20.1.6  Preparer, Promoter, Material Advisor Penalties

Manual Transmittal

September 10, 2013

Purpose

(1) To transmit revised IRM 20.1.6, Penalty Handbook, Preparer, Promoter, Material Advisor Penalties.

Background

IRM 20.1.6 provides information regarding the servicewide preparer, promoter, material advisor penalties policies and procedures.

These penalties are included within IRC Chapter 68, Subchapter B, Assessable Penalties, and are not return related penalties. They are not subject to deficiency procedures.

Material Changes

(1) Minor editorial changes have been made throughout this IRM. Web site addresses, legal references, and IRM references were reviewed and updated as necessary.

(2) Significant changes to this IRM are as follows:

Reference Description of Change
IRM 20.1.6.1.1.2 (1) Updated to reflect guidance regarding managerial approval for assessment of penalties.
IRM 20.1.6.1.1.2 (6) Added "note" regarding form of signature, e.g., handwritten or digital through Adobe PDF.
IRM 20.1.6.2.2 (1) Added "note" regarding applicability of Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, to preparer penalty no-change cases.
IRM 20.1.6.5.6 Added additional information regarding the application of IRC 6695(f), Negotiation of a Taxpayer's Refund Check.
IRM 20.1.6.6 Edited definition of program action case to coincide with IRM 4.1.10.3, Program Action Cases Overview (PAC).
IRM 20.1.6.9.1 (2) Updated to reflect guidance regarding managerial approval for assessment of penalties.
IRM 20.1.6.9.1 (3) Added guidance for the terminal operators when reviewing Form 8278.
IRM 20.1.6.9.1 (4) Added guidance that indicates the terminal operator must enter his or her name in Block 12a of Form 8278 once they verify the required signatures where present.
IRM 20.1.6.12.2 (3) Updated to reflect that Office of Professional Responsibility (OPR) may impose a monetary penalty.
IRM 20.1.6.12.3 (12) and (13) Updated references to revised Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility.
IRM 20.1.6.17 (2)
IRM 20.1.6.17.4 (1)
IRM 20.1.6.17.6 (1)IRM 20.1.6.17.7 (1)
Incorporated IPU 12U1407 issued 07-24-2012 which directed staff to new IRM 4.32.4IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return. Also, incorporated IG SBSE-04-0911-085 by referencing staff to IRM 4.32.4 where this content was incorporated.
IRM 20.1.6.19 (3) Added reference to Announcement 2011–5, Extension of Fast Track Settlement for SB/SE Taxpayers Pilot Program for preparer and material advisor penalties.
IRM 20.1.6.21 (8) Added reference to IRM 4.4.25.7, Quick Assessments on Civil Penalties, Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, Area Office Group Procedures, procedures when the ASED is less than 60 days. and IRM 4.4.25.8, Quick Assessments on Civil Penalties, Form 8278, CCP Procedures, regarding CCP's responsibility to prepare Form 2859.

Effect on Other Documents

This IRM supersedes IRM 20.1.6 dated May 16, 2012, and it incorporates IPU 12U1407, issued 07–24–2012; IPU 12U1534, issued 08–27–2012; and Interim Guidance SBSE-04–0911–085, Updated Interim Guidance on IRC Section 6707A Penalty.

Audience

All operating division employees that work with penalties.

Effective Date

(09-10-2013)

Bradley Bouton
Director, Exam Policy
Small Business/Self-Employed

20.1.6.1  (09-10-2013)
Introduction

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

  2. The IRS has penalty and injunctive authority to address improper tax return preparation and abusive transaction promoters. The Internal Revenue Code (IRC) contains penalties to stop fraudulent, unscrupulous, and or incompetent tax return preparers, abusive transaction promoters, and material advisors that fail to furnish information or maintain lists with respect to reportable transactions. Penalty assertion is one enforcement vehicle for noncompliant return preparers, promoters, and material advisors.

  3. Preparer, promoter, and material advisor penalties are important tools for the IRS to collect, at the least cost, the proper amount of tax revenue . Penalties provide the Service with an important tool to achieve that goal because they enhance voluntary compliance by taxpayers. See IRM 1.2.20.1.1, Policy Statement 20–1 (Formerly P-1–18).

  4. Some divisional IRMs provide supplemental guidance that addresses preparer, promoter, and material advisor penalties.

20.1.6.1.1  (09-17-2010)
Responsibility

  1. IRM 20.1.6 provides servicewide policy for the administration of return preparer penalties, promoter penalties, and material advisor penalties.

  2. IRS operating divisions/business unit (OD/BU) functions may develop additional guidance or reference materials for their specific OD/BU functional administrative needs. These reference materials must receive approval from Office of Servicewide Penalties (OSP) prior to distribution and must remain consistent with the following:

    1. The procedures set forth in this IRM, and

    2. The philosophy of Policy Statement 20-1. See IRM 1.2.20.1.1.

  3. Overall responsibility for the penalty programs is assigned to OSP. OSP is a matrix organization residing in SB/SE Examination Division, Examination Policy. OSP is charged with coordinating policy and procedures concerning the administration of penalty programs and ensuring consistency with the penalty policy statement.

  4. Every function in the IRS has a role in proper return preparer penalties, promoter penalties, and material advisor penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance.

  5. Examiners should keep the following objectives in mind when handling each return preparer penalty, promoter penalty, and material advisor penalty case:

    1. Each taxpayer should have the opportunity to have his or her interests heard and considered.

    2. Strive to make a good determination in the first instance. A wrong decision, even though eventually corrected, has a negative impact on voluntary compliance.

    3. Provide opportunity for incorrect decisions to be corrected.

    4. Treat each case in an impartial and honest way.

    5. Use each return preparer penalty, promoter penalty, and material advisor penalty case as an opportunity to educate the taxpayer, help the taxpayer understand his or her legal obligations and rights, assist the taxpayer in understanding his or her procedural rights, and observe the taxpayer’s procedural rights.

    6. Endeavor to promptly process and resolve each taxpayer’s case.

20.1.6.1.1.1  (09-17-2010)
Fair and Consistent Approach to Penalty Administration

  1. The IRS’s approach to return preparer penalties, promoter penalties, and material advisor penalties administration must ensure the following:

    1. Consistency: The IRS should apply the return preparer penalty, promoter penalty, and material advisor penalty equally in similar situations. Taxpayers base their perceptions about the fairness of the system on their own experience and the information they receive from the media and others. If the IRS does not administer penalties uniformly (guided by the applicable statutes, regulations, and procedures) overall confidence in the tax system is jeopardized.

    2. Accuracy: The IRS must arrive at the correct decision for each penalty decision. Accuracy is essential. Erroneous penalty assessments and incorrect calculations confuse taxpayers and undermine the overall competency of the IRS.

    3. Impartiality: IRS employees are responsible for administering penalties in an even-handed manner that is fair and impartial to both the government and the taxpayer.

