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Penalty Information for Authorized IRS e-file Providers (Updated 08/20/2015)

Preparer penalties may be asserted against an individual or firm meeting the definition of a tax preparer under I.R.C. §7701(a)(36) and Treas. Reg. §301.7701-15. Preparer penalties that may be asserted under appropriate circumstances include, but are not limited to, those set forth in I.R.C. §§ 6694, 6695, 6701 and 6713.

Under §301.7701-15(c), Providers are not tax return preparers for the purpose of assessing most preparer penalties as long as their services are limited to "typing, reproduction or other mechanical assistance in the preparation of a return or claim for refund". If an ERO, Intermediate Service Provider, Transmitter or the product of a Software Developer alters the return information in a non-substantive way, this alteration is considered to come under the "mechanical assistance" exception described in §301.7701-15(c). A non-substantive change is a correction or change limited to a transposition error, misplaced entry, spelling error or arithmetic correction.

If an ERO, Intermediate Service Provider, Transmitter or the product of a Software Developer alters the return in a way that does not come under the "mechanical assistance" exception, the IRS may hold the Provider liable for income tax return preparer penalties. See Treas. Reg.§301.7701-15(c); Rev. Rul. 85-189, 1985-2 C.B. 341 (which describes a situation where the Software Developer was determined to be an tax return preparer and subject to certain preparer penalties).

A penalty may be imposed, per I.R.C. §6695(f), on a return preparer who endorses or negotiates a refund check issued to any taxpayer other than the return preparer. The prohibition on return preparers negotiating a refund check is limited to a refund check for returns they prepared.

A preparer that is also a financial institution, but has not made a loan to the taxpayer on the basis of the taxpayer’s anticipated refund, may

  • cash a refund check and remit all of the cash to the taxpayer
  • accept a refund check for deposit in full to a taxpayer’s account provided the bank does not initially endorse or negotiate the check, or
  • endorse a refund check for deposit in full to a taxpayer’s account pursuant to a written authorization of the taxpayer.

A preparer bank may also subsequently endorse or negotiate a refund check as part of the check-clearing process through the financial system after initial endorsement. Under Treas. Reg. 1.6695-1(f), a tax preparer, however, may affix the taxpayer's name to a check for the purpose of depositing the check into the account in the name of the taxpayer or in joint names of the taxpayer and one or more persons (excluding the tax return preparer) if authorized by the taxpayer or the taxpayer's recognized representative. The IRS may sanction any income tax return preparer that violates this provision.

In addition to the above-specified provisions, the IRS reserves the right to assert all appropriate preparer and non-preparer penalties against a Provider as warranted.

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