.1.6.11, Office of Professional Responsibility.

20.1.6.16  (09-17-2010)
Failure to Maintain Lists of Advisees with Respect to Reportable Transactions - IRC 6708

  1. Under IRC 6112(a) each material advisor with respect to a reportable transaction, listed transaction, and transaction of interest (entered into after November 2, 2007) as defined in IRC 6707A(c), Definitions, is required to maintain a list that:

    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.

20.1.6.16.1  (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 OTSA for LB&I.

  2. IRM 4.32.2, The Abusive Tax Avoidance Transactions (ATAT) 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. They are

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

    2. SB/SE - http://abusiveshelter.web.irs.gov/LDC/FAQ.htm

    3. TE/GE - http://abusiveshelter.web.irs.gov/LDC/TEGE%20SBSE%20MOU.pdf (i) The link is to the 3/17/09 MOU 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 Areas Planning and Special Procedures Programs (PSP) unit for assignment to the field.

  6. LB&I functional guidance and procedures for IRC 6707 and IRC 6708, Material Advisor Investigations are:

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

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

    3. Revenue Agents must report suspected cases of material advisor/promoter activity to OTSA.

    4. They may do so by forwarding their findings, along with supporting documentation, to the OTSA designated Senior Analyst.

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

    6. Please note that only the committee may authorize a material advisor/promoter examination.

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

    8. The LB&I OTSA link is http://lmsb.irs.gov/hq/pftg/otsa/ResourcesInfo/PromoterProcedures/Promoter_Investigation_Guideline.asp

20.1.6.16.2  (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.

20.1.6.16.3  (09-17-2010)
Penalty Relief

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

20.1.6.16.4  (09-17-2010)
Effective Date

  1. The provision requiring a material advisor to maintain an investor list applies to transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004.

  2. The provision imposing a penalty for failing to maintain investor lists applies to requests made after October 22, 2004.

20.1.6.16.5  (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).

20.1.6.16.6  (09-17-2010)
Appeals

  1. See IRM 20.1.6.17, Appeals Rights.

20.1.6.16.7  (09-17-2010)
Referrals to Office of Professional Responsibility

  1. See IRM 20.1.6.11, Office of Professional Responsibility (OPR).

20.1.6.17  (09-17-2010)
Appeal Rights

  1. There are no pre-assessment appeal rights for IRC 6700 and IRC 6701. See IRM 4.32.2.11.11.1(1), Promoter Rights for IRC 6700 and IRC 6701, after the Service assesses the penalty and issues a notice and demand are:

    1. The penalties may be appealed post-assessment if the special claim for refund procedures of IRC 6703, Rules applicable to penalties under section 6700, 6701, 6702, are followed and the claim is disallowed. See IRM 4.32.2.11.11.1(2), Promoter Rights for IRC 6700, and IRC 6701. Collection activity is suspended when a person pays at least 15 percent of the penalty and files a claim for refund within 30 days after the date of notice and demand. Late filed claims and claims based on moral, political, constitutional, religious, or similar arguments are disallowed. See IRM 4.32.2.11.11.1(3), Promoter Rights for IRC 6700 and IRC 6701, and IRM 4.32.2.11.11.1(4), Promoter Rights for IRC 6700 and IRC 6701.

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

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

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

  3. Preparer and material advisor penalties may be the subject of Fast Track Settlement, (see Rev. Proc. 2003-40, IRB 2003-1 C.B. 1044, or Fast Track Mediation (see Rev. Proc. 2003-41, IRB 2003-1 C.B. 1047 ) procedures and may also 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).

    Note:

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

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

20.1.6.17.1  (09-17-2010)
Pre-Assessment Appeals IRC 6694 and IRC 6695(g)

  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(g) penalty. IRC 6694 and IRC 6695(g) penalties will have pre-assessment appeal rights. A return preparer may appeal IRC 6695(a) through IRC 6695(f) and IRC 6713, Disclosure or Use of Information by Preparers of Returns, penalties using the post-assessment penalty appeal procedures or the denial of a claim for refund procedures.

  2. Examination sends the return preparer a 30-day Letter 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 and IRC 6695(g) penalty.

  3. Short Statute

    1. If the statutory period for assessment is about to expire and the preparer will not agree to an extension, the penalty will be assessed. If the preparer has not previously had the opportunity to request a hearing with the Office of Appeals, the preparer, upon request, will be provided post-assessment appeal rights in the same way pre-assessment appeal rights would have been provided. Examiners will advise return preparers that the period for filing a claim for refund under IRC 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 20.1.6.19, Statute Of Limitations.

20.1.6.17.2  (09-17-2010)
Post-Assessment Appeal Procedures

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

  2. There are no post-assessment appeal rights for IRC 6700 and IRC 6701, Penalties. See IRM 20.1.6.17.3, Special Claim for Refund Procedures for IRC 6700 and IRC 6701, for IRC 6703, Special Claim for Refund procedures, which apply to IRC 6700, and IRC 6701.