    4. Representation: Taxpayers must be given the opportunity to have their interests heard and considered. Employees need to take an active and objective role in case resolution so that all factors are considered.

20.1.6.1.1.2  (09-10-2013)
Managerial Approval for Assessment of Penalties

  1. IRC 6751(b), Approval of Assessment, provides, in general, that no penalty under the Code shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher-level official as the Secretary may designate. This provision is effective for notices issued and penalties assessed after June 30, 2001. At this time, the Secretary has not designated any higher-level official for notices issued and penalties assessed to approve initial determinations. The procedural requirements provided in IRC 6751 do not apply to any addition to tax under IRC 6651, IRC 6654, or IRC 6655; or any other penalty automatically calculated through electronic means.

    Note:

    Before signing, the examiner’s immediate supervisor must perform a meaningful review of the penalty determination. The supervisor should verify penalties are fairly imposed, accurately computed, properly asserted, and the conclusions are proper. After completing the meaningful review, approval of the determination must be documented with the supervisor's signature. A signature, whether handwritten or a digital signature through Adobe PDF, which indicates the immediate supervisor’s approval of the penalty, is sufficient to meet the requirements. An acting manager with an approved Designation to Act is considered an immediate supervisor for the purpose of IRC 6751. Also see IRM 20.1.1.2.3, Managerial Approval For Penalty Assessments.

  2. To ensure there is not an already open program action case (PAC) or criminal investigation, the examiner should contact the return preparer coordinator (RPC) prior to going forward with the penalty investigation.

  3. In the course of a taxpayer's examination, if the examiner determines a separate return preparer investigation is warranted, the examiner must secure managerial approval. When the determination is made that the return preparer may be responsible for the understatement of tax, the examiner, in Lead Sheet 300–Penalty Approval Form, or its functional equivalent, should check the "yes" box in the preparer section under "Consider Penalty." The manager should then sign the lead sheet, or its functional equivalent, indicating approval of the penalty.

  4. If the manager approves the penalty investigation, the separate penalty examination case will be controlled and established on Examination Returns Control System (ERCS) or the Reporting Compliance Case Management System (RCCMS) for TE/GE cases.

  5. Form 5809, Preparer Penalty Case Control Card, is completed for operating divisions using ERCS. Form 5809 is signed by the manager and retained in the preparer penalty case file.

    Note:

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

  6. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, requires that both the originator and manager sign and date the form. If the Form 8278 is not signed by both the manager and the originator, the form and associated case file should be returned to the sender using Form 3210, Document Transmittal, procedures. Expedited handling is required for imminent statute cases.

20.1.6.2  (09-17-2010)
Penalty Case

  1. Reminders for Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

20.1.6.2.1  (09-17-2010)
Penalty Reference Numbers

  1. The applicable penalty reference number (PRN) is provided on Form 8278. Therefore, it is crucial that the examiner always use the most current version of the form available from the Electronic Publishing Services catalog.

  2. The PRN is used to generate the notice language the taxpayer receives.

  3. The PRN is used to assess the penalty on Master File by posting a TC 240 on either MFT 13 for BMF entities or MFT 55 for IMF entities.

  4. The notice the taxpayer receives is the IRC 6671, Rules for Application of Assessable Penalties, required notice and demand for payment to the taxpayer that provides an explanation of the penalty being assessed (or reference the explanation provided by the examiner), the amount due, and the other actions available.

20.1.6.2.2  (09-10-2013)
No-Change and Discontinued Investigation Cases

  1. When completing Form 8278, Column 9(c) should be blank for no-change and discontinued investigation cases. In addition, Column 9(d) corresponding to the affected penalty, should be 0.00.

    Note:

    These instructions apply to all preparer penalty, promoter penalty and material advisor penalty no-change cases discussed in this IRM.

  2. The Form 8278, Item 9(d) of 0.00 results in the PRN with a 0.00 amount posting to the MFT 55 (for IMF entities) or MFT 13 (for BMF entities) Civil Penalty Master File and the DLN of the administrative case file.

    Note:

    This does not apply to program action cases. See IRM 4.1.10.3, Program Action Cases Overview (PAC).

20.1.6.2.3  (05-16-2012)
Civil Penalty Name Line

  1. Form 2363, Master File Entity Change, is not required to establish the civil penalty name line when the related MFT 30 filing status is married filing joint (MFJ).

  2. Form 8278 Item 1, Name of Taxpayer (single name) is used to establish the civil penalty for all MFT 55 accounts including taxpayers with an MFT 30, MFJ filing status.

  3. The civil penalty name line is automatically established using Form 8278, Items 1, 2, 3, 5, and 7 when there is an entity module.

    1. Use IMFOL "E" for IMF and BMFOL "E" for BMF to verify there is an entity module for non-filers.

    2. When there is not an entity module, complete Form 2363, Trans. Code 000, to create an entity. Complete the name, address, and EIN or SSN. Send to Centralized Case Processing (CCP) two weeks before closing the case.

20.1.6.2.4  (05-16-2012)
Soliciting Examination Payment

  1. See IRM 4.20.3.2, Tiered Interview Approach, for guidelines for using the tiered interview approach for soliciting payment, securing levy source information, and coordinating with Collection.

20.1.6.3  (05-16-2012)
Overview—Preparer, Promoter, Material Advisor, and Failure to Disclose Reportable Transaction Penalties

  1. There are four categories of penalties addressed in this IRM subsection. They are as follows:

    • Preparer penalties and actions to pursue injunction

    • Promoter penalties and action to pursue injunction

    • Material advisor penalties

    • Failure to disclose reportable transaction penalties

20.1.6.3.1  (05-16-2012)
Preparer Penalties and Action to Pursue Injunction

  1. Preparer penalties and actions to enjoin are as follows:

    • IRC 6694, Understatement of Taxpayer's Liability by Tax Return Preparer

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

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

    • IRC 6713, Disclosure or Use of Information by Preparers of Returns

    • IRC 7407, Action to Enjoin Tax Return Preparers

20.1.6.3.2  (09-17-2010)
Promoter Penalties and Action to Pursue Injunction

  1. Promoter penalties and actions to enjoin are as follows:

    • IRC 6700, Promoting Abusive Tax Shelters, Etc.

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

    • IRC 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions

20.1.6.3.3  (09-17-2010)
Material Advisor Penalties

  1. Material advisor penalties are IRC 6707, Failure to Furnish Information Regarding Reportable Transactions, and IRC 6708, Failure to Maintain Lists of Advisees With Respect to Reportable Transactions.

20.1.6.3.4  (05-16-2012)
Failure to Disclose Reportable Transaction

  1. The failure to disclose reportable transaction penalty is IRC 6707A, Penalty for Failure to Include Reportable Transaction Information With Return.

