20.1.6 Preparer, Promoter, Material Advisor Penalties

Manual Transmittal

July 26, 2017

Purpose

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

Material Changes

(1) Several broken links updated along with other minor editorial revisions as needed.

(2) IRM 20.1.6.1- Changes made to update IRM in accordance with new internal control rules.

(3) IRM 20.1.6.2.1- Table with Penalty Reference Numbers (PRN’s) added

(4) IRM 20.1.6.4.13.2- Changes made to IRM to establish an increased penalty amount for IRC 6694(b) as a result of changes made by the PATH Act.

(5) IRM 20.1.6.5- Changes made to incorporate the expanded credits to which IRC 6695(g) applies per the PATH act.

(6) IRM 20.1.6.5.7.2- Added section that details IRC 6695(g) post-PATH act

(7) Exhibit 20.1.6-1- Adds a chart to show the IRC 6695 (a)-(g) inflationary rates by year

Effect on Other Documents

This IRM supersedes IRM 20.1.6 dated September 10, 2013, and it incorporates IPU 14U0456, issued 03-07-2014; IPU 15U1580, issued 10/29/2015; IPU 16U0837, issued 05/02/2016; and IPU 16U1783 issued 12/20/2016.

Audience

All operating division employees that work with penalties.

Effective Date

(07-26-2017)

Adina Leach
Director, Business Support Office
Small Business/Self-Employed

Program Scope and Overview

  1. Purpose: The purpose of this IRM section is to convey policy as set by the Office of Servicewide Penalties as it relates to return preparer, promoter, and material advisor penalties.

  2. Audience: This IRM provides guidelines to be followed by all operational and processing functions, Servicewide.

    Note:

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

  3. Policy Owner: The Business Support Office (BSO) is under Operations Support (OS). SB/SE is responsible for overseeing civil penalties, including return preparer penalties.

  4. Program Owner: The Office of Servicewide Penalties (OSP) is responsible for preparer, promoter, and material advisor penalty policy.

  5. Contact Information: To recommend changes or make any other suggestions to this IRM, email OSP at *Servicewide Penalties Team. Also seeIRM 1.11.6.6, Providing Feedback About an IRM Section - Out of Clearance.

Background

  1. Return preparer, promoter, and material advisor penalties are important tools for IRS enforcement. In addition, 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).

Authority

  1. 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 incompetent tax return preparers, abusive transaction promoters, and material advisors. Penalty assertion is one enforcement vehicle for noncompliant return preparers, promoters, and material advisors.

  2. Pertinent IRC sections related to preparer, promoter, and material advisor penalties include:

    • IRC 6694

    • IRC 6695

    • IRC 6700

    • IRC 6701

    • IRC 6707

    • IRC 6707A

    • IRC 6708

    • IRC 6713

    • IRC 7407

    • IRC 7408

Responsibilities

  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 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, promoter, 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.

  6. All actions will be done in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).

    Note:

    Additional information may be found at http://www.irs.gov/taxpayer-bill-of-rights

Fair and Consistent Approach to Penalty Administration
  1. The IRS’s approach to return preparer , promoter , and material advisor penalty 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.

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 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 initial determination, 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 satisfy the requirements of IRC 6751(b). 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. 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.

  3. 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.

Program Management and Review

  1. Every function in the IRS has a role in proper penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with the penalty policy statement (Policy Statement 20-1) and philosophy. Attention should be directed to the coordination of penalty programs between offices and functions to make sure that approaches are consistent and penalty information is used for identifying and responding to compliance problems.

  2. Managers should continuously review information for trends that may suggest changes in compliance programs, training courses, educational programs, penalty design, and penalty administration. Managers should institute, on an ongoing basis, a quality review system that evaluates the timely and correct disposition of penalty cases and encourages consistent administration of penalties.

  3. 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.

  4. 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 investigation.

  5. 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.

Terms/Definitions/Acronyms

  1. Refer to the following exhibits:

    • Exhibit 20.1.1-7, Table of Abbreviations and Acronyms, and

    • Exhibit 20.1.1-8, Dictionary of Key Terms

Related Resources

  1. Additional forms and resources include:

    • Form 8278 for assertion of various civil penalties

    • Form 5816 an examination report for IRC 6694/6695/6713 penalties

    • Exhibit 20.1.6-1 for inflation adjusted penalty rates for applicable IRC sections contained within this IRM

Penalty Case

  1. The following subsections are reminders for use of the Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

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 Form 8278 the taxpayer receives is the notice and demand required by IRC 6671 for payment provides an explanation of the penalty being assessed (or reference the explanation provided by the examiner), the amount due, and the other actions available.

  5. The following is a list of the PRN’s that relate to this IRM:

    IRC Section Title PRN
    6694(a) Understatement of Taxpayer’s Liability Due to Unreasonable Position 645
    6694(b) Understatement of Taxpayer’s Liability Due to Willful or Reckless Conduct 650
    6695(a) Failure to Furnish Copy to Taxpayer 624
    6695(b) Failure to Sign Return or Claim for Refund 624
    6695(c) Failure to Furnish Identifying Number 624
    6695(d) Failure to Retain Copy or List 624
    6695(e) Failure of Preparer Employer to File Information Returns 624
    6695(f) Negotiation of Taxpayer’s Refund Check 626
    6695(g) Failure to be Diligent in Determining Eligibility for CTC, AOTC or EITC 627
    6700 Promoting an Abusive Tax Shelter 628
    6701 Aiding and Abetting the Understatement of a Tax Liability 631
    6707 Failure to Provide Information about a Reportable Transaction 634
    6707A Failure to Include Reportable Transaction Information with Return 648
    6708 Failure to Maintain List of Advisees of Reportable Transactions 636
    6713 Disclosure or Use of Information by Return Preparer 633

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 and discontinued investigation 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).

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.

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.

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 actions to pursue injunction

    • Material advisor penalties

    • Failure to disclose reportable transaction penalties

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

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

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.

Failure to Disclose Reportable Transaction

  1. A taxpayer’s failure to disclose a reportable transaction is subject to a penalty pursuant to IRC 6707A, Penalty for Failure to Include Reportable Transaction Information With Return. See IRM 4.32.4.

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-Civil Penalty Approval Form. Estate and gift tax examiners should use the penalty lead sheet in the Notebook Job Aid. LB&I Examiners should document their decision to proceed or not using SAIN:011. Other BOD’s may use a functional equivalent. 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, in lead sheet 300-Penalty Approval Form, or its functional equivalent, 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 20.1.6.1.3.2 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. Use 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.

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://publish.no.irs.gov/cat12.cgi?request=CAT1&catnum=20189

    .

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&catnum=20189 for additional information.

  6. A nonsigning preparer who prepares a schedule, 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 consider the size and complexity of the item relative to the taxpayer’s gross income and the size of the understatement attributable to the item in comparison to the tax payer’s reports tax liability. 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 of tax return preparer.

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).

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.

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

      .

IRC 6694(a) Understatement Due to Unreasonable Positions

  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.

IRC 6694(a)(2)— Unreasonable Position

  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.

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. If a return position is reasonably based on 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), the return position will generally satisfy the reasonable basis standard."

    Note:

    Lesson 2 of Training Publication 26809-001 provides further guidance on this issue. The website address is http://publish.no.irs.gov/cat12.cgi?request=CAT1&catnum=20189

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.

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, for advice given before December 31, 2007, and for 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.

Adequate Disclosure Defined

  1. The criteria for adequate disclosure is outlined and defined in the following IRM sections:

    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.

Signing Tax Return Preparer Adequate Disclosure
  1. Disclosure of a position for which there is a reasonable basis but not substantial authority is adequate if the nonsigning tax return preparer meets the following standards .

  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.

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 but does not satisfy substantial authority, disclosure of that position is adequate if:

    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 for which there is a reasonable basis but not substantial authority, disclosure of that position is adequate if:

    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.

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.

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.

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 functional 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.

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.

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).

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. The PATH Act increased the IRC 6694(b) penalty to the greater of $5,000 or 75 percent of income derived (or to be derived) by the tax return preparer with respect to returns, amended returns, and claims for refund prepared for tax years ending after December 18, 2015.

  3. 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.

  4. 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 75 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 for tax years ending after December 18, 2015.

  5. Examiners calculating the IRC 6694(b) penalty using 75 percent (or 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.

Referrals to Office of Professional Responsibility—IRC 6694

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

Statute of Limitations—IRC 6694

  1. See IRM 20.1.6.21, Statute Of Limitations.

Appeals Procedures

  1. See IRM 20.1.6.19, Appeal Rights.

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:

    Caution:

    The amounts listed below are base rates that are subject to an annual inflation index. Please consult Exhibit 20.1.6-1 for the most current rates.

    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 Child Tax Credit; American Opportunity Tax Credit; and Earned Income Credit, any return preparer who fails to comply with the 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 on or before December 31, 2011 the penalty is $100 per failure. There is no maximum amount. For any tax returns or claims for refund filed for a tax year ending after December 31, 2011 the penalty is $500 per failure. There is no maximum amount.

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 if the following are true:

    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).

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 3.42.5.9.1.3 , 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 entire 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 and amended returns 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. 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 if the following are true:

    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).

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 - https://www.irs.gov/tax-professionals/ptin-requirements-for-tax-return-preparers 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 if the following are true:

    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.

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 if the following are true:

    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).

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), , 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.

Negotiation of a Taxpayer’s Refund Check—IRC 6695(f)

  1. The IRC 6695(f) penalty 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 return) 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.

  5. The penalty is imposed for each 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 amount of 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.

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. Subsequently 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.

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 Before December 31, 2011

  1. The IRC 6695(g) penalty applies if a 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. 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 on or 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).

  3. 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.

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

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 and Before January 1, 2016
  1. The IRC 6695(g) penalty applies if a tax return preparer fails to comply with due diligence requirements with respect to determining eligibility for, or the amount of, the EIC.

  2. 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.

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

  4. See IRM 20.1.6.5.7 (3) above which lists 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.

Failure to Be Diligent in Determining Eligibility for Child Tax Credit; American Opportunity Tax Credit; and Earned Income Tax Credit—IRC 6695(g) for Tax Returns or Claims for Refund for Tax Years Beginning After December 31, 2015
  1. The IRC 6695(g) penalty applies if a tax return preparer fails to comply with due diligence requirements with respect to determining eligibility for, or the amount of, the Child Tax Credit (CTC), American Opportunity Tax Credit (AOTC), and/or the Earned Income Credit (EIC).

    Note:

    The penalty should be applied per credit, not per return. Therefore, if a preparer fails to be diligent in determining eligibility for, or the amount of all three credits on the same return, the preparer would be penalized for each violation.

  2. 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 beginning after December 31, 2015.

    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 by the taxpayer to the tax return preparer or otherwise reasonably obtained by the tax return preparer.

    3. The tax return preparer must either complete the appropriate 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 credit computation, including the method and information used to make the computation.

    4. The completion of the 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 credit 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.

  3. Compliance visits with preparers to determine the due diligence requirement for the EIC, the CTC, and/or the AOTC are not third party contacts that require advance notification.

Who Asserts the Penalties

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

Collection Procedures

  1. When Collection employees secure delinquent returns or claims for refund and determine that a preparer has not complied with the provisions of IRC 6695), a penalty will be asserted. The Collection employee who secures the delinquent return or claim will be responsible for requesting the assertion of these penalties.

  2. Effective January 1, 2011, tax return preparers must have and use a PTIN to prepare returns. See the PTIN application website at - https://www.irs.gov/tax-professionals/ptin-requirements-for-tax-return-preparers. If there is an employment arrangement or association, the related EIN must also be on the tax return.

