8.11.3  Return Preparer Penalty Cases

Manual Transmittal

September 24, 2013

Purpose

(1) This transmits revised IRM 8.11.3, Appeals Penalties, Return Preparer Penalty Cases.

Material Changes

(1) Made minor editorial changes throughout.

(2) Moved Appeals Processing and Case Support (APS) carding procedures to IRM 8.20.5.

(3) IRM 8.11.3.1.1 clarifies that penalties are generally processed under the pre-assessment penalty procedures.

(4) IRM 8.11.3.1.2 clarifies the maximum amount of penalty that can be imposed under IRC 6695.

(5) IRM 8.11.3.1.3 clarifies the maximum amount of penalty that can be imposed under IRC 6713 and that penalties are generally processed under the pre-assessment penalty procedures.

(6) IRM 8.11.3.2 clarifies that an unagreed penalty case will not be sent to Appeals before the related tax return is submitted.

(7) IRM 8.11.3.3 clarifies information that Appeals Technical Employees (ATEs) should review and verify on the case summary card and that IRC 6713 penalties do not have a statute of limitations for assessment.

(8) IRM 8.11.3.4.1 added reference to Letter 5011.

(9) Moved APS closing procedures for return preparer penalty cases to IRM 8.20.7.

(10) IRM 8.11.3.5 clarifies closing procedures for ATEs.

(11) IRM 8.11.3.5 added reference to instructions to ATEs to advise APS when closing an IRC 6695(g) penalty as a premature referral.

Effect on Other Documents

This supersedes IRM 8.11.3 dated September 14, 2012.

Audience

Appeals employees

Effective Date

(09-24-2013)

Susan L. Latham
Director, Policy, Quality and Case Support

8.11.3.1  (10-01-2012)
Return Preparer Penalty Overview

  1. This section addresses the procedures for return preparer penalties 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 6694, Understatement of Taxpayer’s Liability by a Tax Return Preparer, and

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

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

8.11.3.1.1  (09-24-2013)
Return Preparer Penalties Under IRC Section 6694

  1. The definition of a tax return preparer for purposes of Sections 6694 and 6695 is provided in IRC 7701(a)(36) and Treasury Regulation 301.7701-15.

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

  3. The IRC 6694(a) penalty is the greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer with respect to each return, amended return or claim for refund prepared if there is an understatement on the return or claim due to an unreasonable position taken on the return or claim that the preparer knew or reasonably should have known about. A position is unreasonable if:

    1. There was not substantial authority for the position and the position was not disclosed.

    2. The position was disclosed but there was not reasonable basis for the position.

    3. The position is with respect to a tax shelter or reportable transaction under IRC 6662A and it is not reasonable to believe the position will be more likely than not sustained on the merits. See Notice 2009-5. Refer to IRM 20.1.6.4.10 for tax shelters and reportable transactions to which IRC 6662A applies.

  4. The IRC 6694(b) penalty is the greater of $5,000 or 50% 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. The penalty may be imposed against a 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.

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

  6. Because the IRC 6694(b) penalty involves willfulness, there is no statutory period for assessment of this penalty. On tax return preparer penalties asserted under section 6694(a) and 6695, 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. The statute of limitations on assessment for the section 6694(a) and 6695 penalties may be extended using a Form 872-D, Consent to Extend the Time on Assessment of Tax Return Preparer Penalty. IRC 6696(d) addresses periods of limitation.

  7. Refer to IRM 20.1.6.4, IRC 6694 Understatement of Taxpayer's Liability by Tax Return Preparer, for additional information.

  8. These penalties are generally processed under the pre-assessment penalty procedures.

8.11.3.1.2  (09-24-2013)
Preparer Penalties Under IRC Section 6695

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

    1. Fail to provide the taxpayer with a copy of the return, $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(a),

    2. Fail to sign the return, $50 per failure, up to a maximum of $25,000 for each calendar year, per IRC 6695(b),

    3. Fail to provide an identifying number, $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(c),

    4. Fail to retain a copy of the return or a list of returns prepared, $50 per failure, up to a maximum of $25,000 for each return period, per IRC 6695(d),

    5. Fail to file a tax return preparer information return or set forth an item in the return as required under IRC 6060, $50 for each failure, up to a maximum of $25,000 for each return period, per IRC 6695(e),