20.1.6.4  (05-16-2012)
IRC 6694 Understatement of Taxpayer's Liability by Tax Return Preparer

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

  2. Estate and gift tax attorneys and LB&I, SB/SE, and TE/GE examiners should determine if tax return preparer penalties are warranted. The determination is based on all the facts and circumstances of the case including both oral testimony and written evidence developed during the examination process of the tax return prepared by the tax return preparer for his or her client.

  3. Campus examination operations return preparer scheme referral procedures are in IRM 4.19.10.6, Return Preparer Scheme Identification.

  4. Determining whether or not to proceed with a preparer penalty investigation is documented on the penalty lead sheet of the examination return preparer’s client case file. The penalty lead sheet for SB/SE Examination is 300—Penalty Approval Form. Estate and gift tax examiners should use the penalty lead sheet in the Notebook Job Aid. Other BUs may use a functional equivalent. This lead sheet documents whether a return preparer penalty was considered. Disclosure guidelines preclude reference to an examination of another taxpayer in the return preparer’s client case file. When the determination is made that the return preparer may be responsible for the understatement of tax the response in lead sheet 300–Penalty Approval Form, or its functional equivalent under the preparer section is to check "yes" in the box "Consider Penalty." Examiners must discuss their recommendations with their manager and secure managerial approval before initiating a return preparer penalty investigation. See IRM 20.1.6.1.1.2 for additional information regarding the documentation of approval by managers for penalties.

    Note:

    Campus examination employees will document their return preparer penalty determination on Form 4700, Examination Workpapers.

  5. If the manager approves the penalty investigation, the separate penalty examination case will be controlled and established on ERCS. Form 5809, Preparer Penalty Case Control Card, for operating divisions using ERCS. Form 5809 is signed by the manager and retained in the preparer penalty case file.

    Note:

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

20.1.6.4.1  (05-16-2012)
IRC 6694 Penalties That May Apply to a Tax Return Preparer

  1. This section includes the following:

    • IRC 6694(a), Understatement Due to Unreasonable Positions

    • IRC 6694(b), Understatement Due to Willful or Reckless Conduct

    Note:

    See Training Publication 26809-001, Return Preparer Penalties—IRC 6694 and IRC 6695 (Student Guide), Catalog Number 20189I, at http://core.publish.no.irs.gov/trngpubs/pdf/20189f09.pdf

    .

20.1.6.4.2  (05-16-2012)
Tax Return Preparer Defined

  1. Section 8246 of The Small Business Work Opportunity Tax Act of 2007 (SBWOTA) amended IRC 7701(a)(36), Tax Return Preparer, expanding the definition of tax return preparer for periods after May 25, 2007, to any person (including a partnership or corporation) who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of a tax return or claim for refund.

  2. For periods prior to May 26, 2007, the definition of a tax return preparer is limited to income tax return preparers.

  3. Treas. Reg. 301.7701–15(a) and various revenue rulings provide information on the definition of a tax return preparer, including nonsigning preparers.

  4. Treas. Reg. 301.7701–15(f) provides guidance on persons who are not tax return preparers.

  5. See Lesson 1 of Training Publication 26809—001, Return Preparer Penalties—IRC 6694 and IRC 6695, Catalog Number 20189I at http://publish.no.irs.gov/cat12.cgi?request=CAT1&=20189f for additional information.

  6. A nonsigning preparer who prepares a schedule or entry or portion that constitutes a substantial portion of the return may be considered a tax return preparer. In making the decision as to what constitutes a "substantial portion," examiners should compare the length, complexity, and tax liability or refund of the entity, schedule, or portion of the return or claim of refund prepared by the nonsigning preparer to the length, complexity, and tax liability or refund of the return or claim for refund as a whole. To determine whether an individual is a nonsigning tax return preparer, see Treas. Reg. 301.7701-15(b)(2) and (3).

  7. See IRC 7701(a)(36)(B), Tax Return Preparer, for exceptions to the general definition.

20.1.6.4.3  (05-16-2012)
Firm Liability

  1. Prior to January 1, 2009, regulations encompassed a "one preparer per firm" rule that treated the signing preparer as the preparer subject to the IRC 6694 penalty. Under the prior regulations, if there is no signer in a firm, the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim is the nonsigner subject to penalty.

  2. After December 31, 2008, Treas. Reg. 1.6694-1(b) changed the rule under previous regulations. In the course of identifying the individual who is primarily responsible for the position, the IRS may advise multiple individuals within the firm that it may be concluded that they are the individual within the firm who is primarily responsible for the position. A penalty, however, may only be assessed against the individual in the firm who is the primarily responsible tax return preparer. See Treas. Reg. 301.7701-15(b)(3).

20.1.6.4.4  (09-17-2010)
Employers Subject to IRC 6694 Penalty

  1. For years after December 31, 2008, Treas. Reg. 1.6694-2(a)(2) provides that corporations, partnerships, and other firms that employ a tax return preparer may be subject to a penalty under IRC 6694(a).

  2. A firm that employs a tax return preparer subject to the penalty under IRC 6694 (or a firm in which the individual tax return preparer is a partner, member, shareholder, or other equity holder) is also subject to the penalty if, and only if the following:

    1. One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by IRC 6694(a);

    2. The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

    3. The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

20.1.6.4.5  (05-16-2012)
Rev. Proc. 2009-11 Section 3

  1. Rev. Proc. 2009-11, Section 3, Returns and Claims for Refund Subject to the Section 6694 Penalty, identifies categories of returns to which the penalties under IRC 6694 apply. The categories are as follows:

    1. Income Tax Returns–Subtitle A (e.g., Form 1040, U.S. Individual Income Tax Return, Form 1041, U.S. Income Tax Return for Estates and Trusts, Form 1120, U.S. Corporation Income Tax Return)

    2. Estate and Gift Tax Returns–Subtitle B (e.g., Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return)

    3. Employment Tax Returns–Subtitle C (e.g., Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, Form 941, Employer's Quarterly Federal Tax Return, Form 943, Employer's Annual Tax Return for Agricultural Employees)

    4. Miscellaneous Excise Tax Returns–Subtitle D (e.g., Form 720, Quarterly Federal Excise Tax Return, Form 2290, Heavy Highway Vehicle Use Tax Return)

    5. Alcohol, Tobacco, and Certain Other Excise Taxes–Subtitle E (e.g., Form 8725, Excise Tax on Greenmail)

      Note:

      Rev. Proc. 2009–11 obsoletes Notice 2008–12, IRB 2008-3 280, and , Notice 2008–46, IRB 2008-18 868. Rev. Proc. 2009–11 modifies and supersedes the list of forms in Notice 2008–13, IRB 2008–3 282

      .