  3. The return preparer may be contacted if relevant information is needed.

  4. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is used to assert preparer penalties. Form 8278 will be forwarded to Collection Centralized Case Processing (CCP) function for input.

Referrals to Office of Professional Responsibility

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

Statute of Limitations

  1. See IRM 20.1.6.21, Statute of Limitations.

Appeals Procedures

  1. See IRM 20.1.6.19, Appeal Rights.

Program Action Cases Overview

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

  2. A program action case (PAC) is a preparer investigation where clients of a questionable preparer are examined to determine whether preparer penalties and or injunctive actions against the preparer is warranted. See IRM 4.1.10.3, Program Actions Cases Overview (PAC).

  3. A PAC is selectively designed to concentrate enforcement activity on preparers who represent habitual noncompliance and lack of competence. Projected examination results are part of, but not the sole deciding factor for a PAC.

  4. A PAC can result in the assessment of IRC 6694 or IRC 6695 penalties which in turn might result in an injunction under IRC 7407, Action to Enjoin Tax Return Preparers. Alternatively, the government might seek an injunction under IRC 7407 without prior assessment of a penalty.

  5. The RPC maintains files containing information on return preparer activity and related Service actions. The file(s) may contain various information received from the Campuses, Examination, Collection, and other sources including some or all of the following:

    1. Copies of Form 5809, Preparer Penalty Case Control Card, showing penalties previously asserted against preparers and pending assertion,

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS.

    2. Information on representative bypass actions, or

    3. Information forwarded through the group manager on examiners’ recommendations for program action or no program action.

    When additional information is received indicating a pattern of noncompliance, consideration will be given to requesting a program action case on the preparer. The RPC should coordinate with the RPCs in other ODs and BUs for pattern of return preparer noncompliance in the other ODs and BUs.

  6. A return preparer can violate both IRC 6694 and IRC 6701 but both penalties may not be assessed with respect to the same document. See IRC 6701(f)(2). It is important that coordination between the RPCs and the Lead Development Center (LDC) occur at various stages of the PAC process.

  7. Before an RPC submits a PAC request, contact will be made with the LDC to determine if an IRC 6700 or IRC 6701 investigation has been considered.

    1. If an IRC 6700 or IRC 6701 investigation is already approved or approval is pending, the RPC will provide support (evidence) to the person conducting the investigation. A PAC will not be requested.

    2. If an IRC 6700 or IRC 6701 investigation on the preparer is not already approved or pending approval, the LDC will evaluate the lead. If there is no indication of promoter activity, the LDC will add the preparer's name to the database or update an existing record to reflect the preparer penalty investigation. The LDC will then place the RPC’s name in the database as the assigned person and the RPC will proceed with the PAC approval process.

    3. If an IRC 6700 or IRC 6701 investigation on the preparer is not already approved or pending approval, but there is indication of promoter activity, the LDC will review the lead on an expedited basis to determine if an IRC 6700 promoter investigation is warranted. If so, then the LDC will notify the RPC that the promoter will be approved for an IRC 6700 or IRC 6701 investigation and the RPC will not proceed with the PAC.

  8. The RPC will contact the local Criminal Investigation (CI) return preparer coordinator to avoid any conflict.

  9. RPCs secure listings of returns prepared by preparers using IDRS command code RPVUE. Both individual and business returns can be identified through RPVUE. See IRM 2.3.63.3, Command Code RPVUE, for further information.

  10. Visit http://mysbse.web.irs.gov/examination/tip/rp/contacts/12293.aspx for a listing of SB/SE's RPCs.

Operating Divisions / Business Units (OD/BU) PAC Functional Procedures

  1. IRM 20.1.6.6, Program Action Case Overview, guidance is applicable to all OD/BU PAC.

  2. However, an OD/BU may have additional guidance it requires for its functional coordinators and it should also be followed.

Penalty for Unauthorized Preparer Disclosure or Use—IRC 6713

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

  2. IRC 6713 imposes a penalty for each unauthorized disclosure or use of information furnished for, or in connection with, the preparation of an individual income tax return. The penalty may be asserted against a preparer or any person providing services in connection with the preparation of an income tax return.

Asserting the Penalty

  1. Examiners assert the penalty (e.g., tax auditors, tax compliance officers, estate and gift tax examiners, and revenue agents).

  2. If return-information was used or disclosed pursuant to a provision of the Code that permits use or disclosure, then the penalty will not be asserted.

  3. Taxpayers, during examinations, may express concern that their tax information was disclosed or used for a purpose other than to prepare, or assist in preparing, their income tax return.

  4. The procedures outlined in IRM 20.1.6.4 (4) and (5) provide guidance that may be applied to this penalty for managerial approval. The ERCS controls are established using Form 5809, Preparer Penalty Case Control Card, or functional equivalent. See IRM 20.1.6.8, Operating Division Business Unit Return Preparer Penalty Functional Procedures, for OD/BU functional procedure cites.

    Note:

    TE/GE penalty investigations will be controlled and established on RCCMS.

  5. If any person prepares a return for compensation or provides services in connection with the preparation of an income tax return, and knowingly or recklessly discloses or uses return information improperly, the examiner should consider making a criminal referral under IRC 7216, Disclosure or Use of Information by Preparers of Returns, to the Treasury Inspector General for Tax Administration (TIGTA). Visit TIGTA's website at https://www.treasury.gov/tigta/contact_report.shtml for further guidance for a criminal referral under IRC 7216.

Computing the Penalty

  1. For each unauthorized disclosure or use of return information under IRC 6713, a penalty of $250 may be asserted. The total amount cannot exceed $10,000 per person per calendar year.

Coordination With Other Penalties

  1. The IRC 6713 penalty can be asserted in conjunction with any other preparer penalty.

Appeal Rights

  1. See IRM 20.1.6.19, Appeal Rights.

Statute of Limitations

  1. There is no statute of limitations for this penalty.

Referrals to Office of Professional Responsibility

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

Operating Division Business Unit Return Preparer Penalty Functional Procedures

  1. The OD/BU functional return preparer procedures provide guidance for its examiners respectively.

Examiners Operating Division Business Unit Functional Guidance Topics

  1. The OD/BU functional guidance addresses:

    1. Auditing the taxpayer.

    2. Identifying preparer problems.

    3. Gathering pertinent information from audit of preparers' clients' tax return.

    4. Finishing preparer's client tax case.

    5. Establishing and working a preparer penalty.

    6. Contacting the return preparer coordinator (RPC).

    7. Preparing Form 5809, Preparer Penalty Case Control Card, to establish on ERCS.

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS.

    8. Determining the statute.

    9. Charging time to preparer penalty case.

    10. Determining when to forward a copy of the completed Form 5809 or the procedure for the functional equivalent of Form 5809 to the RPC.

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS.

    11. Contacting the preparer and conducting the interview.

    12. Determining if preparer penalties are warranted.

    13. Preparing Form 5816, Report of Tax Return Preparer Penalty Case.

    14. Closing procedures for agreed, unagreed, no-change, and prompt assessment cases.

    15. Providing guidelines for preparation of return preparer penalty and related forms:

      Form Title
      Form 872-D Consent to Extend the Time on Assessment of Tax Return Preparer Penalty
      Form 5816 Report of Tax Return Preparer Penalty Case
      Form 8278 Assessment and Abatement of Miscellaneous Civil Penalties
      Form 8484 Report of Suspected Practitioner Misconduct
      Form 4665 Report Transmittal
      Form 3244-A Payment Posting Voucher—Examination
      Form 2859 Request for Quick or Prompt Assessment
      Form 3198 Special Handling Notice for Examination Case Processing, or functional equivalent
      Form 5809 Preparer Penalty Case Control Card, or the functional equivalent

      Note:

      TE/GE penalty investigations will be controlled and established on RCCMS.

Operating Division Business Unit (OD/BU) Functional Procedures

  1. The OD/BU functional procedures are found in these locations:

    • SB/SE, Examination: IRM 4.1.10, Return Preparer Program Coordinators, and SB/SE Return Preparer website found at http://mysbse.web.irs.gov/exam/tip/rp/jobaids/12289.aspx.

    • SB/SE, Excise Tax: http://mysbse.web.irs.gov/Specialty/excise/issues/pen/preppen/22967.aspx

    • SB/SE, Estate and Gift: http://mysbse.web.irs.gov/penalty/news/34176.aspx

    • SB/SE, Employment Tax: http://mysbse.web.irs.gov/penalty/news/34176.aspx

    • LB&I: https://organization.ds.irsnet.gov/sites/lbi_ipg_program/penalties/pages/penaltiespreparerprogram.aspx

    • TE/GE: https://organization.ds.irsnet.gov/sites/lbi_ipg_program/penalties/pages/penaltiespreparerprogram.aspx

Processing and Assessment of Return Preparer Penalties Overview

  1. The OD/BU functional procedures provide guidance for processing and assessment of return preparer penalties. See IRM 20.1.6.8 above.

  2. Return preparer penalties are assessed or abated on the Master File (MF) civil penalty module using Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. Check one box in Item 3, MFT, either IMF 55 for individual return preparers or BMF 13 for business return preparers.

    1. These procedures allow tracking of return preparer penalty assessments or abatements. The information must be input completely and correctly for data on the return preparer penalty program to be accurate.

    2. Form 8278 has important reminders and detailed instructions for completing the form.

Centralized Case Processing Functional Procedures

  1. When multiple penalties apply to the same preparer for the same period:

    1. Input the first penalty to be assessed using Blocking Series 52X.

    2. Input subsequent penalties using Blocking Series 53X.

    3. Annotate Form 8278 with the correct blocking series opposite each penalty to facilitate terminal input.

    4. With Blocking Series 53X, CP Notice 55 will be generated to alert the Campus to associate Form 5147, IDRS Transaction Record, for subsequent penalty assessments with the penalty case file containing the input and source documents.

  2. Form 8278 instructions require that both the originator and manager sign and date the form.

    Note:

    SB/SE requires the PSP RPC's signature on Form 8278. See IRM 4.1.10.7.4(4), Closing Return Preparer Penalty Cases Procedures for SB/SE only.


    A managerial 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 of IRC 6751 and Form 8278. 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.

  3. Terminal operator should review Form 8278 for required signatures as follows:

    1. Verify originator's signature in Block 10a: If Block 1a does not contain an originator's signature, Form 8278 and the associated case file should be returned to the manager using Form 3210 procedures.

    2. Verify manager's signature in Block 11a: If Block 11a does not contain a manager's signature, the Form 8278 and the associated case file should be returned to the attention of the originator's manager using Form 3210 procedures.

    3. For SB/SE cases, verify the PSP RPC's signature is on the Form 8278: If Form 8278 does not contain the PSP RPC's signature, return the file to the PSP RPC using Form 3210 procedures. See IRM 4.1.10.7.4 (4).

      Note:

      If the case has an imminent statue and it must be returned for a signature, ensure expedite handling.

  4. Once the terminal operator verifies the required signatures are present, he or she will enter his or her name and date the data is input in Block 12a.

Action to Enjoin Preparers—IRC 7407 & IRC 7408

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

  2. Review IRM 20.1.6.20, Affidavits Overview.

  3. Under IRC 7407 the Service has the power to seek an injunction prohibiting a tax return preparer from engaging in certain practices. The United States may bring a civil action in the U.S. District Court for the district of one of the following:

    1. The return preparer's residence,

    2. The return preparer's principal place of business, or

    3. The residence of the taxpayer with respect to whose return the action is brought.

  4. Return preparer practices that may cause the Service to initiate injunctive action include the following:

    1. Conduct subject to IRC 6694 and IRC 6695 penalties.

    2. Conduct subject to criminal penalties.

    3. Misrepresentation of the return preparer's eligibility to practice before the Service, or his or her experience and education as an income tax return preparer.

