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Part 8. Appeals

Chapter 11. Penalties Worked in Appeals

Section 3. Return Preparer Penalty Cases

8.11.3  Return Preparer Penalty Cases

8.11.3.1  (10-19-2007)
Return Preparer Penalty Overview

  1. This section addresses the procedures for Returns Preparer Penalty considered by Appeals. Return Preparer penalties are imposed against the person or business that prepared a return.

  2. The penalties discussed in this section are penalties proposed under:

    • IRC Section 6694, Understatement of Taxpayer’s Liability by Income Tax Return Preparer, and

    • IRC Section 6695, Other Assessable Penalties with Respect to the Preparation of Income Tax Returns for Other Persons.

  3. Refer all IRC Section 6694 and 6695(f) preparer penalties sustained in whole or in part, by Appeals against an attorney, certified public accountant or enrolled agent, to the Office of Professional Responsibility. See IRM 1.25.1, Rules Governing Practice Before the Service.

    1. Each month, submit supporting statements on sustained IRC Sections 6694 and 6695 penalties to the Appeals Area Director for referral to the Office of Professional Responsibility.

    2. Refer a proposed or assessed IRC Sections 6694 and 6695(f) penalty determined to be valid by Appeals whether or not the preparer agrees to the penalty. See IRM 8.10.1, Internal Reports, for procedures on reports to the Office of Professional Responsibility.

8.11.3.1.1  (10-19-2007)
Return Preparer Conduct Penalties

  1. The definition of an income tax return preparer is provided in IRC Section 7701(a)(36)

  2. The IRC Section 6694 penalties can only apply if there is an understatement of tax liability.

  3. The IRC Section 6694(a) penalty is $250, and it may be imposed against an income tax return preparer if:

    1. There is an understatement of liability, on a return or claim for refund prepared by the preparer, which is due to a position for which there was not a realistic possibility of being sustained on its merits,

    2. The preparer knew or reasonably should have known of the position, and

    3. the position was not disclosed or was frivolous.

  4. The IRC Section 6694(b) penalty is $1,000 and may be imposed against an income tax preparer if:

    1. There is an understatement of liability, on a return or claim for refund prepared by the preparer, which is due to a willful attempt in any manner to understate the tax liability by the preparer, or

    2. The preparer has recklessly or intentionally disregarded rules or regulations.

    3. the position was not disclosed or was frivolous.

  5. Reduce the IRC Section 6694(b) penalty by the amount of the IRC Section 6694(a) penalty if both the IRC Section 6694(a) and (b) penalties are asserted against the preparer on the same return or claim.

  6. Because the IRC Section 6694(b) penalty involves willfulness, there is no statutory period for assessment of this penalty. On all other income tax return preparer penalties, the three year statute of limitations for assessment begins to run on the statutory due date of the return or, if filed late, the filing date of the return. IRC Section 6501(c)(4) allows for extension of the statute of limitations.

8.11.3.1.2  (10-19-2007)
Preparer Identification Penalties under IRC Section 6695

  1. The return preparer penalties under IRC Section 6695 are assessed against preparers who:

    1. fail to sign the return,

    2. fail to provide an identifying number,

    3. fail to retain a copy of the return,

    4. fail to provide file correct information returns,

    5. fail to provide the taxpayer with a copy of the return,

    6. fail to be diligent in determining eligibility for the Earned Income Tax Credit, or

    7. negotiate a refund check.

  2. These penalties are processed under the postassessment penalty procedures.

  3. Form 8278 will be used when an adjustment is required..

  4. Form 5402 and appeals case memo will be included in the closing package forwarded to APS for processing.

8.11.3.2  (10-19-2007)
Origin of Return Preparer Penalty Cases

  1. Examinations under Small Business/Self Employed (SB/SE), Large and Mid Size Business (LMSB) and Tax Exempt and Government Entities (TE/GE) Divisions are responsible for identifying income tax returns to which the IRC Section 6694 penalties apply. See IRM 20.1, Penalty Handbook, for detailed procedures.

  2. Examiners are responsible for submitting to Appeals both the related unagreed income tax return case with the unagreed income tax return preparer conduct penalty case to Appeals before the related unagreed income tax case is submitted to Appeals. If the two cases are submitted separately, Examination includes information on the current status and location of the unagreed income tax case in the case file.

    1. A preparer conduct penalty may not be submitted to Appeals if there is less than 120 days remaining on the statute of limitations.

    2. If the statutory period for assessment of the IRC Section 6694(a) penalty is about to expire and the taxpayer will not agree to an extension, LMSB Field Operations or SBSE Area Office assesses the penalty.

  3. Treasury Reg. 1.6694–4(a) provides for a deficiency type assessment procedure even though IRC Section 6696(b) provides that the deficiency procedures do not apply to IRC section 6694 penalties.

    1. Examination sends the preparer Letter 1125, which provides the preparer with information on appeals rights.

    2. If there is no response to the letter, the penalty is assessed.

  4. Provide the preparer, upon request, the same appeal rights postassessment as would have been provided if the appeal was received in a preassessment status.

8.11.3.3  (10-19-2007)
Return Preparer Penalty Cases as Appeals Coordinated Issue (ACI)

  1. Return Preparer Penalty issues were designated as Appeals Coordinated Issues on July 23, 2003.

  2. Appeals employees having a workunit with a Return Preparer Penalty issue must make a referral to Appeals Technical Guidance through their manager upon assignment or preliminary review using Form 13381Appeals Technical Guidance Referral.

  3. Appeals employees considering a case with Return Preparer Penalties must contact the Technical guidance Coordinator (TGC) prior to scheduling the initial conference to obtain the most current information.