20.1.6.4.6  (05-16-2012)
IRC 6694(a) Standards of Conduct Required

  1. Pre-SBWOTA, Prior to May 26, 2007: For income tax returns and claims for refund filed under the following:

    1. Any part of an understatement of liability with respect to an income tax return or claim for refund was due to a position for which there was not a realistic possibility of being sustained on its merits, and

    2. A person who is an income tax return preparer with respect to that return or claim for refund knew (or reasonably should have known) of the position, and

    3. The position was not disclosed as provided in IRC 6662(d)(2)(B)(ii), or was frivolous,

    4. Then the penalty was $250 for such person with respect to such return or claim unless it is shown that there was a reasonable cause for the understatement and such person acted in good faith.

  2. Post-SBWOTA, After May 25, 2007: SBWOTA both increased the penalty amount under IRC 6694(a) and made it applicable with respect to all tax returns, amended returns and claims for refund, including estate tax returns and gift tax returns, generation-skipping transfer tax returns, employment tax returns, and excise tax returns. SBWOTA and Tax Extenders and Alternative Minimum Tax Relief Act (TEAMTRA) also changed the standards of conduct that return preparers must meet in order to avoid imposition of the IRC 6694(a) penalty. The preparer penalty under IRC 6694(a) applies to tax returns and claims for refund filed after May 25, 2007, if there is an understatement of taxpayer’s liability due to an unreasonable position; and either of the following:

    1. The position was properly disclosed, but there was no reasonable basis for the position, or

    2. The position was not properly disclosed and there was not substantial authority for the position.

    SBWOTA increased the penalty applicable to IRC 6694(a), Understatement Due to Unreasonable Positions, to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to returns, amended returns and claims for refund prepared after May 25, 2007.

20.1.6.4.7  (09-17-2010)
IRC 6694(a)—Understatement Due to Unreasonable Positions

  1. The standard for disclosed position is reasonable basis.

  2. The standard for positions that are not disclosed is substantial authority if the position is not a tax shelter (as defined in IRC 6662(d)(2)(C)(ii)(I))) or a reportable transaction to which IRC 6662A, Imposition of Accuracy-related Penalty on Understatements With Respect to Reportable Transactions, applies.

20.1.6.4.7.1  (09-17-2010)
Reasonable Basis—Standard for Disclosed Position

  1. "Reasonable basis" has the same meaning as in Treas. Reg. 1.6662-3(b)(3) or any successor provision of the accuracy-related penalty regulations.

  2. Treas. Reg. 1.6662-3(b)(3) states, "Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. A return position is reasonable when using one or more of the authorities set forth in Treas. Reg. 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments)."

    Note:

    Lesson 2 of Training Publication 26809-001 provides further guidance on this issue. The website address is http://core.publish.no.irs.gov.trngpubs/pdf/20189f09.pdf

20.1.6.4.7.2  (09-17-2010)
Substantial Authority Standard for Positions Not Disclosed

  1. The substantial authority standard is less stringent than the more likely than not standard (the standard that is met when there is a greater than 50 percent likelihood of the position being upheld), but more stringent than the reasonable basis standard as defined in Treas. Reg. 1.6662-3(b)(3). See Treas. Reg. 1.6662-4(d)(2).

  2. For tax shelters and reportable transactions to which IRC 6662A, Imposition of Accuracy-related Penalty on Understatements With Respect to Reportable Transactions, applies see IRM 20.1.6.4.10, Tax Shelters and Reportable Transactions.

20.1.6.4.8  (09-17-2010)
Notices 2007-54 and Notice 2008-11

  1. Notice 2007–54, IRB 2007–27 12, and Notice 2008–11, IRB 2008–3 279, provided transitional relief for all returns, amended returns, and refund claims due on or before December 31, 2007, to advice given before December 31, 2007, and 2007 employment and excise tax returns due on or before January 31, 2008 that are filed after May 25, 2007. Also, see Notice 2009–5, IRB 2009–3 309, for further information.

    Note:

    Treasury Decision (T.D.) 9436 effective December 22, 2008, obsoletes Notice 2007–54 and Notice 2008-11. The T.D. is the final regulation implementing changes to return preparer legislation in 2007 and 2008. Announcement 2009–15 contains corrections to T.D. 9436.

20.1.6.4.9  (09-17-2010)
Adequate Disclosure Defined

  1. The criteria for adequate disclosure is defined as follows:

    1. See IRM 20.1.6.4.9.1, Signing Tax Return Preparer Adequate Disclosure.

    2. See IRM 20.1.6.4.9.2, Nonsigning Tax Return Preparer Adequate Disclosure.

  2. See Treas. Reg. 301.7701–15(b)(2) for definition of nonsigning tax return preparer.

20.1.6.4.9.1  (09-10-2013)
Signing Tax Return Preparer Adequate Disclosure

  1. Disclosure of a position for which there is a reasonable basis but for which there is not substantial authority is adequate if the signing tax return preparer meets the standard outlined in paragraphs 2, 3, or 4 below.

  2. The position is disclosed in accordance with Treas. Reg. 1.6662-4(f) on the following:

    1. A properly completed and filed Form 8275, Disclosure Statement, or Form 8275-R , Regulation Disclosure Statement, as appropriate; or

    2. On the tax return in accordance with the annual revenue procedure described in Treas. Reg. 1.6662-4(f)(2).

  3. The tax return preparer provides the taxpayer with the prepared tax return that includes the disclosure in accordance with Treas. Reg. 1.6662-4(f).

  4. For returns or claims for refund that are subject to penalties pursuant to IRC 6662, Imposition of Accuracy-related Penalty on Underpayments, other than the accuracy-related penalty attributable to a substantial understatement of income tax under IRC 6662(b)(2) and IRC 6662(d):

    1. The tax return preparer advises the taxpayer of the penalty standards applicable to the taxpayer under IRC 6662, and

    2. The tax return preparer also contemporaneously documents the advice in the tax return preparer’s files.

20.1.6.4.9.2  (09-10-2013)
Nonsigning Tax Return Preparer Adequate Disclosure

  1. Disclosure of a position for which there is a reasonable basis standard but does not satisfy the substantial authority standard is adequate if the nonsigning tax return preparer meets either of the following standards:

    1. The position is disclosed in accordance with Treas. Reg. 1.6662-4(f) on a properly completed and filed Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, as applicable; or

    2. The position is disclosed on the return in accordance with an annual revenue procedure described in Treas. Reg. 1.6662-4(f)(2).

  2. If a nonsigning tax return preparer provides advice to a taxpayer with respect to a position which there is a reasonable basis standard but does not satisfy the substantial authority standard, disclosure of that position is adequate based on the following:

    1. The tax return preparer advises the taxpayer of any opportunity to avoid penalties under IRC 6662A, Imposition of Accuracy-related Penalty on Understatements With Respect to Reportable Transactions, that could apply to the position, if relevant, and of the standards for disclosure to the extent applicable.