    4. Guarantee of payment of a tax refund or of allowance of a tax credit.

    5. Other fraudulent or deceptive conduct that substantially interferes with proper administration of the Internal Revenue laws.

  5. If the court finds that the return preparer has engaged in one or more of the enumerated practices, it may enjoin him or her from further engaging in such conduct if the court finds that injuctive relief is appropriate to prevent the recurrence of such conduct. If the court finds that the return preparer has continually or repeatedly engaged in those practices and than an injunction prohibiting such conduct would no be sufficient to prevent the return preparer interference with tax laws, it may enjoin him or her from acting as a tax return preparer.

  6. The Committee Reports for the Tax Reform Act of 1976 (which enacted IRC 7407) indicate that injunctive relief sought by the Service must be commensurate with the conduct which led to the seeking of the injunction. For example, if a tax return preparer, who is only experienced in preparing individual returns, overstates his qualifications as a preparer by claiming expertise in the preparation of corporate returns, it is anticipated that any injunction would be directed toward the misrepresentation itself or the preparation of corporate returns and not toward preventing the preparer from preparing any returns at all. Furthermore, if some of an employer's employee-preparers have engaged in conduct leading to a request for an injunction against the further preparation of returns, any injunction is to be sought only against those preparers and not the employer (or other employees), unless the employer (or other employees) is actively involved in the improper conduct.

  7. Actions to Enjoin Specific Conduct Related to Tax Shelters and Reportable Transactions. A civil action may be brought under IRC 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions, to enjoin specified conduct. The action may be brought in the U.S. District Court for the district in which the individual resides, has his principal place of business, or has engaged in specified conduct. See IRM 20.1.6.15 for additional information.

  8. The term "specified conduct" means any action, or failure to take action, that is one of the following:

    1. Subject to penalty under IRC 6700, IRC 6701, IRC 6707, or IRC 6708; or

    2. In violation of Treasury Department Circular No. 230, Regulations Governing Practice Before the Internal Revenue Service (Circular 230).

  9. The court may grant injunctive relief against any person if it finds the following:

    1. That the person has engaged in any specified conduct, and

    2. That injunctive relief is appropriate to prevent recurrence of such conduct.

  10. See IRM 4.32.2.9, Injunctive Action, and IRM 4.32.3.7.1, Steps in an Injunctive Case, for additional information.

Action on Injunctions: Seeking an Injunction

  1. Any examiner conducting an investigation under IRC 6694, IRC 6695, IRC 6700, IRC 6701, IRC 6707, or IRC 6708 will consider whether an injunction should be sought under IRC 7407 or IRC 7408. In addition, an injunction may be sought by an examiner to whom an investigation is assigned for activities specified in IRC 7407 or other specified conduct under IRC 7408.

Identifying Persons Subject to an Injunction
  1. Service personnel who become aware of income tax return preparers engaged in activities identified in IRC 7407(b)(1)(A) through (D), Action to Enjoin Tax Return Preparers, will notify in writing the LDC or Office of Tax Shelter Analysis (OTSA) of the facts and circumstances.

Initiating an Investigation Under IRC 7407
  1. An investigation under IRC 7407 will be conducted in the same fashion as an investigation under IRC 6700 and IRC 6701.

Coordination With Other Penalties

  1. The injunction authorized under IRC 7407 is coordinated with civil penalties under IRC 6694 and IRC 6695 and criminal tax provisions. In addition, IRC 7407 can be used in conjunction with IRC 7408, if appropriate.

  2. An injunction may be sought without regard to whether penalties have been or may be assessed against any return preparer.

Statute of Limitations

  1. The IRC does not explicitly provide any limitation period for seeking an injunction under IRC 7407.

Office of Professional Responsibility

  1. See IRM 20.1.6.12, Office of Professional Responsibility.

E-file Program

  1. Return preparers may participate in the IRS e-file program.

Standards for Return Preparer

  1. Preparers in the IRS e-file program must meet standards reflected in Rev. Proc. 2007–40 and Pub 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns. Penalties asserted against preparers are a factor in determining suitability for the IRS e-file program. RPCs will notify electronic filing coordinators (EFCs) of all penalties asserted on return preparers.

  2. Section 6 of Rev. Proc. 2007-40 broadly defines the applicability of return preparer penalties for those participating in the IRS e-file program. The Service may assert all appropriate preparer, non-preparer, and disclosure penalties against an authorized IRS e-file provider as warranted under the circumstances.

  3. SB/SE area offices may establish multi-functional teams to visit electronic filers to determine their compliance with the IRS e-file program procedures. A team approach is preferred if resources are available. A team consists of two (2) representatives who may be from examination. Examiners who participate on these teams charge their time to Activity Code 522.

  4. See IRM 4.21.1, Monitoring the IRS e-file Program, for more information.

  5. See IRM 3.42.4, Electronic Tax Administration—IRS e-file for Business Tax Returns, and IRM 3.42.5, Electronic Tax Administration—IRS e-file for Individual Income Tax Returns, for more information on the e-file program.

Individual Income Tax Return Preparer's—E-file Rules

  1. The Workers, Homeownership, and Business Assistance Act of 2009 added a special rule for preparers of individual income tax returns. See IRC 6011(e)(3), Special Rule for Tax Return Preparers.

  2. The provision generally requires that any individual income tax return prepared and filed by a tax return preparer be filed on magnetic media when such return preparer is a specified tax return preparer for the calendar year during which such return is filed.

  3. "Specified tax return preparer" means, with respect to any calendar year, any tax return preparer, as defined in IRC 7701(a)(36) and Treas. Reg. 301.7701-15, unless such preparer reasonably expects to file 10 or fewer individual income tax returns during such calendar year. If a person who is a tax return preparer is a member of a firm, that person is a specified tax return preparer unless the firm members in the aggregate reasonably expect to file 10 or fewer individual income returns in a calendar year.

  4. Solely for the 2011 calendar year, a tax return preparer will not be considered a specified tax return preparer if the preparer reasonably expects, or if the preparer is a member of a firm, the firm's members in the aggregate reasonably expect, to file fewer than 100 individual income tax returns in the 2011 calendar year. See Treas. Reg. 301.6011-7(a)(3).

  5. The term "individual income tax return" means any return of the tax imposed by subtitle A on individuals, estates, or trusts.

  6. The effective date is for returns filed after December 31, 2010.

Office of Professional Responsibility (OPR)

  1. The Office of Professional Responsibility (OPR) supports the IRS’s strategy to enhance enforcement of the tax law by ensuring that tax practitioners adhere to professional standards and follow the law. OPR is the governing body authorized to interpret and apply Circular 230 and is generally responsible for matters related to practitioner conduct and exclusive responsibility for discipline.

    Note:

    OPR’s authorizing statute is Title 31 U.S.C. section 330. This statute gives OPR broad authority to regulate the practice of representatives before the Department of Treasury for violation of the regulations which are found at 31 CFR Title 10, commonly known as Circular 230.

  2. OPR attorneys are responsible for reviewing, investigating, and resolving alleged ethical violations of the professional standards of competence, integrity, and conduct by tax practitioners who represent taxpayers before the IRS, and for identifying and resolving alleged violations of the applicable professional standards enumerated by Circular 230.

  3. Individuals who may practice before the IRS pursuant to the provisions of Circular 230 include but are not limited to the following:

    • Attorneys

    • Certified public accountants

    • Enrolled retirement plan agents

    • Enrolled actuaries

    • Appraisers

    • Enrolled agents

Practice Before the IRS

  1. Practice before the IRS encompasses all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the IRS.

  2. Such presentations include, but are not limited to the following:

    1. Preparing documents;

    2. Filing documents;

    3. Corresponding and communicating on behalf of a client with the IRS;

    4. Rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and

    5. Representing a client before the IRS at conferences, hearings and meetings.

  3. Practice also may consist of providing written advice based on an unreasonable factual or legal assumption as well as giving a false opinion, knowingly, recklessly or through gross incompetence.

    Note:

    Enrolled actuaries are limited to representation with respect to issues involving specific employee and annuity plans as defined in section 10.3(2) of Circular 230. Similarly, enrolled retirement plan agents are limited to representation with respect to issues involving certain employee plans and forms under the 5300 and 5500 series which are filed by retirement plans and plan sponsors, but not with respect to actuarial forms or schedules. See section 10.3(e)(2) of Circular 230.

  4. An unenrolled tax return preparer who prepares and signs a taxpayer’s tax return as the preparer may represent the taxpayer before examiners, customer service representatives, or similar officers and employees of the IRS during and examination of the taxable year or period covered by that tax return. This right does not permit these individuals to represent the taxpayer, regardless of the circumstances requiring representation, before appeals officers, revenue officers, counsel or similar officers or employees. For tax returns prepared and signed after 2015, Rev. Proc. 2014-42 requires participation in the Annual Filing Season Program in order to participate as a taxpayer’s representative before the IRS

Sanctions for Violation of the Regulations

  1. OPR may sanction a practitioner, after notice and an opportunity for a hearing, who is shown to be incompetent or disreputable (within the meaning of section 10.51 of Circular 230) or who fails to comply with and or knowingly and willfully violates any regulation enumerated by Circular 230 or, who with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client.

  2. Sanctions available to OPR include issuing a censure (a public reprimand), and suspending or disbarring the practitioner's privilege to practice before the IRS.

  3. In certain situations, OPR may impose a monetary penalty on a representative who engages in conduct subject to sanction. If the representative was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the monetary penalty may also be imposed on such employer, firm, or entity if it knew, or reasonably should have known, of such conduct. The amount of the penalty may not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to, or in lieu of, any suspension, disbarment or censure of the practitioner and may be in addition to a penalty imposed on an employer, firm or other entity.

  4. OPR may also seek Department of Justice assistance in obtaining an injunction.

  5. OPR may also disqualify any appraiser for a violation of the rules applicable to appraisers.

Referral to the Office of Professional Responsibility

  1. Circular 230 section 10.53 specifies that if an officer or employee of the IRS has reason to believe that a practitioner, as described above, has violated any provision of Circular 230, the officer or employee must promptly make a written report to the Director of OPR of the suspected violation.

  2. Based on the above, the decision to refer a particular matter to OPR is not an issue for negotiation with a taxpayer or practitioner. OPR referrals may not be negotiated as a settlement item with respect to any IRS or Title 26 tax matter.

  3. The potential that a matter may be referred to OPR should never be discussed with a taxpayer or a representative . In certain situations, it is acceptable to remind a practitioner of his or her duties relative to Circular 230; however, IRS employees should never imply or infer that a referral to OPR will result in disciplinary action against a practitioner.

  4. Each referral to OPR should describe and document the practitioner's actions that support disciplinary action. Include a summary of the suspected misconduct providing as much detail as possible regarding the alleged misconduct along with supporting documentation.

  5. Once an IRS employee makes a referral with the approval of the employee’s manager, OPR will contact the employee within 30 days to acknowledge the referral and may request additional information.

  6. Examiners should exercise discretion in making referrals of assessed IRC 6694(a) penalties to OPR. Referrals of assessed IRC 6694(a) penalties to OPR should be based on a pattern of failing to meet the required penalty standards under IRC 6694(a).

  7. When preparer penalties are assessed under IRC 6694(b) for willful or reckless conduct pertaining to an examination case closed agreed or unagreed, a referral to OPR is mandatory.

  8. For penalties imposed pursuant to IRC 6695(a) through (g), examiners should exercise discretion in making referrals to OPR. However, in matters where preparer penalties are assessed when there is willful neglect, examiners should consider making a referral to OPR.