  4. Appeals employees mustsecure review and concurrence from the TGC before finalizing any resolution of the issue.

8.11.3.3.1  (10-19-2007)
Issue Consideration of Return Preparer Penalty Cases

  1. Appeals officers work appeals of these penalties in the same manner as appeals of any other proposed liability not subject to the deficiency procedures of subchapter B of Chapter 63 of the Internal Revenue Code.

  2. Prior to the effective date of the burden of proof provision changes under Section 3001 of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), the burden of proof was on the income tax return preparers for IRC Section 6694(a) and 6694(b)(2) determinations. However, as a result of RRA 98, for IRC Section 6694(a) and 6694(b)(2) determinations involving individuals who are income tax return preparers, the burden of proof is on the government in court proceedings arising in connection with examinations commencing after the date of enactment (July 22,1998) of RRA 98. Where there is no examination, the burden of production is on the government in court proceedings arising in connection with taxable periods or events beginning or occurring after the date of enactment of RRA 98. For any IRC Section 6694(b)(1) determination, the burden of production is on the government.

  3. IRC Section 6694 penalties have little in law to directly interpret them. The following references are helpful:

    1. House of Representatives Report No. 101–386, 101st Congress, 1st Session (1989), 655, includes the conference report on the major amendments enacted by the Omnibus Budget Reconciliation Act (OBRA) of 1989, P.L. 101–239

    2. Treasury Reg. 1.6694–1 through 1.6694–3 contains information on standards for preparer conduct penalties recommended for returns due after December 31, 1989.

  4. For IRC Section 6694(a) and 6694(b)(2) determinations involving tax return preparers who are non-individuals, the burden of production is on the income tax return preparers.

8.11.3.3.2  (10-19-2007)
Processing Return Preparer Cases

  1. Process return preparer penalties as follows:

    1. Use Form 8278, Computation and Assessment of Miscellaneous Penalties, to process the request for Assessment/Adjustment/Abatement.,

    2. Use Form 5402, Appeals Transmittal and Case Memo, as the transmittal document for all preparer penalty cases when closing the case with abatement, adjustment or sustention.

    3. If IRC Section 6694 penalties are to be assessed upon closing, use Form 8278 to input the assessment information. Appeals usually receives most of the IRC Section 6694 penalty cases before assessment.

  2. Use Letter 1342, Tax Preparer Penalty Closing Letter, to notify an income tax preparer that an appeal is denied. Sign the letter but do not mail it until after the Appeals Team Manager has approved the recommended disposition of the case.

  3. Use Form 5838, Waiver of Restriction on Assessment and Collection of Tax Return Preparer Penalty, or Form 5838–AD, Offer of Waiver of Restriction on Assessment and Collection of the Tax Return Preparer Penalty, if the penalty is settled or conceded by the preparer.

  4. Work claims for refund on IRC Section 6694 penalties in the same manner as any other claim for refund:

    1. Abate the penalty if the claim is accepted,

    2. Send Letter 906 (IO), Claim Disallowance, or Letter 1364, Statutory Notice of Claim Disallowance, to the taxpayer if the claim is denied,

    3. Sign Letter 1364 but do not mail it until after the Appeals Team Manager, approves the recommended disposition of the case, and

  5. Forward Form 5402, Appeals Transmittal and Case Memo, with the case at the time of closing.

  6. Include Form 8278 if adjustments are required.

8.11.3.4  (10-19-2007)
Establishing Workunit on ACDS for Return Preparer Penalty Cases

  1. All Return Preparer Penalty Workunits are controlled on ACDS (Appeals Centralized Database System).

  2. Preparer penalties are established on ACDS the same way as other penalty appeal cases except for the following:

    • TYPE = 6694A, 6694B or 6695 (these are Code Sections and will be identified on the Form 8278 under column (a))

    • MFT = 55 for individual, 13 for business (also found on Form 8278)

    • FEATRCD (Feature Code) = AI Appeals Coordinated Issue

    • STATDATE(statute date) or STATCODE (statute code) = If the penalty is assessed enter the statute code ASESD. If the penalty is not assessed, see the table below.

      Type STATDATE (statute date) CODE (statute code)
      6694A 3 years from the date the prepared return or claim for refund was filed. Leave Blank
      6694B Leave Blank Enter 6694B – Penalties under IRC Section 6694B do not have a statute of limitations for assessment.
      6695 3 years from the date the prepared return or claim for refund was filed. Leave Blank

  3. Treat the case as one work unit when multiple returns are involved in a preparer penalty case. For Example:

    IRC Section 6694(a) is proposed against a preparer on 10 returns that were prepared. Card-in the case as one work-unit number under the preparer's TIN. It is not necessary to record information on the 10 individual taxpayers.

  4. Assign case according to Appeals employee in accord with case assignment practices.

8.11.3.5  (10-19-2007)
Return Preparer Closing Procedures for APS

  1. Preparer penalties are closed the same as other penalty appeals with one addition:

    1. If either IRC section 6694 or 6695(f) is fully or partially sustained, send a copy of the Appeals Case Memo (ACM) to the Area Director following local office procedures on dates for submission.

    2. The Area Director will forward this report to the Director of Practice.

  2. Review and process the case file.

  3. Form 5402 will be included in the closing package from the Appeals technical employee. It should include information on the revised penalty amounts need to update ACDS.

  4. Depending on the resolution, Form 8278 may be included and will require processing. See IRM 8.11.1.8.1 for additional information on processing Form 8278.

  5. Update ACDS following general closing procedures outlined in IRM 8.11.1.6.3.1.

  6. The following closing codes apply:

    Determination Made CLOSINGCD
    Sustained (penalties are not removed) 14
    Abated (penalties are fully removed) 15
    Partially Abated(only part of penalties are removed) 16

  7. Maintain closed office files in accordance with guidelines found in IRM 8.20.


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