    2. The tax return preparer also contemporaneously documents the advice in the tax return preparer’s files. The contemporaneous documentation should reflect that the affected taxpayer has been advised by a tax return preparer in the firm of the potential penalties and the opportunity to avoid penalty through disclosure.

  3. If a nonsigning tax return preparer provides advice to another tax return preparer with respect to a position which there is a reasonable basis standard but does not satisfy the substantial authority standard, disclosure of that position is adequate based on the following:

    1. The tax return preparer advises the other tax return preparer that disclosure under IRC 6694(a) may be required.

    2. The tax return preparer also contemporaneously documents the advice in the tax return preparer’s files. The contemporaneous documentation should reflect that the tax return preparer outside the firm has been advised that disclosure under IRC 6694(a) may be required.

20.1.6.4.10  (09-17-2010)
Tax Shelters and Reportable Transactions

  1. Notice 2009–5, IRB 2009–3 309, provides that TEAMTRA’s standard of more likely than not for tax shelters and reportable transactions applies for taxable years ending after October 3, 2008.

    1. It is reasonable to believe that positions have a "more likely than not" chance of being upheld on their merits if a preparer has analyzed the pertinent facts and authorities and concluded, in good faith, that there is greater than 50 percent likelihood that the tax treatment will be upheld if the IRS challenges it.

    2. The analysis prescribed by Treas. Reg. 1.6662-4(d)(3)(ii) (or any successor provision) for purposes of determining whether substantial authority is present applies for purposes of determining whether the more likely than not standard is satisfied. Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer’s due diligence.

    3. Notice 2009–5, IRB 2009–3 309, also provides an interim compliance rule for tax shelter transactions that are not listed or otherwise reportable under IRC 6662A, Imposition of Accuracy-related Penalty on Understatements With Respect to Reportable Transactions. A position will not be deemed an "unreasonable position" if there is substantial authority for the position and the tax return preparer advises the taxpayer of the penalty standards applicable to the taxpayer.

      Note:

      These interim compliance rules do not apply to a position, described in IRC 6662A, that is a reportable transaction with a significant purpose of federal tax avoidance or evasion or a listed transaction.

20.1.6.4.11  (05-16-2012)
Reasonable Cause Exception

  1. The penalty under IRC 6694(a) will not be imposed if, considering all the facts and circumstances, it is determined that the understatement was due to reasonable cause and the tax return preparer acted in good faith. See Treas. Reg. 1.6694-2(e). A tax return preparer will be found to have acted in good faith when the tax return preparer relied on the advice of a third party who is not in the same firm as the tax return preparer and who the tax return preparer had reason to believe was competent to render the advice. The advice may be written or oral, but in either case the burden of establishing that the advice was received is on the tax return preparer. A tax return preparer is not considered to have relied in good faith if—

    1. The advice is unreasonable on its face;

    2. The tax return preparer knew or should have known that the third party advisor was not aware of all relevant facts; or

    3. The tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the tax return or claim for refund was prepared, that the advice was no longer reliable due to developments in the law since the time the advice was given.

  2. The other factors to consider include the following:

    1. Nature of the error causing the understatement: Whether the error resulted from a provision that was so complex, uncommon, or highly technical that a competent preparer of returns or claims of the type at issue reasonably could have made the error. The reasonable cause and good faith exception does not apply to an error that would have been apparent from a general review of the return or claim for refund by the preparer.

    2. Frequency of errors: Whether the understatement was the result of an isolated error (such as an inadvertent mathematical or clerical error) rather than a number of errors. Although the reasonable cause and good faith exception generally applies to an isolated error, it does not apply if the isolated error is so obvious, flagrant or material that it should have been discovered during a review of the return or claim. Furthermore, the reasonable cause and good faith exception does not apply if there is a pattern of errors on a return or claim for refund even though any one error, in isolation, would have qualified for the reasonable cause and good faith exception.

    3. Materiality of errors: Whether the understatement was material in relation to the correct tax liability. The reasonable cause and good faith exception generally applies if the understatement is of a relatively immaterial amount. Nevertheless, even an immaterial understatement may not qualify for the reasonable cause and good faith exception if the error or errors creating the understatement are sufficiently obvious or numerous.

    4. Preparer's normal office practice: Whether the preparer's normal office practice, when considered together with other facts and circumstances, such as the knowledge of the preparer, indicates that the error in question would rarely occur and the normal office practice was followed in preparing the return or claim in question. Such a normal office practice must be a system for promoting accuracy and consistency in the preparation of returns or claims and generally would include, in the case of a signing preparer, checklists, methods for obtaining necessary information from the taxpayer, a review of the prior year's return, and review procedures. Notwithstanding the above, the reasonable cause and good faith exception does not apply if there is a flagrant error on a return or claim for refund, a pattern of errors on a return or claim for refund, or a repetition of the same or similar errors on numerous returns or claims.

20.1.6.4.12  (09-17-2010)
Penalty Computation

  1. SBWOTA increased the IRC 6694(a) penalty for understatements due to unreasonable positions from $250 to the greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim with respect to which the penalty was imposed. Examiners calculating the penalty using 50% of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim must elevate the calculation determination through his or her manager to the function RPC. For SB/SE Examination, the area RPC is used in lieu of the functional RPC. The RPC will then consult with the appropriate local Counsel contact person.

20.1.6.4.13  (09-10-2013)
Understatement Due to Willful or Reckless Conduct—IRC 6694(b)

  1. Standard of conduct for IRC 6694(b) remains the same for both prior and post SBWOTA.

  2. There must be an understatement of liability for the penalty under IRC 6694(b) to be considered. It should be imposed when the following conditions are met:

    1. Any part of the understatement was due to a willful attempt by a tax return preparer; or

    2. Reckless or intentional disregard of rules or regulations by a tax return preparer.

  3. Prior to SBWOTA, IRC 6694(b) was applied only to income tax return preparers.

20.1.6.4.13.1  (05-16-2012)
IRC 6694(b)—Burden of Proof

  1. Under IRC 7491(c) the IRS bears the burden of production in any court proceeding with respect to the liability of any individual for a penalty. Under IRC 7427, Tax Return Preparers, the IRS bears the burden of proof on the issue of whether the preparer willfully attempted to understate the tax liability.

  2. Reckless conduct is a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances.

  3. Following are examples of willful or reckless conduct from Treas. Reg. 1.6694-3(d):

    1. A taxpayer provided a preparer with detailed check registers reflecting personal and business expenses. One of the expenses was for domestic help, and this expense was identified as personal on the check register. The preparer knowingly deducted the expenses of the taxpayer's domestic help as wages paid in the taxpayer's business. The preparer is subject to the penalty under IRC 6694(b).

    2. A taxpayer provided a preparer with detailed check registers to compute the taxpayer's expenses. However, the preparer knowingly overstated the expenses on the return. After adjustments by the examiner, the tax liability increased significantly. Because the preparer disregarded information provided in the check registers, the preparer is subject to the penalty under IRC 6694(b).