  9. The RPC, based on assessed IRC 6694(a) penalties, may identify a pattern of penalties pertinent to a particular examination or across multiple clients that warrant a referral to OPR and initiate that referral to OPR.

  10. IRC 6700 and IRC 6701 penalties when assessed, are mandatory referrals to OPR.

  11. Federal courts have the authority to permanently prohibit individuals from practicing before the IRS. This usually results from an IRC 6700 or IRC 6701 investigation. Examiners assigned promoter investigations should consider a referral to OPR where practitioner misconduct is present and a complaint for injunction is not filed for the practitioner misconduct.

  12. When making a return preparer referral to OPR involving a Circular 230 practitioner, examiners will do the following:

    1. Complete and forward Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, to the Director of OPR through the area RPC based on a preparer or promoter penalty(s).

    2. Review IRM 4.11.55.4.2, Referral to the Office of Professional Responsibility (OPR), for other civil penalty examinations, return examinations that are not civil penalty examinations, and practitioner actions that may warrant a referral to OPR.

  13. Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, is used for the referral to OPR. The referent must complete all parts of Form 8484 following the instructions attached to the form.

    Note:

    Provide a detailed explanation of the suspected misconduct. Attach all supporting documentation to the referral, including reports of penalty assessment against tax practitioners.

  14. Completing the Referral

    1. When a determination is made that a referral to OPR is warranted, follow procedures in IRM 4.11.55.4.2.3, Referral to the Office of Professional Responsibility (OPR)—Procedures.

    2. OPR requires management approval for misconduct reports. Management approval ensures that the misconduct reports are based on objective, generally understood standards of practitioner service, and professionalism. RPCs are a valuable resource and may assist with OPR referrals. In SB/SE Examination, area RPCs have been established and are listed at http://mysbse.web.irs.gov/exam/tip/rp/contacts/12293.aspx, Return Preparer Contacts. SB/SE Employment, Estate and Gift, and Excise each have an RPC. SB/SE Collection can contact SB/SE Examination area RPCs for OPR referral questions. LB&I and TE/GE also have an RPC.

  15. The referent will receive written acknowledgement from OPR. As the case progresses, OPR or a member of the Legal Analysis Branch of OPR may need additional information and cooperation from the examiner, other field offices, or other parts of the Service.

Penalty for Promoting Abusive Tax Shelters—IRC 6700

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

  2. The penalty for promoting abusive tax shelters is imposed on any person who

    1. Organizes (or assists in the organization of) a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement; or

    2. Participates (directly or indirectly) in the sale of any interest in any entity or plan or arrangement in a) above; and

    3. Makes or furnishes or causes another to make or furnish (in connection with such organization or sale)–
      (i) A statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter, or
      (ii) A gross valuation overstatement as to any material matter.

      Note:

      Abusive tax shelters are now also referred to as abusive tax avoidance transactions.

LB&I, SB/SE, and TE/GE Functional Guidance

  1. Under no circumstances should an examiner start a promoter examination without documented approval from the LDC for SB/SE and TE/GE or Technical Tax Shelter Promoter Committee (TTSPC) for LB&I.

  2. IRM 4.32.2.1, Overview of Abusive Transaction (AT) Program, contains an overview of the IRC 6700 and IRC 6701 penalty program concerning the promoters of abusive tax avoidance transactions and the examination of taxpayer participants.

  3. IRM 4.32.2, The Abusive Transactions (AT) Process, contains the administrative procedures.

  4. IRM 4.32.3, Coordination and Roles of Cross Functional Units, contains the cross functional guidance.

  5. The following websites contain functional procedures and guidance.

    1. LB&I: \http://lmsb.irs.gov/hq/srp/OTSA/SWEI/EmergingIssuesServicewide.asp.

    2. SB/SE: http://mysbse.web.irs.gov/examination/examorg/hq/eqts/emerging/18339.aspx.

    3. TE/GE: http://tege.web.irs.gov/article.asp?category=job&title=atat-itg&path=/my-job Examiners should contact the appropriate function through the links on TE/GE Emerging Issues Intranet page.

  6. The SB/SE LDC processes referrals concerning promoters of abusive tax avoidance transactions. The LDC evaluates referrals based on established criteria and authorizes IRC 6700 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP for assignment to the field.

  7. The LB&I OTSA processes all leads of potential promoters of tax shelters. LB&I Financial Services is responsible for the field assignments of all LB&I approved promoter investigations.

Who Asserts the Penalty

  1. Examiners assert the penalty. Also refer to IRM 4.32.2.11.1, Approval of Penalties.

Computing the Penalty

  1. See IRM 4.32.2.11.3.2, Computation of IRC 6700 Penalties.

Coordination With Other Provisions

  1. This penalty is in addition to all other penalties that may be imposed under the Code. However, under IRC 6701(f)(3), Coordination With Section 6700, no penalty may be assessed under IRC 6700 on any person with respect to any document for which a penalty is assessed on such person under IRC 6701. This provision allows the IRS to choose which penalty to assert if both apply to a set of facts, but prohibits the Service from assessing penalties under both sections for the same document.

  2. IRC 6694(b) imposes a penalty if a return preparer understates a taxpayer’s liability as a result of willful or reckless conduct. In some instances, a person who is subject to the penalty under IRC 6700 may also be subject to the penalty under IRC 6694(b).

  3. IRC 7206(2), Aid or Assistance, imposes a criminal penalty on any person who willfully aids or assists in making fraudulent or false statements. In some cases, promoters might be criminally prosecuted under IRC 7206(2), for assisting, procuring, or advising the preparation or presentation of a return or other document which is fraudulent or false.

  4. IRC 7408 authorizes the United States to commence a civil action at the request of the Secretary to enjoin any person from further engaging in conduct subject to the penalty under IRC 6700, Promoting Abusive Tax Shelters, etc. The promoter penalty under IRC 6700 and the injunction actions under IRC 7408 are more effective when applied prior to the time investors file their returns. Therefore, abusive tax avoidance transactions should be identified and IRC 6700 penalty investigations that have been authorized by the LDC should be initiated promptly. Also refer to IRM 4.32.2.5, Case Control/Case Assignment Procedures.

Referral to the Office of Professional Responsibility

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

Appeal Rights

  1. See IRM 4.32.2.11.7.1, Promoter Rights for IRC 6700 and IRC 6701.

Special Claim Procedures

  1. See IRM 4.32.2.11.7.1.1, Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701, applicable per IRC 6701(c).

Statute of Limitations

  1. There is no statute of limitations on assessment with respect to the promoter penalty imposed by IRC 6700.

Penalties for Aiding and Abetting—IRC 6701

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

  2. Review IRM 20.1.6.20, Affidavits Overview.

  3. IRC 6701 is the penalty for aiding and abetting understatement of tax liability.

  4. The penalty is for any person who does the following:

    1. Aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document;

    2. Knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws; and

    3. Knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

  5. The burden of proof for this penalty lies with the government. Most court decisions hold that the government need only establish its proof by a preponderance of evidence rather than the clear and convincing evidence standard.

  6. Amount of Penalty—The penalty is $1,000, however, if the return, affidavit, claim or other document relates to a corporation, the penalty is $10,000.

Activities Subject to the Penalty

  1. Key words in the penalty are "document," "knows," and "understatement." For the penalty to be imposed, the person penalized must be implicated in the preparation or presentation of a document some portion of which he or she knows or has reason to know, will be used in connection with a material matter arising under the tax laws and knows that such position would result in an understatement of tax liability if so used.

    1. In general, tax counselors who advise clients to take unsupported filing positions or to file false or fraudulent returns are subject to the penalty.

    2. The authors of legal opinions made available to promoters of tax shelters are another target of the penalty. A carefully fabricated legal opinion may lend credence to an abusive tax shelter. The penalty may be imposed even if the opinion does not contain any false advice if the writer knows that the opinion is based on inaccurate assumptions and/or knows of other facts which render the legal advice false.

    3. The penalty can be imposed for gratuitous advice or assistance in preparing any document.

    4. In order to aid in the understatement of another’s tax, it is not necessary to actually prepare the tax return or document that leads to the understatement. A person who controls the activities of subordinates and either orders the subordinates to act, or does not prevent their participation in actions that person knows will produce an understatement, is subject to the penalty under IRC 6701.

  2. The definition of procures, subordinate, and advises are as follows:

    1. The term "procures" includes ordering (or otherwise causing) a subordinate to do an act subject to the penalty. It also includes knowing of, and not attempting to prevent, participation by a subordinate in such an act.

    2. The term "subordinate" means any other person (whether or not a director, officer, employee, or agent of the taxpayer involved) over whose activities the person has direction, supervision or control. Such direction must be direct and immediate. Where a subordinate is directed or expected, as a condition of retaining his position, to participate in the prohibited activity by a person who directs, supervises, or controls such subordinate, the latter person is the one potentially subject to the penalty.

    3. The term "advises" includes actions of independent contractors such as lawyers and accountants who counsel a particular course of action.

      Note:

      A person furnishing typing, reproduction, or other mechanical assistance with respect to a document is not to be considered as having aided or assisted in the preparation of the document for purposes of the statute solely by reason of such assistance.

  3. Congressional intent in enacting the provision.

    1. A tax advisor would not be subject to this penalty for suggesting to a client an aggressive but supportable filing position even though that position was later rejected by the courts and even though the client was subjected to the substantial understatement penalty. However, if the advisor suggested a position which he or she knew could not be supported on any reasonable basis under the law, the penalty would apply.

    2. No person will be subject to the penalty unless they are "directly involved in aiding or assisting in the preparation of a false or fraudulent document under the tax laws." Thus, the preparation of a correct schedule by a preparer to be incorporated in a return will not expose the preparer of the schedule to a penalty even though the preparer is aware other portions of the return may be fraudulent.

  4. Single penalty per taxpayer per period.

    1. If a penalty is imposed on a person with respect to a federal tax document, no penalty shall be imposed under IRC 6701 on such person with respect to any other federal tax document relating solely to the same taxpayer and the same taxable period, or, if there is no taxable period, the same taxable event. If, however, such other federal tax document also related to another taxpayer or another taxable period or taxable event, a second penalty may be imposed under IRC 6701 with respect to such other federal tax document.

    2. A husband and wife who make a joint return of income tax are considered to be the same taxpayer for the taxable year.

      Note:

      Someone who assists two taxpayers in preparing false documents would be liable for a $2,000 penalty whereas the penalty would be only $1,000 if he had advised in the preparation of two false documents for the same taxpayer. Similarly, an advisor who prepares a false partnership return and then false Schedules K-1 for 10 individual partners would be subject to a $10,000 penalty.

LB&I and SB/SE Functional Guidance

  1. Under no circumstances should an IRC 6701 penalty examination be started without documented approval from one of the following:

    1. LDC for SB/SE,

    2. TTSPC for LB&I reportable transactions, or

    3. RPC for LB&I non-reportable transactions involving tax return preparers.

  2. IRM 4.32.2, The Abusive Transactions (AT) Process, contains the administrative procedures.

  3. IRM 4.32.3, Coordination and Roles of Cross Functional Units, contains the cross functional guidance.

  4. The following websites contain functional procedures and guidance.

    1. LB&I: https://organization.ds.irsnet.gov/sites/lbi_ipg_program/penalties/pages/penaltiespreparerprogram.aspx

    2. SB/SE: http://mysbse.web.irs.gov/examination/tip/preparerinvestigations/default.aspx

  5. The SB/SE LDC processes referrals for IRC 6701 penalty examination. The LDC evaluates referrals based on established criteria and authorizes IRC 6701 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP unit for assignment to the field.