    6. Negotiate a refund check or misappropriate a refund via electronic means, $500 per failure per IRC 6695(f), or

    7. Fail to be diligent in determining eligibility for the Earned Income Tax Credit, $500 per failure per IRC 6695(g).

  2. These penalties are generally processed under the pre-assessment penalty procedures.

  3. Refer to IRM 20.1.6.5, IRC 6695 Penalties That May Apply to a Tax Return Preparer, for additional information.

8.11.3.1.3  (09-24-2013)
Return Preparer Penalties Under IRC Section 6713

  1. The penalty under IRC 6713 is assessed against preparers who:

    1. receive compensation for preparing a tax return, or engage in the business of preparing or providing services in connection with the preparation of tax returns; and

    2. disclose any information furnished to him or her in connection with the preparation of any return; or

    3. use any information furnished to him or her for any purpose other than to prepare or assist in preparing the taxpayer's return. The same exceptions set forth in IRC 7216(b) apply to IRC 6713.

  2. The penalty is $250 for each disclosure or use, up to a maximum of $10,000 for each calendar year.

  3. These penalties are generally processed under the pre-assessment penalty procedures.

  4. Refer to IRM 20.1.6.7, Penalty for Unauthorized Preparer Disclosure or Use - IRC 6713, for additional information.

8.11.3.2  (09-24-2013)
Origin of Return Preparer Penalty Cases

  1. Examinations under Small Business/Self Employed (SB/SE) Campus and Area, Large Business and International (LB&I) and Tax Exempt and Government Entities (TE/GE) Divisions are responsible for identifying tax returns to which return preparer penalties apply. See IRM 20.1.6.4, IRC 6694 Understatement of Taxpayer's Liability by Tax Return Preparer , for detailed procedures.

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

    1. IRC 6694, IRC 6695, and IRC 6713 penalties generally have pre-assessment appeal rights. Refer to IRM 20.1.6.19.1, Pre-Assessment Appeals IRC 6694, IRC 6695, IRC 6707A, and IRC 6713.

    2. A preparer conduct penalty may not be submitted to Appeals if there is less than 180 days remaining on the statute of limitations.

    3. If the statutory period for assessment of the IRC 6694(a) penalty is about to expire and the taxpayer will not agree to an extension, Compliance assesses the penalty.

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

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

  3. Provide the preparer, upon request, the same appeal rights post-assessment as would have been provided if the appeal was received in a pre-assessment status.

8.11.3.3  (09-24-2013)
Receipt of Preparer Penalty Cases

  1. Refer to IRM 8.20.5.29.2 , Return Preparer Penalty (RPP) Cases Carding, for APS carding procedures.

  2. All return preparer penalty work units are controlled on ACDS (Appeals Centralized Database System).

  3. Appeals Technical Employees (ATEs) should review the case summary card for accuracy. 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).) 6713 will be "OTHPEN."

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

    • FEATRCD (Feature Code) = AI Appeals Coordinated Issue except 6713

    • 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 statutory due date of the underlying return or, if filed late, 3 years from the filing of the return. Use the earliest ASED if there is more than one statute date. Blank
      6694B Blank 6694B – Penalties under IRC 6694B do not have a statute of limitations for assessment.
      6695 3 years from the statutory due date of the underlying return or, if filed late, 3 years from the filing of the return. Use the earliest ASED if there is more than one statute date. Blank
      OTHPEN for 6713 Blank 6713 – Penalties under IRC 6713 do not have a statute of limitations for assessment.

  4. Treat the case as one work unit when multiple returns are involved in a preparer penalty case.

    Example:

    IRC 6694(a) is proposed against a preparer on 10 returns that were prepared. The case will appear as one work unit number under the preparer's TIN.

8.11.3.4  (09-24-2013)
Return Preparer Penalties as Appeals Coordinated Issues (ACI)

  1. Return preparer penalty issues were re-designated as Appeals Coordinated Issues, Category of Case (ACIcc) on August 28, 2011. Review and concurrence is no longer required before finalizing any resolution for a return preparer penalty.

  2. Appeals employees having a work unit with a return preparer penalty issue must make a referral to Domestic Operations through their manager upon assignment or preliminary review using Form 13381, Appeals Technical Guidance Referral.