20.1.6.4.13.2  (09-17-2010)
Penalty Computation—IRC 6694(b)

  1. SBWOTA increased the IRC 6694(b) penalty to the greater of $5,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to returns, amended returns, and claims for refund prepared on or after May 26, 2007.

  2. If both IRC 6694(a) and IRC 6694(b) penalties apply to a tax return preparer, the IRC 6694(b) penalty amount must be reduced by the IRC 6694(a) penalty amount per IRC 6694(b)(3), Reduction in Penalty.

  3. Examiners should ensure that the combined assessment of IRC 6694(a) and IRC 6694(b) penalties against a preparer do not exceed the greater of $ 5,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to returns, amended returns, and claims for refund prepared on or after May 26, 2007.

  4. Examiners calculating the IRC 6694(b) penalty using 50 percent of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim must elevate the calculation determination through his or her manager to the functional RPC. The RPC will then consult with the appropriate local Counsel contact person.

20.1.6.4.14  (09-17-2010)
Referrals to Office of Professional Responsibility—IRC 6694

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

20.1.6.4.15  (09-17-2010)
Statute of Limitations—IRC 6694

  1. See IRM 20.1.6.21, Statute Of Limitations.

20.1.6.4.16  (09-17-2010)
Appeals Procedures

  1. See IRM 20.1.6.19, Appeal Rights.

20.1.6.5  (05-16-2012)
IRC 6695 Penalties That May Apply to a Tax Return Preparer

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

  2. The IRC 6695 penalties only apply to tax return preparers. See IRM 20.1.6.4.2, Tax Return Preparer Defined. The following is a list of penalties found in IRC 6695:

    1. IRC 6695(a), Failure to Furnish Copy to Taxpayer, a $50 penalty will be asserted for each failure, with a maximum of $25,000 per preparer per calendar year;

    2. IRC 6695(b), Failure to Sign Return, a $50 penalty will be asserted for each failure, with a maximum of $25,000 per preparer, per calendar year;

    3. IRC 6695(c), Failure to Furnish Identifying Number, no more than one penalty may be imposed with respect to a single return or claim for refund. A $50 penalty will be asserted for each failure, with a maximum of $25,000 per preparer, per calendar year;

    4. IRC 6695(d), Failure to Return Copy or List, a $50 penalty will be asserted for each failure, with a maximum of $25,000 to any return period;

    5. IRC 6695(e), Failure to File Correct Information Returns, the penalty is $50 for each failure to file a return as required by IRC 6060, Information Returns of Tax Return Preparers, and $50 for each failure to include a required item in the return. The maximum amount for any return period is $25,000;

    6. IRC 6695(f), Negotiation of Check, the penalty is $500 for each negotiated check. There is no maximum amount; and

    7. IRC 6695(g), Failure to Be Diligent in Determining Eligibility for Earned Income Credit, any return preparer who fails to comply with the EITC due diligence requirements of IRC 6695(g) will be charged a penalty for each failure. For any tax returns or claims for refund for tax years ending before December 31, 2011 the penalty is $100 per failure. There is no maximum amount. For any tax returns or claims for refund for tax years ending on or after December 31, 2011 the penalty is $500 per failure. There is no maximum amount.

20.1.6.5.1  (09-10-2013)
Failure to Furnish Copy to Taxpayer-IRC 6695(a)

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

    1. This copy may be given to the taxpayer in any media, including electronic media, that is acceptable to both the taxpayer and the tax return preparer.

    2. In the case of an electronically filed return, a complete copy of a taxpayer's return or claim for refund consists of the electronic portion of the return or claim for refund, including all schedules, forms, attachments, and jurats, which were filed with the IRS. The copy provided to the taxpayer must include all information submitted to the IRS to enable the taxpayer to determine what schedules, forms, electronic files, and other supporting materials have been filed with the return.

    3. The copy, however, need not contain the identification number of the paid tax return preparer. The electronic portion of the return or claim for refund may be contained on a replica of an official form or on an unofficial form. On an unofficial form, however, data entries must reference the line numbers or descriptions on an official form. See Treas. Reg. 1.6107-1(a)(2).

  2. If there is an employment arrangement between two or more preparers, the requirement to furnish a copy only applies to the person who employs (or engages) one or more other preparers. Similarly, if there is a partnership arrangement, the requirement to furnish a copy only applies to the partnership. See Treas. Reg. 1.6107-1(c).

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

    1. A person is a nonsigning preparer under Treas. Reg. 301.7701–15(b)(2), or

    2. A person is a preparer under Treas. Reg. 301.7701–15(b)(3) on account of having prepared another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner's return).

  4. The IRC 6695(a) penalty will also not be imposed where a preparer deletes certain information from the copy furnished to the taxpayer if the taxpayer holds an elected or politically appointed position with the government of the United States or a state or political subdivision thereof and who in order to carry out his or her official duties, has arranged his or her affairs so that he or she has less than full knowledge of the property he or she holds or of the debts for which he or she is responsible. See Treas. Reg. 1.6695-1(a)(2).

20.1.6.5.2  (09-17-2010)
Failure to Sign Return or Claim for Refund—IRC 6695(b)

  1. The IRC 6695(b) penalty applies if the preparer, who is required by regulations to sign the taxpayer’s return or claim for refund, fails to sign the return or claim for refund. Preparers must sign the return or claim for refund that are not signed electronically using the appropriate method prescribed by the Secretary after it is completed and before it is presented to the taxpayer for signature.

    1. In the case of electronically signed tax returns, the signing tax return preparer need not sign the return prior to presenting a completed copy of the return to the taxpayer. The signing tax return preparer, however, must furnish all of the information that will be transmitted as the electronically signed tax return to the taxpayer contemporaneously with furnishing the Form 8879, IRS e-file Signature Authorization. The information may be furnished on a replica of an official form. The signing tax return preparer shall electronically sign the return in the manner prescribed by the Commissioner in forms, instructions, or other appropriate guidance. See Treas. Reg. 1.6695-1(b)(2). Also see IRM 3.42.5.16.1.3 (5), IRS e-File Signature Authorization Forms, for signatures on electronically filed returns.

    2. If the preparer required to sign the return or claim for refund is unavailable to sign, another preparer must review the return or claim for refund and then sign the return or claim for refund. If more than one preparer is involved in the preparation of the return or claim for refund, the preparer with primary responsibility for the overall substantive accuracy of the return or claim for refund is the preparer who must sign the return or claim for refund. See Treas. Reg. 1.6695–1(b)(1).

  2. A signing tax return preparer must provide a signature on returns or claims for refund that are filed on or after January 1, 2009. Rev. Proc. 2009-11, IRB 2009–3 313, section 4.02, identifies categories of returns and claims for refund required to be signed by a tax return preparer in order to avoid a penalty under IRC 6695(b).