  6. The LB&I OTSA evaluates referrals based on established criteria and presents the referral to the TTSPC. The TTSPC authorizes IRC 6701 investigations when warranted for reportable transactions. For tax return preparer investigations in LB&I which do not involve a reportable transaction, approval of the RPC is required and assistance of local counsel should be requested.

Development of the Required Referral

  1. A person subject to penalty under IRC 6701 may be identified by one of the following:

    • Area field examiner

    • Campus correspondence examiner

    • IRS appraiser and or engineer

    • Any other IRS employee who determines that the penalty might apply

      Note:

      Many of these cases will be discovered during LB&I examinations. However, the referral should be based on the taxpayer under penalty investigation, in most cases, an SB/SE taxpayer.

Evidence Supporting the Government's Burden of Proof
  1. IRC 6694 penalties may only be imposed on tax return preparers. IRC 6701 penalties may be imposed on any person, including tax return preparers.

    1. The government’s burden of proof under IRC 6694(b) and IRC 6701 is not sustained by the mere presence of unreported income or overstated credits and deductions.

    2. The focus is on the information that establishes the knowledge, willfulness, or recklessness of the preparer (e.g., information conveyed by the taxpayer to the preparer, information known or reasonably known by the preparer, and or the inquiries or statements directed by the preparer to the taxpayer).

      Example:

      If the preparer fabricates deductions (without the taxpayer’s knowledge), the preparer could be liable for a penalty under IRC 6694(b) or IRC 6701 because ohe willfully attempting to understate the tax and because ohe prepared a return based on information which is known by the preparer to result in an understatement of the taxpayer’s tax liabilities.

  2. Even though a preparer may in good faith rely on the taxpayer to provide accurate information, the preparer may not ignore the implications of such information and must make reasonable inquiries when information furnished appears to be incorrect or incomplete. It must be shown that the preparer failed to make any reasonable inquiry under circumstances required by rule or regulation, and a deliberate act of omission prevails.

  3. The evidence should show the amount of understatement on each return related to IRC 6701 activity. Examples of evidence to be collected include, but are not limited to the following:

    1. Tax returns or other documents that were prepared by the person under investigation. Although copies may be used during the investigation, originals or certified copies will be needed for introduction in court.

    2. Affidavits taken from taxpayers whose federal tax returns were prepared by the person under investigation. These affidavits should define the items falsely reported on the filed return as well as any other preparer violations. The affidavits are used for report purposes, but the individuals must be available to testify if the case goes to court. Review IRM 20.1.6.20, Affidavits Overview.

    3. Computation of loss to the government due to the understatement of tax attributable to the return preparer.

    4. False receipts or other documents to establish the involvement of the individual under investigation in aiding or assisting in the filing of false documents specified in IRC 6701.

    5. Affidavits taken from third parties who can testify as to the preparer’s tax knowledge and personal responsibility in the preparation of the tax returns or other factors bearing on the investigation.

    6. Refer also to IRM 4.32.2.7.6, Evidence.

Coordination With Other Penalties

  1. The penalty under IRC 6701 is not imposed on a person with respect to a federal tax document if a penalty with respect to such document has been assessed on such person under IRC 6694. The IRC 6701 penalty may be imposed, however, with respect to any other federal tax document for which the penalty under IRC 6694 has not been assessed, even though the document relates to the same taxpayer and taxable year as a document with respect to which the penalty under IRC 6694 has been assessed.

  2. A penalty under IRC 6701 may not be applied to the same activities that result in the application of a penalty under IRC 6700. Therefore, if a promoter develops promotional materials such as a prospectus and other documents which explain the promotion and those documents are used as the evidence supporting a penalty under IRC 6700 for organizing and promoting an abusive tax shelter, a penalty under IRC 6701 will not be assessed for those same documents. However, if the same promoter prepares a partnership tax return relating to the same tax plan or arrangement, a penalty can be assessed under IRC 6701 for each Schedule K-1 if an understatement of tax liability is reported on the investor’s federal tax returns.

Examples of IRC 6701 Activity

  1. Example 1: A tax advisor would not be subject to the penalty for suggesting an aggressive but supportable filing position to a client even though that position was later rejected by the courts and even though the client was subjected to the substantial understatement penalty.

  2. Example 2: However, if the tax advisor suggested a position which he or she knew could not be reasonably supported by statute or regulation, and the advisor prepared (or assisted in the preparation of) a document for the underlying tax return reflecting that insupportable position, the penalty could apply.

    1. Thus, if a person prepares a return (or a schedule or other portion of a return) for a client reflecting a deduction of an amount the preparer knows is not deductible, the preparer could be subject to the penalty.

    2. However, if a person prepares a schedule or other portion of a return that reflects positions which are reasonably supported by rules or regulations, the person will not be subject to an IRC 6701 penalty even if other portions of the return are erroneous or fraudulent.

  3. Example 3: Taxpayer B was given a winning horse race ticket at a race course by Taxpayer A, the ticket owner. The race course, using information supplied by Taxpayer B, prepared a Form W-2G, Certain Gambling Winnings, in Taxpayer B's name. Taxpayer B received the proceeds from the winning ticket and returned the proceeds to Taxpayer A for a 6 percent fee.

    1. Taxpayer B is a person who has aided, assisted in the preparation of, or procured a document (the Form W-2G) that Taxpayer B knows, or has reason to know, will be used in connection with material matters under the Internal Revenue laws.

    2. Taxpayer B knows that, if used, the document would result in an understatement of Taxpayer A's income tax liability. Thus, Taxpayer B is liable for the IRC 6701 penalty.

  4. Example 4: Mr. C, an accountant, prepared a 2015 return for Taxpayer D, a client. Mr. C knowingly overstated D's expenses on the return, thereby creating a net operating loss (NOL) for the year. Mr. C prepared amended returns for Taxpayer D for 2013 and 2014, claiming refunds for those years based on the 2015 NOL carryback. The carryback was not exhausted in 2014. Mr. E, another accountant, prepared Taxpayer D's 2016 return using the information presented to Mr. E by Taxpayer D, including copies of the document prepared by Mr. C. Mr. E is unaware of the overstatement of expenses by Mr. C and deducted the remaining unused NOL on Taxpayer D's 2016 return.

    1. Mr. C is liable for three separate IRC 6701 penalties for his role in preparing Taxpayer D's 2013, 2014, and 2015 returns, which Mr. C knew, or had reason to know would result in understatements of Taxpayer's D's 2013, 2014, and 2015 federal income tax liabilities.

    2. Mr. E, however, was unaware of the overstatement of expenses on the 2015 return and is unaware of the understatement of tax liability on the 2016 return. Thus, Mr. E is not liable for an IRC 6701 penalty.

  5. Example 5: On January 15, 2016, A, an individual, offers to donate a painting to museum X. B, the curator of the museum, agrees to accept the painting. B offers to backdate a receipt for the donation to December 30, 2015. B knows that the receipt will be used to substantiate A's charitable deduction. A uses the backdated receipt to claim a charitable deduction for 2015.

    1. B has aided in the preparation of a federal tax document knowing that it will be used in connection with a material tax matter and that it will result in an understatement of tax.

    2. Thus, B is liable for the IRC 6701 penalty.

  6. Example 6: Taxpayer F retains Mr. G., an appraiser, to appraise rare books that she wishes to donate to a university. Mrs. F tells Mr. G. that she needs the appraisal to substantiate a charitable contribution deduction for federal income tax purposes. Mr. G. knows that the fair market value of the books may be any amount between $50,000 and $75,000. Mr. G. offers to provide Mrs. F an appraisal, for a fee, indicating the books are worth $100,000. Mr. G. indicates to Mrs. F that if the IRS challenges the valuation, the appraisal of $100,000 can be used to negotiate a fair market value of $75,000.

    1. Mrs. F agrees to pay the fee for the appraisal indicating the books are worth $100,000, and Mr. G. prepares the appraisal.

    2. Mr. G. has aided in the preparation of a document knowing that it will be used in connection with a material tax matter and that it will result in the understatement of tax liability. Thus, Mr. G. is liable for the IRC 6701 penalty.

  7. Example 7: Mrs. H, an accountant, overstates the value of depreciable property on an estate tax return. Mrs. H knows there is no reasonable basis for the valuation. Mrs. H also knows that the valuation claimed on the estate tax return will not understate the tax liability of the estate because of the application of the unified credit. Mrs. H, however, intends that the value claimed on the return will be used by the beneficiary of the estate in computing depreciation deductions. Mrs. H has aided in the preparation of a tax document and knows that the estate tax return will result in an understatement of the tax liability of the beneficiary. The IRC 6701 penalty therefore applies.

  8. Example 8: Mr. A, an attorney, knowingly understates an item of partnership income in preparing a partnership return for calendar year 2015. Mr. A prepares and transmits to the partners Schedules K-1 for the 10 individual partners for the same calendar year reflecting the understated income. Mr. A is subject to ten separate $1,000 IRC 6701 penalties for his preparation of ten Schedules K-1 which Mr. A knew would, if used, result in understatements of the federal tax liabilities of the ten partners on their federal income tax returns. Mr. A will not be subject to an eleventh penalty in connection with the partnership return itself, since the partnership itself is not liable for income tax and the only understatements of tax liability are the understatements of tax liability on the ten partners' individual returns.

  9. Example 9: Mrs. B, an officer of an S corporation under IRC 1361(a)(1), S Corporation Defined, prepares the corporation's tax return for calendar year 2015. Mrs. B intentionally understates the corporation's net capital gain for the taxable year, resulting in an understatement of the corporation's tax liability under IRC 1374, Tax Imposed on Certain Built-in Gains. Mrs. B also prepares Schedules K-1 for the individual shareholders for the same calendar year reflecting the understated capital gain. Mrs. B is subject to a $10,000 penalty for her aid in the preparation of the small business corporation return and a $1,000 penalty for each Schedule K-1 prepared.

    Note:

    If Mrs. B intentionally understated operating income rather than net capital gains, Mrs. B is subject to a $1,000 penalty for each Schedule K-1 prepared, but is not subject to a penalty for the S corporation return since under these facts the S corporation is not subject to tax.

  10. Example 10: Mrs. C, an accountant, prepares false income and gift tax returns for client Mr. D. Each of the returns is prepared for calendar year 2015. The calendar year 2015, however, relates to a period for which different taxes are imposed. Thus, there are two taxable periods for purposes of application of the penalty under IRC 6701 the calendar year 2015 which is the period for which the income tax is imposed, and the calendar year 2015 which is the period for which the gift tax is imposed. Mrs. C is subject to a penalty of $2,000.

Appeal Rights

  1. See IRM 4.32.2.11.7.1, Promoter Rights for IRC 6700 and IRC 6701.

Special Claim Procedures

  1. See IRM 4.32.2.11.7.1.1, Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701, applicable per IRC 6701(c).

Statute of Limitations on Assessment

  1. There is no statute of limitation on assessment of penalties under IRC 6701 because the penalty does not depend on the filing of a return.

Office of Professional Responsibility

  1. When the IRC 6701 penalty is asserted against a practitioner or an appraiser, an information referral to OPR is mandatory. See IRM 20.1.6.12, Office of Professional Responsibility (OPR).

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

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

  2. Review IRM 20.1.6.20, Affidavits Overview.

  3. A civil action may be brought under IRC 7408 to enjoin specified conduct. The action may be brought in the U.S. District Court for the district in which the individual resides, has his principal place of business, or has engaged in specified conduct.