    Note:

    Return preparer penalties under IRC 6713 are not coordinated and a referral should not be made.

  3. Refer to the "Domestic Ops" tab on the Appeals Website http://appeals.web.irs.gov/lbsp/default.htm for list of Technical Specialists.

8.11.3.4.1  (09-24-2013)
Consideration of Return Preparer Cases

  1. Differences in preparer penalty cases.

    1. Penalties under sections 6694, 6695, and 6713 are not subject to deficiency procedures.

    2. We use Closing Codes 14, 15, or 16 which refer to whether penalties have been sustained or abated rather than cases closed "agreed" or "unagreed."

    3. We use Closing Code 20 for all premature referral cases.

    4. There is no required "agreement form" for return preparer penalties, nor is one required to assess the penalty and close the case. The only way to enter into a binding agreement would be a Form 906, Closing Agreement.

    5. When Appeals sustains or partially sustains a pre-assessment return preparer penalty, the return preparer can still file a claim, and if disallowed, can come to Appeals again in post-assessment status.

  2. Upon receipt of the case, the Appeals Technical Employee (ATE) must follow the procedures outlined in IRM 8.11.1.1.6, New Receipt Procedures for Appeals Technical Employees. This includes, but is not limited to:

    • Determining the statute of limitations and validating the statute-related fields on ACDS within five (5) business days of receipt of the case in accordance with IRM 8.11.1.1.6 (1) and IRM 8.21.3, Appeals Technical Employees Statute Responsibility.

    • Validating the Case Summary Card (CSC) information and making updates, if necessary, in accordance with IRM 8.11.1.1.6 (2). Refer to IRM 8.11.3.3 for fields pertaining to return preparer penalty cases.

    • Ensuring that the ACDS Uniform Acknowledgment Letter 4141 was issued in accordance with IRM 1.4.28.3.1, Assignment of Work Units and Issuance of Letter 4141(CG), Uniform Acknowledgment Letter (UAL) and IRM 1.4.28-6, Pre-Selected Enclosures for the UAL Based Upon the Category and Type of Case.

  3. Consideration of the penalty case will include an analysis of the litigating hazards. See IRM 8.11.1.1.7.2, Hazards of Litigation .

  4. 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 the customized Form 5402, Appeals Transmittal and Case Memo, as the transmittal document for all preparer penalty cases.

    3. Use closing Letter 1342 with addendum, for cases where a penalty is sustained or partially abated. This letter describes the procedures for filing suit with district or claims court.

    4. Use closing Letter 5011 for cases where the penalty is conceded in full.

  5. Refer all IRC 6694(b) preparer penalties asserted by Appeals against an attorney, certified public accountant, registered tax return preparer, enrolled agent or enrolled actuary, to the Office of Professional Responsibility (OPR). See IRM 8.10.2.1.2.2, Reports to Outside Officials, for procedures on reports to the Office of Professional Responsibility and IRM 20.1.6.12.3, Referral to the Office of Professional Responsibility.

  6. ATEs should exercise discretion in making referrals to OPR for other return preparer penalties. Referrals of asserted IRC 6694(a) and/or IRC 6695(a) through (g) penalties to OPR should be based on a pattern of behavior or penalties across multiple taxpayers, tax issues or tax years.

8.11.3.5  (09-24-2013)
Closing Procedures for Return Preparer Penalty Cases

  1. Refer to IRM 8.20.7.8.4, Return Preparer Penalty Closing Procedures, for APS closing procedures.

  2. Preparer penalties are closed the same as other penalty appeals with the following additions:

    1. Form 5402, Appeals Transmittal and Case Memo, will be included in the closing package. It should include information on the revised penalty amounts needed to update ACDS.

    2. Form 8278 will be included and will require processing.

  3. 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
    Premature Referral (case returned to Examination) 20

  4. APS will assess or abate penalty per the ATE prepared Forms 5402 and 8278 instructions.

    1. Penalties are assessed using TC 240 and the applicable reference code.

  5. If closing a case as a premature referral that contains an IRC 6695(g) penalty, the ATE will advise APS to return the case to the appropriate EITC coordinator by notating this in the other remarks section of the Form 5402. The list of EITC coordinators can be found at http://mysbse.web.irs.gov/exam/tip/rp/contacts/12536.aspx.


More Internal Revenue Manual