  3. For a list of tax returns filed during the 2008 calendar year that must be signed to avoid a penalty under IRC 6695(b), see Notice 2008–12, IRB 2008–3 280.

  4. IRC 6695(b) no longer requires a manual signature. The IRS will permit tax return preparers to sign original returns, amended returns, or requests for filing extensions by rubber stamp, mechanical device, or computer software program. These alternative methods of signing must include either a facsimile of the individual preparer's signature or the individual preparer's printed name. Tax return preparers utilizing one of these alternative means are personally responsible for affixing their signatures to returns or requests for extension. See Notice 2004–54, IRB 2004–33 209. The signature requirement may also be satisfied if the preparer signs the completed return, makes a photocopy of the return, and the taxpayer signs and files the photocopy. See Rev. Rul. 78–370, 1978–2 C.B. 336.

  5. If a preparer is physically unable to sign a return because of a temporary or permanent disability, the IRC 6695(b) penalty should not be imposed if the words "Unable to Sign" are printed, typed, or stamped on the preparer signature line. Also, the preparer’s name should be printed, typed, or stamped under the signature line after the return is completed, and before it is presented to the taxpayer for signature. See Rev. Proc. 79-7, 1979-1 C.B. 486.

  6. A preparer is not required to affix an identification number to the taxpayer’s copy of the return. See preamble to T.D. 9436, IRB 2009–3 268.

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

    1. A person is a nonsigning preparer under Treas. Reg.1.301.7701-15(b)(2), or

    2. A person is a preparer under Treas. Reg. 1.301.7701-15(b)(3) on account of having prepared another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner’s return).

20.1.6.5.3  (05-16-2012)
Failure to Furnish Identifying Number—IRC 6695(c)

  1. The IRC 6695(c) penalty applies if the preparer fails to comply with IRC 6109(a)(4), Furnishing Identifying Number of Tax Return Preparer. Under IRC 6109(a)(4) and the regulations thereunder, the return or claim for refund must contain the following:

    1. The identifying number of the preparer required to sign the return or claim for refund under IRC 6695(b), and

    2. The identifying number of the partnership or employer (if there is a partnership or employment arrangement between two or more preparers).

  2. A self-employed preparer can use either his or her social security number (SSN) or preparer tax identification number (PTIN) for tax returns or refund claims prepared through December 31, 2010. If there is an employment arrangement or association, the employer’s identification number (EIN) and the individual preparer’s SSN or PTIN must be on the return. The preparer is not required to provide his or her SSN, PTIN, or EIN on the copy furnished to the client.

  3. Effective January 1, 2011, tax return preparers must have a PTIN to prepare returns. The PTIN is to be used as of January 1, 2011, as the preparer identifying number. See PTIN Requirements for Tax Return Preparers at - http://www.irs.gov/taxpros/article/0,,id=210909,00.html?banner=PTIN and Treas. Reg 1.6109-2(d). If there is an employment arrangement or association the related EIN must also be on the tax return.

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

    1. A person is a nonsigning preparer under Treas. Reg. 1.301.7701-15(b)(2) or

    2. A person is a preparer under Treas. Reg. 1.301.7701-15(b)(3) on account of preparing another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner’s return).

  5. IRC 6695(c) penalties will not be imposed against the following:

    1. A preparer who is employed or engaged by a person who is also a preparer of the return or claim for refund, or

    2. A preparer who is a partner in a partnership which is also a preparer of the return or claim for refund.

20.1.6.5.4  (09-17-2010)
Failure to Retain Copy or List—IRC 6695(d)

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

    1. Retain a completed copy of the return or claim for refund, or alternatively retain a record (by list, card file, electronically, or otherwise) of all the taxpayers, their taxpayer identification numbers, the taxable years, and the type of returns or claims for refund prepared.

    2. Retain a record (by copy of the return or claim for refund or by a list, card file, electronically, or otherwise) of the name of the preparer required to sign the return or claim for refund under IRC 6695(b) for each return or claim for refund presented to the taxpayer.

    3. Make such copy or list available for inspection upon request by the IRS for a three year period following the close of the return period. See IRC 6060(c), Return Period Defined.

  2. If there is an employment arrangement between two or more preparers, the requirement to retain a copy or list only applies to the person who employs (or engages) one or more tax return preparers. Similarly, if there is a partnership arrangement, the requirement to retain a copy or list only applies to the partnership. See Treas. Reg. 1.6107-1(c).

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

    1. A person is a nonsigning preparer under Treas. Reg. 301.7701-15(b)(2), or

    2. A person is a preparer under Treas. Reg. 301.7701-15(b)(3) on account of having prepared another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner’s return).

20.1.6.5.5  (09-17-2010)
Failure of Preparer Employer to File Information Returns—IRC 6695(e)

  1. The IRC 6695(e) penalty applies if the preparer fails to comply with IRC 6060, Information Returns of Tax Return Preparers. Under IRC 6060(a), General Rule, and Treas. Reg. 1.6060–1(a)(1), each person who employs (or engages) one or more signing tax return preparers must retain a record of the name, taxpayer identification number, and place of work of each tax return preparer employed (or engaged) by him. For purposes of IRC 6060, a partnership is treated as the employer of the partners.

    Note:

    Employers satisfy the filing requirement of IRC 6060 by retaining a record of the information described above and by making that record available for inspection upon request by the IRS. See Treas. Reg. 1.6060-1(a)(1).

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

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

  4. If a tax return preparer is not employed by another preparer, such preparer is treated as his or her own employer for purposes of this penalty. Therefore, if a preparer is a sole proprietor, he or she must retain and make available a record.

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

  6. The IRC 6695(e) penalty must be assessed within three years after the return or claim for refund was filed.

20.1.6.5.6  (09-10-2013)
Negotiation of a Taxpayer’s Refund Check—IRC 6695(f)

  1. The IRC 6695(f) penalty of $500 applies if the preparer endorses or otherwise negotiates (directly or through an agent) a refund check (including an electronic version of a check) issued to a taxpayer (other than the preparer).

  2. The penalty applies to a tax return preparer who directs (either on Form 8888 or on the direct deposit line of the form series returns) the IRS to deposit a taxpayer's refund into a bank account in the preparer's name or into a bank account under the preparer's control.

  3. Taxpayers sometimes request that their refunds be direct deposited into a bank account in the preparer’s name or into a bank account under the preparer’s control when taxpayers do not have their own bank account. Even if a taxpayer has requested the direct deposit to be made in this manner, the preparer is still subject to the IRC 6695(f) penalty for complying with the request.

  4. The preparer may not endorse or negotiate a check for a taxpayer even though the preparer was designated as the taxpayer's representative on a Form 2848, Power of Attorney. See Rev. Rul. 80–35.

  5. The penalty is imposed at a rate of $500 per refund check or direct deposit of a refund. It does not vary based on how much compensation the preparer receives from the taxpayer, the amount of the refund check, or the direct deposit.