  4. If any citizen or resident of the United States does not reside in, and does not have his principal place of business in, any United States judicial district, such citizen or resident shall be treated for purposes of this as residing in the District of Columbia.

  5. The term "specified conduct" means any action, or failure to take action, that is one of the following:

    1. Subject to penalty under IRC 6700, IRC 6701, IRC 6707, or IRC 6708; or

    2. In violation of Circular 230.

  6. The court may grant injunctive relief against any person if it finds the following:

    1. That the person has engaged in any specified conduct and

    2. That injunctive relief is appropriate to prevent recurrence of such conduct.

Action on Injunctions—Seeking an Injunction

  1. Any examiner conducting an investigation under IRC 6700, IRC 6707, or IRC 6708 will consider whether an injunction should be sought under IRC 7408.

  2. An injunction may be sought by an examiner to whom an investigation is assigned for activities specified in IRC 7407.

Initiating an IRC 7408 Investigation

  1. An investigation under IRC 7408, will be conducted in the same fashion as an investigation under IRC 6700 and IRC 6701.

Procedural Guidance

  1. See IRM 4.32.2.9, Steps in an Injunction Case, and IRM 4.32.3.7.1, Steps in an Injunctive Case, for procedural guidance.

Coordination With Other Penalties

  1. The injunction authorized under IRC 7408 is coordinated with civil penalties under IRC 6700, IRC 6701, IRC 6707, and IRC 6708.

  2. In addition, IRC 7408 can be used in conjunction with IRC 7404, if appropriate.

Statute of Limitations

  1. The Code does not provide any limitation period for seeking an injunction under IRC 7408.

Failure to Furnish Information Regarding Reportable Transactions—IRC 6707

  1. Material advisors, with respect to any reportable transaction as defined in IRC 6707A(c) and Treas. Reg. 1.6011-4(b)(1), are required to timely file an information return under IRC 6111(a), Disclosure of Reportable Transactions, with the Secretary in the manner and on such date as prescribed by the Secretary.

  2. Under IRC 6111(a) the return must include the following:

    1. Information identifying and describing the transaction,

    2. Information describing any potential tax benefits expected to result from the transaction, and

    3. Such other information as the Secretary may prescribe.

  3. Under IRC 6111(b) a material advisor is any person:

    1. Who provides material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and

    2. Who directly or indirectly derives gross income in excess of $250,000 ($50,000 in the case of a reportable transaction substanially all of the tax benefits from which are provided to natural persons), or such other amount as may be prescribed by the Secretary, for such material aid, assistance, or advice.

LB&I and SB/SE Functional Guidance

  1. Under no circumstances should an examiner start a material advisor examination without documented approval from the LDC for SB/SE and TE/GE and TTSPC for LB&I.

  2. IRM 4.32.2, The Abusive Transactions (AT) Process, contains the administrative procedures.

  3. IRM 4.32.3, Coordination and Roles of Cross Functional Units, contains the cross functional guidance.

  4. The following websites contain functional procedures and guidance.

    1. LB&I: http://lmsb.irs.gov/complan/Programs/Research/OTSA/index.aspOffice of Tax Shelter Analysis (OTSA)—Penalties.

    2. SB/SE: http://mysbse.web.irs.gov/examination/examorg/hq/eqts/emerging/18339.aspx .

    3. TE/GE: http://tege.web.irs.gov/article.asp?category=job&title=myjob-atat&path=/my-job, ATAT Portal.

  5. The SB/SE LDC processes referrals concerning material advisors. The LDC evaluates referrals based on established criteria and authorizes IRC 6707 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP unit for assignment to the field.

  6. LB&I functional guidance and procedures for IRC 6707 and IRC 6708, material advisor investigations are as follows:

    1. OTSA has responsibility for making referrals of suspected promoters of abusive tax avoidance transactions and material advisors to the LB&I TTSPC (formerly known as the 6700 committee).

    2. TTSPC considers these referrals and may authorize a promoter and or material advisor examination, as appropriate.

    3. Revenue agents must report suspected cases of material advisor and or promoter activity to OTSA. They forward their findings, along with supporting documentation, to the OTSA designated senior analyst

    4. OTSA reviews and develops these referrals; and those that meet the criteria set forth by the TTSPC will be recommended to TTSPC for audit consideration.

    5. Please note that only the TTSPC may authorize a material advisor examination.

    6. Under no circumstances should an examiner start a material advisor and or promoter examination without sanction from the TTSPC. Please review guidance concerning the type of information that should be gathered before referring an entity or individual for a material advisor and or promoter examination.

    7. The LB&I OTSA link is http://lmsb.irs.gov/complan/Programs/Research/OTSA/index.asp.

Penalty Computation

  1. The amount of the penalty under IRC 6707 for failure to furnish information regarding reportable transactions, other than listed transactions, is $50,000.

  2. If the penalty is with respect to a listed transaction, the amount of the penalty is the greater of the following:

    1. $200,000, or

    2. 50% of the gross income derived by the material advisor with respect to aid, assistance, or advice which is provided before the date the information return is filed.

      Example:

      One cumulative penalty is assessed in the year the failure is discovered for each type of listed transaction that an advisor derives income. For example, an advisor becomes a material advisor to Client X in 2011 with respect to a listed transaction. The advisor derives $400,000 in gross income from advice given to Client X in 2011 even though the advisor has not yet received that amount. The advisor unintentionally does not file a Form 8918 in 2011. In 2012, the advisor becomes a material advisor to Client Y with respect to the same type of listed transaction. The gross income the advisor expects to receive in 2012 from the advice given to Client Y is $100,000. The advisor does not become a material advisor with respect to any other client and unintentionally does not file a Form 8918 in 2012. In 2013 it is determined during an examination that the advisor should have filed Form 8918 for the transactions in 2011 and 2012 and failed to do so by the prescribed date. The advisor is subject to one IRC 6707 penalty in 2013 (the year the failure is discovered) of $250,000 (50% of the gross income [$400,000 in 2011 and $100,000 in 2012] the advisor derived) as there was only one type of listed transaction involved during the two years.

  3. In the case of intentional failure or act, the penalty is 75% of the gross income derived by the material advisor with respect to aid, assistance, or advice which is provided before the date the information return is filed.

Penalty Rescission IRC 6707

  1. The penalty cannot be rescinded (abated) with respect to a listed transaction.

  2. As to reportable transactions, the penalty can be rescinded only in exceptional circumstances where rescinding the penalty would promote compliance with the tax laws and effective tax administration.

  3. The authority to rescind the penalty can only be exercised by the Commissioner or his or her delegate.

  4. There is no right to appeal a refusal to rescind a penalty.

Effective Date Under America Jobs Creation Act

  1. IRC 6707 was amended by the America Jobs Creation Act (AJCA) of 2004 and as amended is effective for returns with a due date of October 23, 2004 or later.

Appeal Rights

  1. See IRM 4.32.2.11.7.2, Promoter Rights for IRC 6707 and IRC 6708 Assessments.

Office of Professional Responsibility

  1. See IRM 20.1.6.12, Office of Professional Responsibility.

Failure to Include Reportable Transaction Information With Return—IRC 6707A

  1. IRC 6707A provides a monetary penalty for the failure to include on any return or statement any information required to be disclosed under IRC 6011, General Requirement of Return, Statement, or List, with respect to a reportable transaction. The IRC 6707A penalty is in addition to any other penalty that may be imposed, and applies without regard to whether the transaction ultimately results in an understatement. It is a stand-alone penalty; it does not require an associated income tax examination.

  2. See IRM 4.32.4,Abusive Transactions, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.

Amount of penalty

  1. For each failure, the penalty is 75 percent of the decrease in tax shown on the return as a result of such transaction which would have resulted from such transaction if the transaction were allowed for federal tax purposes.

    1. The maximum penalty for failure to report a listed transaction is $200,000 for an entity or $100,000 for an individual.

    2. The maximum penalty for failure to report any other reportable transaction is $50,000 for an entity or $10,000 for an individual.

    3. The minimum penalty for failure to report any reportable transaction is $10,000 for an entity or $5,000 for an individual.

    Failure to disclosure a penalty under IRC 6707A(a) in a report required to be filed under section 13 or 15(d) of the Securities Exchange Act of 1934 is treated as a failure to which the penalty under IRC 6707A(b)(2) applies. See IRC 6707 A(e). See Rev. Proc. 2005–51 for additional information about the penalty under IRC 6707A(e).

    1. The maximum penalty is $200,000 if the penalty described above is for failure to disclose a listed transaction.

    2. The maximum penalty is $50,000 if the penalty described above is for failure to disclose any other reportable transaction.

    3. The minimum penalty is $10,000 for failure to disclose any reportable or listed transaction.

Operating Division IRC 6707A Functional Procedures

  1. The operating division functional procedures are located at the following websites.

    1. SB/SE Examination: http://mysbse.web.irs.gov/exam/tip/ajca/default.aspxAJCA Penalties

    2. LB&I: https://organization.ds.irsnet.gov/sites/lbi_ipg_program/penalties/pages/penaltiespreparerprogram.aspx Penalty Investigation—LBI

    3. TE/GE: http://tege.web.irs.gov/article.asp?category=job&title=myjob-atat&path=/my-job, ATAT Procedures and Guidance

Definitions

  1. Reportable transaction: The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under IRC 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

  2. Listed transaction: The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of IRC 6011.

Rescission Request

  1. See IRM 4.32.4, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.

  2. There is no judicial appeal. Notwithstanding any other provision of law, any determination may not be reviewed in any judicial proceeding.

Coordination With Other Penalties

  1. The IRC 6707A penalty is in addition to any other penalty that may be imposed, and applies without regard to whether the transaction ultimately results in an understatement.

Appeal Rights

  1. See IRM 4.32.4, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.

Statute of Limitations

  1. See IRM 4.32.4, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.

  2. The operating division's functional procedures should be reviewed for additional instructions regarding the statute of limitations. See IRM 20.1.6.17.2.

  3. See IRM 4.32.4.1.4, Statute of Limitations—General Information, for additional guidance.

Failure to Maintain Lists of Advisees With Respect to Reportable Transactions—IRC 6708

  1. Under IRC 6112(a), Material Advisors of Reportable Transactions Must Keep Lists of Advisees, Etc., each material advisor with respect to a reportable transaction shall (whether or not required to file a return under IRC 6111 with respect to such transaction) maintain a list that includes the following:

    1. Identifies each person with respect to whom the advisor acted as a material advisor with respect to the reportable transaction, non-listed transaction, and

    2. Contains other information as may be required by the Secretary.

  2. The Secretary may prescribe regulations which provide that, in cases in which two or more persons are required to maintain the same list, only one person would be required to do so.

LB&I and SB/SE Functional Guidance

  1. Under no circumstances should an examiner start a material advisor examination without documented approval from the LDC for SB/SE and TE/GE and TTSPC for LB&I.

  2. IRM 4.32.2, The Abusive Transactions (AT) Process, contains the administrative procedures.

  3. IRM 4.32.3, Coordination and Roles of Cross Functional Units, contains the cross functional guidance.

  4. The following websites contain functional procedures and guidance.

    1. LB&I: http://lmsb.irs.gov/complan/Programs/Research/OTSA/index.asp.

    2. SB/SE -http://mysbse.web.irs.gov/examination/tip/ajca/default.aspx.

    3. TE/GE: http://tege.web.irs.gov/article.asp?category=job&title=myjob-atat&path=/my-job .

  5. The SB/SE LDC processes referrals concerning material advisors. The LDC evaluates referrals based on established criteria and authorizes IRC 6708 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP for assignment to the field.

