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

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:

Overall responsibility for the penalty programs is assigned to the Office of Servicewide Penalties (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.

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.

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

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 Forms repository.

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

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

The notice the taxpayer receives is the IRC 6671 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.

Form 8278 for no-change and discontinued investigation cases Item 9(c) should be blank for Penalty No-Change and/or Withdrawal Cases and Item 9(d) is 0.00 for a specific Item 9(a) and the same Item 9(b).

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

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).

Form 8278 Item 1 of Taxpayer's Name (single name) is used to establish the CVPN for all MFT 55 civil penalties including taxpayer's with an MFT 30 MFJ filing status

The Civil Penalty Name Line is automatically established using Form 8278 Items 1, 2, 3, 5, and 7 when there is an entity module.

See IRM 4.20.3.2, Soliciting Payment, for guidelines for using the tiered interview approach for soliciting payment, securing levy source information, and coordinating with Collection.

Preparer penalty sections and action to enjoin are:

Promoter penalty Internal Revenue Code sections and action to enjoin are:

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.

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

This section includes:

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.

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

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

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

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.

Nonsigning tax return preparer

See IRC 7701(a)(36)(B)(iv) explanation regarding an exception to the definition of a tax return preparer

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 non-signer subject to penalty.

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).

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).

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

Pre-SBWOTA, Prior to May 26, 2007 – Income Tax Returns

Post-SBWOTA, After May 25, 2007:

The standard for disclosed position is reasonable basis.

The standard for positions that are not disclosed is substantial authority if the position is not a tax shelter or a reportable transaction to which IRC 6662A, Imposition of Accuracy-related Penalty on Understatements with Respect to Reportable Transactions, applies.

Notice 2007-54 I.R.B. 2007-27, and Notice 2008-11 I.R.B. 2008-3 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, I.R.B. 2009-3, for further information.

Signing tax return preparers - disclosure of a position for which there is a reasonable basis but for which there is not substantial authority is adequate if the tax return preparer meets any of the following standards:

Nonsigning tax return preparers - disclosure of a position for which there is a reasonable basis standard but does not satisfy the substantial authority standard is adequate if the tax return preparer meets any of the following standards:

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

Notice 2009-5 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.

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—

The other factors to consider are:

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 Return Preparer Functional Coordinator. For SB/SE Examination, the Area Preparer Coordinator is used in lieu of the Return Preparer Functional Coordinator. The Coordinator will then consult with the appropriate local Counsel contact person.

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

There was an understatement. The penalty under IRC 6694(b) is imposed when:

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

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

See IRM 20.1.6.21, Statute Of Limitations.

See IRM 20.1.6.19, Appeals Rights.

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.

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).

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

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

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.

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, 2009-3 I.R.B. 313, Section 4.02, identifies categories of returns that the penalties under IRC 6695(b) should apply.

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 Rev. Proc. 2009-11, Section 3.

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. (Notice 2004-54, 2004-2 C.B. 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. (Rev. Rul. 78–370, 1978–2 C.B. 336).

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. (Rev. Proc. 79-7, 1979-1 C.B. 486).

A preparer is not required to affix an identification number to the taxpayer’s copy of the return. (Preamble to T.D. 9436, 2009-3 I.R.B. 268 at 270).

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 in substantiation of the preparer’s claim of reasonable cause. The penalty for failure to sign will not be imposed solely because:

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:

A self-employed preparer can use either his/her social security number (SSN) or their 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 their SSN, PTIN or EIN on the copy furnished to the client.

Effective January 1, 2011 Tax Return Preparers must have a Preparer Identification Number (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.

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:

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

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:

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 the regulations each person who employs (or engages) one or more 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.

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.

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.

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

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

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

The IRC 6695(f) penalty applies if the preparer endorses or otherwise negotiates (directly or through an agent) a refund check issued to a taxpayer (other than the preparer). For exceptions see below. 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 and Declaration of Representative.

A person in a business other than tax return preparation who fills out or reviews returns for its customers may be a preparer and, thus, subject to the IRC 6695(f) penalty if such person endorses or otherwise negotiates the customer’s refund check. See Rev. Rul. 86-55, 19861 C.B. 373 and Tiddy v. United States, 762 F. Supp. 122, (W.D.N.C., 1991).

Exceptions:

There is no reasonable cause exception to this penalty.

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).

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

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 before December 31, 2011:

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

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