  6. A person in a business other than tax return preparation who fills out or reviews returns for his or her customers may be a preparer and, thus, subject to the IRC 6695(f) penalty if such person endorses or otherwise negotiates the customer’s refund check. See Rev. Rul. 86-55, 19861 C.B. 373.

20.1.6.5.6.1  (09-10-2013)
Exceptions to IRC 6695(f)

  1. A tax return preparer will not be considered to have endorsed or otherwise negotiated a check as a result of having affixed the taxpayer’s name to a refund check for the purpose of depositing the check into an account in the name of the taxpayer or in the joint names of the taxpayer and one or more other persons (excluding the tax return preparer). See Treas. Reg. 1.6695-1(f)(1).

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

    1. Cash a refund check and remit all the cash to the taxpayer.

    2. Accept a refund check for deposit in full to the taxpayer’s account, provided the bank does not initially endorse or negotiate the check (unless the bank has made a loan to a taxpayer on the basis of the anticipated refund).

    3. Endorse a refund check for deposit in full to the taxpayer’s account pursuant to a written authorization of the taxpayer (unless the bank has made a loan to the taxpayer on the basis of the anticipated refund).

    4. Endorse or negotiate a refund check as part of the check clearing process after initial endorsement or negotiation by the taxpayer. See Treas. Reg. 1.6695-1(f)(2).

  3. There is no reasonable cause exception to this penalty.

20.1.6.5.7  (05-16-2012)
Failure to Be Diligent in Determining Eligibility for Earned Income Tax Credit—IRC 6695(g) for Tax Returns or Claims for Refund for Tax Years Ending Before December 31, 2011

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

  2. Compliance visits with preparers to determine the due diligence requirement for the earned income credit are not third party contacts.

  3. Under Treas. Reg. 1.6695-2(b), preparers must comply with the following due diligence requirements for tax returns or claims for refund for tax years ending before December 31, 2011:

    1. Complete an eligibility checklist. Preparers may use Form 8867, Paid Preparers Earned Income Credit Checklist, or their own form as long as it provides the same information.

    2. Compute the credit using either the EIC worksheet in the Form 1040, Form 1040A, U.S. Individual Income Tax Return, Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, instructions, or Pub 596, Earned Income Credit, or their own worksheet that contains the same information.

    3. Retain copies of Form 8867, Paid Preparers Earned Income Credit Checksheet, (or its successor), computation worksheet, and record of how and when the information used to determine eligibility and compute the EIC was obtained by the preparer. The items must be retained for three years from June 30th following the date the return or claim was given to the taxpayer for signature. The items may be retained either on paper or electronically.

    4. The tax return preparer must not know, or have reason to know, that any information used by the tax return preparer in determining the taxpayer’s eligibility for, or the amount of, the EIC is incorrect.

    5. The tax return preparer may not ignore the implications of information furnished to, or known by, the tax return preparer, and must make reasonable inquiries if the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete.

    6. A tax return preparer must make reasonable inquiries if a reasonable and well–informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete.

    7. The tax return preparer must also contemporaneously document in the files the reasonable inquiries made and the responses to these inquiries. See Treas. Reg. 1.6695-2(b)(3)(i).

  4. Treas. Reg. 1.6695-2(b)(3)(ii) provides the following examples.

    Example 1: A 22 year-old taxpayer wants to claim two sons, ages 10 and 11, as qualifying children for purposes of the EIC. Preparer A must make additional reasonable inquiries regarding the relationship between the taxpayer and the children as the age of the taxpayer appears inconsistent with the ages of the children claimed as sons.

    Example 2: An 18 year-old female taxpayer with an infant has $3,000 in earned income and states that she lives with her parents. Taxpayer wants to claim the infant as a qualifying child for the EIC. This information appears incomplete and inconsistent because the taxpayer lives with her parents and earns very little income. Preparer B must make additional reasonable inquiries to determine if the taxpayer is the qualifying child of her parents and, therefore, ineligible to claim the EIC.

    Example 3: Taxpayer asks Preparer C to prepare his tax return and wants to claim his niece and nephew as qualifying children for the EIC. Preparer C should make reasonable inquiries to determine whether the children meet EIC qualifying child requirements and ensure possible duplicate claim situations involving the parents or other relatives are properly considered.

    Example 4: Taxpayer asks Preparer D to prepare her tax return and tells D that she has a Schedule C business, that she has two qualifying children, and that she wants to claim the EIC. Taxpayer indicates that she earned $10,000 from her Schedule C business, but that she has no expenses. This information appears incomplete because it is very unlikely that someone who is self-employed has no business expenses. D must make additional reasonable inquiries regarding taxpayer's business to determine whether the information regarding both income and expenses is correct.

20.1.6.5.7.1  (05-16-2012)
Failure to Be Diligent in Determining Eligibility for Earned Income Tax Credit—IRC 6695(g) for Tax Returns or Claims for Refund for Tax Years Ending on or After December 31, 2011

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

  2. Compliance visits with preparers to determine the due diligence requirement for the earned income credit are not third party contacts.

  3. Under Treas. Reg. 1.6695-2(b), the preparer must comply with the following due diligence requirements for tax returns or claims for refund for tax years ending on or after December 31, 2011.

    1. The tax return preparer must complete Form 8867 or such other form and such other information as may be required by the IRS to be submitted in the manner required by forms, instructions, or other appropriate guidance.

    2. The tax return preparer's completion of Form 8867 (or successor form) must be based on information provided to the tax return preparer or otherwise reasonably obtained by the tax return preparer.

    3. The tax return preparer must either complete the earned income credit worksheet in the Form 1040 instructions or such other form and such other information as may be prescribed by the IRS or otherwise record in one or more documents in the tax preparer's paper or electronic files the EIC computation, including the method and information used to make the computation.

    4. The completion of the earned income credit worksheet or other permitted record must be based on information provided by the taxpayer to the tax return preparer or otherwise reasonably obtained by the tax return preparer.

    5. The tax return preparer must not know, or have reason to know, that any information used by the tax return preparer in determining the taxpayer's eligibility for, or the amount of, the EIC is incorrect. The tax return preparer may not ignore the implications of information furnished to, or known by, the tax return preparer, and must make reasonable inquiries if the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. A tax return preparer must make reasonable inquiries if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. The tax return preparer must also contemporaneously document in the files the reasonable inquiries made and the responses to these inquiries.

  4. See IRM 20.1.6.5.7 (4) above which list the four examples from Treas. Reg. 1.6695-2(b)(3)(ii).

  5. See Treas. Reg. 1.6695-2(b)(4) regarding record retention.

  6. See Treas. Reg. 1.6695-2(c) regarding special rule for firms.

  7. See Treas. Reg 1.6695-2(d) regarding exceptions to the penalty.


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