  6. LB&I functional guidance and procedures for IRC 6707 and IRC 6708, material advisor investigations include the following:

    1. OTSA has responsibility for making referrals of suspected promoters of abusive tax avoidance transactions and material advisors to the LB&I TTSPC (formerly known as the 6700 committee).

    2. The committee considers these referrals and may authorize a promoter and or material advisor examination, as appropriate.

    3. Revenue agents must report suspected cases of material advisor and or promoter activity to OTSA. They forward their findings, along with supporting documentation, to the OTSA designated senior analyst.

    4. OTSA will review and develop these referrals; and those that meet the criteria set forth by the TTSPC will be recommended to the committee for audit consideration.

    5. Only the TTSPC may authorize a material advisor and or promoter examination.

    6. Under no circumstances should an examiner start a material advisor and or promoter examination without sanction from the TTSPC. Please review guidance concerning the type of information that should be gathered before referring an entity or individual for a material advisor and or promoter examination.

    7. The LB&I OTSA link is http://lmsb.irs.gov/complan/Programs/Research/OTSA/index.asp

Penalty Computation

  1. IRC 6708 imposes a penalty on any person required to maintain a list under IRC 6112(a), Material Advisors of Reportable Transactions Must Keep List of Advisees, Etc., who fails to make such list available.

  2. A material advisor who fails to make the list available upon written request by the Secretary within 20 business days after the request will be subject to a penalty of $10,000 for each day of such failure after the 20th business day.

Penalty Relief

  1. The penalty does not apply for any day where the failure to comply is due to reasonable cause.

Effective Date

  1. IRC 6112, as amended by the American Jobs Creation Act of 2004 (AJCA), requires a material advisor to maintain a list identifying each person with respect to whom the advisor acted as a material advisor with respect to a transaction (and such other information as required by regulations) and applies to transactions with respect to which material aid, assistance, or advice is provided after October 22, 2004.

  2. IRC 6708, as amended by the AJCA, imposes a penalty for a material advisor's failure to maintain a list under IRC 6112 and applies to requests for such lists made after October 22, 2004.

Statute of Limitations

  1. IRC 6708 penalties are not subject to a statutory period of limitation. Sage v. United States, 908 F.2d.18 (5th Cir. 1990); Mullikin v. United States, 952 F.2d. 920 (6th Cir. 1991), cert. denied 506 U.S. 827 (1992); Capozzi v. United States, 980 F.2d. 872 (2d. Cir.1992).

Appeals

  1. See IRM 4.32.2.11.7.2, Promoter Rights for IRC 6707 and IRC 6708 Assessments.

Referrals to Office of Professional Responsibility

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

Appeal Rights

  1. Material advisor penalties (IRC 6707 and IRC 6708) have been designated as appeals coordinated issues (ACI). In general, taxpayers and tax return preparers are entitled to one administrative appeal with Appeals. See Treas. Reg. 601.106, Appeals Function. The appeal process differs depending on the penalty involved.

  2. IRC 6694 and IRC 6695 preparer penalties were redesignated, on August 28, 2011, to Appeals Coordination Issue Category of Case (ACIcc) from ACI. Appeals officers are no longer required to obtain review and concurrence by a technical guidance coordinator prior to making a determination of the amount of the penalty.

  3. Preparer and material advisor penalties may be the subject to Rev. Proc. 2003-40, LMSB Appeals Fast Track Settlement Procedure Mediation, and Rev. Proc. 2003-41, SB/SE–Appeals Fast Track Mediation Procedure. Also, Announcement 2011–5, Extension of Fast Track Settlement for SB/SE Taxpayers Pilot Program, procedures may be considered by Appeals during the course of a Collection Due Process hearing. See IRC 6320, Notice and Opportunity for Hearing Upon Filing of Notice of Lien, and IRC 6330, Notice and Opportunity for Hearing Before Levy.

  4. Underlying tax cases—-Unagreed cases. 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.

  5. See IRM 8.11.3 for more on return preparer penalty appeals guidelines.

Pre-Assessment Appeal Rights—IRC 6694, IRC 6695, IRC 6707A, and IRC 6713

  1. Treas. Reg. 1.6694-4(a)(1) allows for pre-assessment appeal rights of IRC 6694 penalties. Although the regulation only relates to IRC 6694 penalties, examiners will follow the same guidelines for IRC 6695 penalties. IRC 6694, IRC 6695, and IRC 6713 penalties will have pre-assessment appeal rights.

  2. Examination sends the return preparer a 30-day letter, Letter 1125, Transmittal of Examination Report, with an examination report and Pub 5, Your Appeal Rights and How To Prepare a Protest If You Don't Agree, for appeal procedures. If there is no timely response to the letter, the penalty is assessed. Pre-assessment appeals consideration will be granted if requested for IRC 6694, IRC 6695, and IRC 6713 penalties.

  3. Short statute cases

    1. If the statutory period for assessment is about to expire and the preparer will not agree to an extension, the penalty will be assessed. If the preparer has not previously had the opportunity to request a hearing with Appeals, the preparer, upon request, will be provided post-assessment appeal rights in the same way pre-assessment appeal rights would have been provided. Examiners will advise return preparers that the period for filing a claim for refund under IRC 6694(c), Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty, is not extended by a post-assessment appeal.

    2. Examiners will not submit preparer penalty cases to Appeals if less than 180 days remain on the statute of limitations when received by Appeals. In these instances, examiners will first solicit an extension of the statutory period for assessment.

    3. See IRM 20.1.6.21, Statute Of Limitations.

  4. See IRM 20.1.6.17.2, Operating Division IRC 6707A Functional Procedures.

  5. See IRM 20.1.6.17.6, Appeal Rights.

Post-Assessment Appeal Procedures

  1. There are post-assessment appeal rights for IRC 6707 and IRC 6708 penalties.

  2. In cases where there has not been a prior hearing with Appeals, the person may request, and will be granted, an appeals hearing after assessment. Advise tax return preparers that the period for filing a claim for refund under IRC 6694(c) is not extended by a post-assessment appeal.

Denial of Claim No Prior Appeals Hearing

  1. If a return preparer or promoter has not had a hearing with Appeals and files a claim for refund of assessed penalties, the return preparer or promoter may request, and will be granted, an appeals hearing after the proposed denial of the claim.

Denial of Claim Prior Appeals Hearing

  1. Return preparers for IRC 6694, IRC 6695, and IRC 6713 penalties are currently permitted to request an appeals hearing if they file a claim and the claim is disallowed, even if the case was previously considered by Appeals in pre-assessment status.

Appeals for Special Claims

  1. Preparers and promoters may appeal the denial of a special claim for refund. Administrative appeal rights will be granted when the basis for the claim does not conflict with Appeals procedural rules set forth in Treas. Reg. 601.106(b) of the statement of procedural rules. An appeal should not be based on moral, political, constitutional, religious, or similar arguments.

  2. See IRM 20.1.6.23.1, Special Claim—IRC 6694, IRC 6700 and IRC 6701.

Affidavits Overview

  1. An affidavit is a person's written declaration or statement of facts voluntarily made and confirmed by oath or affirmation before a person with authority for administering it. Affidavits relating to the return preparer program will usually be taken from taxpayers.

  2. Affidavits are not used routinely in return preparer cases; however, affidavits are recommended in all cases where the Service may ask the Department of Justice to seek an injunction. The affidavit will facilitate the filing of a suit, obtaining a preliminary injunction, and an early hearing. Form 2311, Affidavit, can be used for this purpose. See also IRM 4.16.1.3.2.1, Securing Affidavits.

  3. The affidavit should identify and incorporate the following:

    1. The judicial district involved.

    2. The name, TIN, business and home address, and business and home telephone numbers of the witness.

    3. Persons present during the interview and their relation to the investigation.

    4. Tax periods involved.

    5. Specific portions of the return that are false or fabricated, if any.

  4. The affidavit should include other relevant information pertaining to the preparer including the following:

    1. Actions taken by the preparer when informed of the client's examination (e.g., preparer offered to supply false documents to support false deductions, the preparer told the client to ignore the IRS, etc.).

    2. Experience of the preparer in preparing returns.

    3. Education of the preparer.

    4. Where the preparer is or was working.

    5. How the preparer solicits clients and whether the preparer is currently soliciting clients.

  5. Examiners should make the following determinations and include them in the affidavit.

    1. How and when the taxpayer met the person under investigation.

    2. The specific information that the taxpayer gave to the person under investigation, and how and when that information was given.

    3. Whether the taxpayer signed the return, has seen the return, was provided a copy of the return, and had the return explained to them.

    4. If the person under investigation was paid and how the fee was determined (e.g., a set fee, percent of the refund, etc.).

    5. How the fee was paid (e.g., cash, check, money order, barter, etc.).

    6. When the fee was paid (e.g., when the information was provided, after the return was completed, after the refund was received, etc.).

    7. Whether the taxpayer asked the preparer to put false items on the return or claim.

Statute of Limitations

  1. The statute of limitations on assessment of penalties depends on the applicable code section.

    1. IRC 6694(a) and IRC 6695 expire three years from the later of the due date of the underlying related return or the date the return was filed.

    2. There is no statute of limitations on assessment for IRC 6694(b), IRC 6700, IRC 6701, IRC 6708, and IRC 6713 penalties.

    3. If a person required to register a tax shelter failed to file the Form 8264, Application for Registration of a Tax Shelter, or its successor (Form 8918, Material Advisor Disclosure Statement), IRC 6707(a)(1)(A) penalties may be assessed at any time.

    4. Former IRC 6707(b)(2) penalties for failing to include a tax shelter registration number on a return must be assessed within 3 years of filing the return with the missing identification number.

    5. IRC 6707 penalties (as amended effective 10/22/04) must be assessed within 3 years of the filing of the Form 8264, Application For Registration of a Tax Shelter, or its successor (Form 8918).

    6. See IRM 20.1.6.17.7 for IRC 6707A statute of limitations guidance.

    7. There is no statute of limitations on actions to enjoin preparers or promoters under IRC 7407 or IRC 7408.

    Caution:

    Extending the statute using Form 872Consent to Extend the Time to Assess Tax on a taxpayer’s return does not extend the statue for the return preparer penalty case.

  2. The statute on a return preparer penalty case under IRC 6694(a) and IRC 6695 can be extended using Form 872-D, Consent to Extend the Time on Assessment of Tax Return Preparer Penalty. See Rev. Rul. 78-245, IRB 1978-1 C.B. 35.

  3. A transcript of the underlying return that the preparer penalty is based upon should be included in the preparer penalty case file for accurate monitoring of the statute expiration date.

  4. Consents should be obtained when the statute of limitations for assessing the preparer penalty will expire within 180 days and there is insufficient time to complete the examination. Also, the statute for assessment must be extended if the preparer requests to go to Appeals and there is less than 365 days remaining on the statute for assessment, when received by Appeals. Ample time for processing is important because deficiency procedures do not apply to preparer and promoter penalties.

  5. A separate consent should generally be obtained for each taxable period under consideration, but the related taxpayer returns for which the penalties are applicable can be included on each consent.

  6. See IRM 25.6.22.6.15, Preparer Penalty, and IRM 25.6.1.9.13.3, The Period of Assessment, for further information.

  7. See IRM 4.4.25.7, Quick Assessments on Civil Penalties, Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, Area Office Group Procedures, for procedures when the ASED is less than 60 days. Per IRM 4.4.25.8, Quick Assessments on Civil Penalties, Form 8278, CCP Procedures, CCP prepares Form 2859, Request for Quick or Prompt Assessment.