20.1.6.17.3  (09-17-2010)
Special Claim for Refund Procedures - IRC 6700 and IRC 6701

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

    1. Form 6118, Claim for Refund of Tax Return Preparer and Promoter Penalties, is used to file claims for refund made under these conditions.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. Under IRC 6703(c), Extension of period of collection where person pays 15 percent of penalty, collection action and the running of the statute of limitations on collection are suspended until the claim is finally resolved.

    4. IRC 6700 and IRC 6701 claims are sent by Campus Classification to the SB/SE LDC in Laguna Niguel, CA. The LDC will ensure the claim is reviewed by the appropriate examination personnel.

  2. Denial of Special Claim for Refund

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

    2. Preparers and promoters may appeal the denial of a special claim for refund. Administrative appeal rights will be granted when the basis for the claim does not conflict with Appeals function procedural rules set forth in 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.

20.1.6.18  (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. It is taken from any person having knowledge of facts and circumstances relating to a violation of law to document and validate the Service's position in applying sanctions. 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 Justice Department 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 following items should be identified and incorporated in the affidavit:

    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:

    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 also 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/claim.

20.1.6.19  (09-17-2010)
Statute of Limitations

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

    1. IRC 6694(a) and IRC 6695 expires 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, or its successor, Application for Registration of a Tax Shelter, former IRC 6707(a)(1)(A) penalties may be assessed at any time.

    4. Former IRC 6707(b)(2)(e) 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 10/22/06) must be assessed within 3 years of the filing of the Form 8264, Application For Registration of a Tax Shelter, or its successor.

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

  2. CAUTION: Extending the statute (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 Limitation period, 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.

20.1.6.20  (09-17-2010)
Third Party Contacts - IRC 7602(c)

  1. RRA 98 created IRC 7602(c), Notice of Contact of Third Parties, which 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), Notice of contact of third party, 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), Notice of contact of third party, may apply to contacts made to determine the applicability of return preparer penalties because these penalties are treated as a tax under IRC 6671. When IRC 7602(c), Notice of contact of third party, applies is indicated below with reference to specific Code provisions.

  2. IRC 6695(a) and IRC 6695(f) 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), Notice of contact of third party, 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, See, the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx,. for the procedures. 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.

    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), Notice of contact of third party, 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, Imposition of accuracy-related penalty on understatements, penalty may indicate that the advice exception applies. (See Treas. Reg.1.6664-4(c) Reliance on Opinion or Advise 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,( i.e. 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 character 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. 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:

    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), Notice of contact of third party, 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 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), Notice of contact of third party, 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), Notice of contact of third party, 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), Notice of contact of third party, requirements. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx, for the procedures.

20.1.6.21  (09-17-2010)
Claims for Refund and IRC 6694(d), Abatement of Penalty Where Taxpayer's Liability Not Understated

  1. If a return preparer or promoter has not had a hearing with the Appeals Office 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. Preparers use Form 6118, Claim for Refund of Tax Return Preparer Penalties and Promoter Penalties, for penalties under IRC 6694, IRC 6695, IRC 6700, and IRC 6701 to submit claims. The preparer has three years from the date of payment to file a claim for preparer penalties under IRC 6694, Understatement of taxpayer's liability by tax return preparer, and IRC 6695. See IRC 6696(d)(2), Claim for Refund, and Treas. Reg.1.6696-1(g).

  2. 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, Claim for Refund of Tax Return Preparer Penalties and Promoter Penalties, to submit claims.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. The IRC 6694 and IRC 6695 claims for refunds are sent by Campus Examination Classification to SB/SE Area RPC for the Area 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.

  5. 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.

  6. IRC 6694 and IRC 6700 and IRC 6701 special claim for refund procedures.

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

    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 claim is finally resolved administratively or judicially (i.e., by Appeals or by the Federal District Court).

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

    4. 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 faxed to Collection Centralized Case Processing campus for the input of the TC 470 CC 95. The FAX number is (215) 516-1555. 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 it on the activity record.

    5. For agreed Special Claims the examiner complete and FAX Form 3177, Notice of Action for Entry on Master File, for the input by Collection of TC 472 CC 95, for the reversal of TC 470 CC 95. The FAX number is (215) 516-1555 and document it on the 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. and faxed to (215) 516-1555 for processing.

20.1.6.21.1  (09-17-2010)
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 subsection (a) or (b) of IRC 6694 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, Claim for Refund of Tax Return Preparer Penalties and Promoter Penalties, Claims asserting as the basis for the refund IRC 6694(d), Abatement of penalty where taxpayer's liability not understated, are allowed for the amount paid by the preparer.

    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.

20.1.6.21.2  (09-17-2010)
Campus Claim Processing

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. The IRC 6694 and IRC 6695 claims for refunds are sent by Campus Examination Classification to SB/SE Area RPC for the Area 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 Classification are made to request the administrative file before forwarding the claim to the appropriate office above

  5. Campus 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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