Third Party Contacts—IRC 7602(c)

  1. IRC 7602(c), Notice of Contact of Third Parties, requires that before Service employees initiate contact with third parties for the determination or collection of a taxpayer's tax liability, the taxpayer must be given reasonable notice in advance that third parties may be contacted. IRC 7602(c) also requires the Service to make a record of persons contacted and provide that record to the taxpayer both periodically and upon the taxpayer's request. See third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx for general examination procedures on third party contacts. In certain situations the notice and recordkeeping requirements of IRC 7602(c) may apply to contacts made to determine the applicability of return preparer penalties because these penalties are treated as a tax under IRC 6671, Rules for Application of Assessable Penalties. When IRC 7602(c) applies it is indicated below with reference to specific Code provisions.

  2. During a routine examination, mandatory pro forma inquiries addressed to the taxpayer regarding the preparer's compliance with IRC 6695(a) and IRC 6695(f) are not third party contacts.

    1. The notice requirements of IRC 7602(c) are not immediately triggered if the taxpayer's response to pro forma questions asked as part of a routine examination provides a basis for conducting a preparer penalty investigation.

    2. If the taxpayer indicates that the preparer did not provide a copy of the return and or the preparer negotiated the refund check, examiners should briefly confirm and record the response, discontinue inquiry on the issue, and continue with the examination of the return. Contact the preparer to determine if IRC 6695(a), and or IRC 6695(f), penalties apply. If further contact with the taxpayer regarding the determination of a preparer penalty is necessary, review the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx,. Notification is now required since contact with the taxpayer is a third party contact with respect to a determination of the preparer's liability for a penalty.

  3. IRC 6695(g) compliance visits with preparers to determine the due diligence requirement for the earned income credit are not third party contacts.

  4. During routine examinations, the preparer penalty issue under IRC 6694 is usually not subject to third party notification and recordkeeping requirements. See IRM 4.11.57 , Third Party Contacts, for general guidelines for Examination cases.

    1. The criteria for applying IRC 6694 penalties for unreasonable positions, willful attempts to understate the liability, reckless or intentional disregard of rules and regulations are decided by the character of the adjusted return positions and the preparer's part in the noncompliance.

    2. Information on the applicability of preparer penalties is often a by-product of an examination and does not always require examiners to directly address the taxpayer as a third party for information on the preparer's conduct. The notice requirements of IRC 7602(c) are not immediately triggered by a taxpayer's response that provides a basis for conducting a preparer penalty investigation. For example, in order to account for an erroneous return position and determine if an IRC 6662, Imposition of Accuracy-related Penalty on Understatements, penalty applies against the taxpayer, examiners may ask taxpayers what information was given to the preparer and to what extent the preparer was informed of all relevant, underlying facts.

    3. Information from the taxpayer in response to a proposed IRC 6662 penalty may indicate that the advice exception applies. See Treas. Reg.1.6664-4(c), Reliance on Opinion or Advice and IRM 20.1.5.6.2, Taxpayer's Effort to Report the Proper Tax Liability. Any contact with preparers to determine the applicability of the taxpayer's penalty is a third party contact. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx, for the procedures prior to any additional contacts with the preparer and record the contact.

    4. The notice and recordkeeping requirements come into effect whenever examiners address taxpayers as a third party (e.g., whenever the examiner directly asks the taxpayer for information needed for making a determination on the preparer's liability for a penalty). Before an inquiry of that nature is initiated, examiners must follow the third party contact procedures. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx and then re-contact the taxpayer.

  5. Program Action Cases—Examination contacts with program action taxpayers are considered third party contacts for purposes of making penalty determinations for the related preparer, see IRM 4.1.10.5, Third Party Notification in PACs, for the procedures. The contacts are third party contacts after the return preparer project is approved and before the related taxpayers are first contacted for examinations. Contacts with each related taxpayer must be documented.

  6. Criminal Investigations—

    1. Examiners may conduct examinations of program action taxpayers (following third party contact procedures). See IRM 4.1.10.5(6), PAC Requested in Conjunction With an Ongoing Criminal Investigation, for the procedures to follow regarding civil issues at the same time that special agents are independently conducting a criminal investigation of the related preparer.

    2. The pending criminal investigation exception under IRC 7602(c)(3)(C), Exceptions, applies to third party contacts made by special agents in CI. It also applies to examiners or other Service personnel while working under CI and assisting in a criminal investigation.

  7. IRC 6700 and IRC 6701- Contact with third parties for the purpose of the following:

    1. Investigating persons described in IRC 6700(a), Imposition of Penalty, who may be subject to a tax shelter promoter penalty, and

    2. Investigating IRC 6701 are third party contacts and are subject to IRC 7602(c) requirements. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx, for the procedures.

  8. IRC 6713- A violation regarding the prohibition on a preparer's disclosure or use of tax return information is almost always brought to the attention of the Service by the affected taxpayer. The unsolicited receipt of information from a third party is not initiated by the IRS and is not subject to IRC 7602(c) notification or reporting requirements.

  9. IRC 7407 and IRC 7408 are legal proceedings to prohibit certain conduct and are not to determine or collect tax liabilities. Therefore, IRC 7602(c) does not apply to the action to enjoin nor to referrals to Area Counsel or the Department of Justice. However, the underlying investigative actions requiring third party contacts, such as certain contacts under paragraphs (2), (4), (5), and (7) above, are subject to IRC 7602(c) requirements. See the third party contact procedures website at http://mysbse.web.irs.gov/exam/tip/3rdparty/jobaid/11001.aspx for the procedures.

Claims for Refund—IRC 6694, IRC 6700, and IRC 6701

  1. Preparers use Form 6118, Claim for Refund of Tax Return Preparer and Promoter Penalties, for penalties under IRC 6694 and IRC 6695.

  2. Promoters use Form 6118 to submit claims for penalties under IRC 6700 and IRC 6701.

  3. The preparer has three years from the date of payment to file a claim for refund of preparer penalties under IRC 6694(a) and IRC 6695. See IRC 6696(d)(2), Claim for Refund, and Treas. Reg.1.6696-1(g).

  4. For IRC 6700 and IRC 6701, a claim for refund of penalties paid timely must be made within 2 years of the date paid. Preparers use Form 6118 to submit claims.

  5. When Form 6118 is submitted for IRC 6694, IRC 6695, IRC 6700, IRC 6701 claims, see IRM 21.5.3, General Claims Procedures, for processing these claims for refund.

  6. The IRC 6694 and IRC 6695 claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim. The RPC sends the claim to the examiner or the office of the examiner that asserted the return preparer penalty. Claims for other OD/BUs are sent to the RPC for the OD/BU.

  7. IRC 6700 and IRC 6701 claims for refund are sent by campus examination classification to the LDC in Laguna Niguel, CA. The SB/SE LDC will ensure the claims are reviewed by the appropriate examination personnel.

Special Claim—IRC 6694, IRC 6700, and IRC 6701

  1. Within 30 days after the day that notice and demand is made, preparers/promoters may pay 15 percent of the penalty and file a special claim for refund for IRC 6694, IRC 6700, and IRC 6701 penalties.

    1. IRC 6694(c), Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty, and IRC 6703(c), Extension of Period of Collection Where Person Pays 15 Percent of Penalty, provide special claim for refund procedures for preparers/promoters assessed penalties under IRC 6694, IRC 6700, and IRC 6701. Form 6118 becomes a special claim when, within 30 days after the day that notice and demand is made, preparers/promoters pay 15 percent of the penalty.

    2. Under IRC 6694(c) and IRC 6703(c) collection action and the running of the statute of limitation on collection are suspended until the special claim is finally resolved administratively or judicially (e.g., by Appeals or by the Federal District Court).

    3. These special claims must be processed on an expedite basis, especially when Appeals consideration is warranted and will be granted.

    4. The examiner that receives the claim will request a transcript to validate that TC 470 CC 95 was input to stay collection activity, see IRC 6694(c) and IRC 6703(c) special claims for refund. When TC 470 CC 95 is not on the MFT 55 module for IMF or MFT 13 module for BMF for these special claims Form 3177, Notice of Action for Entry on Master File, should be completed and emailed to Collection Centralized Case Processing (CCP) for the input of the TC 470 CC 95. Use the Collection CCP electronic mailing links at the following website: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/ccpcoll/mailingprocedures/21080.aspx

      Note:

      Select the email link that corresponds to and includes the name of the Area in which you work.

      The examiner will verify the TC 470 CC 95 on the MFT 55 module for IMF or MFT 13 module for BMF special claims, and document actions taken on the case activity record.

    5. For agreed special claims the examiner completes and faxes Form 3177 for the input by collection of TC 472 CC 95, for the reversal of TC 470 CC 95. Email Form 3177 to Collection CCP using one of the electronic mailing links at the following website: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/ccpcoll/mailingprocedures/21080.aspx. The examiner should document the action taken on the case activity record.

    6. For unagreed special claims the examiner uses Form 3198, Special Handling Notice for Examination Case Processing, to flag the special claim case for the reversal of the TC 470 CC 95. The Other Instructions item will be checked in the Special Features section. The explanation is Form 3177, Notice of Action for Entry on Master File, with TC 472 CC 95 is completed by the function concluding the special claim. Email Form 3177 to Collection CCP using one of the electronic mailing links at the following website: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/ccpcoll/mailingprocedures/21080.aspx

  2. The IRC 6694 special claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim.

  3. The IRC 6700 and IRC 6701 special claims for refund are sent by campus examination classification to the SB/SE LDC in Laguna Niguel, CA. The LDC will ensure the claim is reviewed by the appropriate examination personnel.

  4. Also see IRM 4.32.2.11.8.3.2.5, Claims for Refund Procedures—SB/SE.

IRC 6694(d), Abatement of Penalty Where Taxpayer’s Liability Not Understated

  1. If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under IRC 6694(a) or IRC 6694(b) has been assessed, such assessment shall be abated.

  2. If any portion of such penalty has been paid, the amount so paid shall be refunded to the person who made such payment as an overpayment of tax without regard to any period of limitations.

  3. Form 6118 is used by the return preparer for IRC 6694(d), Abatement of Penalty Where Taxpayer's Liability Not Understated, claims.

    1. The examiner verifies the final administrative determination or a final judicial decision cited by the return preparer for the client’s return that the penalty was based upon and that there is currently no understatement of liability that the penalty was based upon.

    2. There is no statute of limitations for these claims.

Campus Claim Processing

  1. When Form 6118 is submitted for IRC 6694, IRC 6695, IRC 6700, or IRC 6701 claims, see IRM 21.5.3 for processing of these claims for refund.

  2. The IRC 6694 and IRC 6695 claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim.

  3. The IRC 6700 and IRC 6701 claims for refund are sent by campus examination classification to the SB/SE LDC in Laguna Niguel, CA.

  4. Two attempts by campus examination classification are made to request the administrative file before forwarding the claim to the appropriate office above.

  5. Campus examination classification coordinates with Accounts Management for the input of TC 470 to stay collection activity for IRC 6694(c) and IRC 6703(c) special claims for refund.

IRC 6695 Base and Inflated Rates

IRC Title Tax Years 2014 & prior (Base rate) Tax year 2015 Tax Year 2016 Tax Year 2017
6695(a) Failure to Furnish Copy to Taxpayer $50 per return or claim; $25,000 maximum $50 per return or claim; $25,000 maximum $50 per return or claim; $25,500 maximum $50 per return or claim; $25,500 maximum
6695(b) Failure to Sign Return $50 per return or claim; $25,000 maximum $50 per return or claim; $25,000 maximum $50 per return or claim; $25,500 maximum $50 per return or claim; $25,500 maximum
6695(c) Failure to Furnish Identifying Number $50 per return or claim; $25,000 maximum $50 per return or claim; $25,000 maximum $50 per return or claim; $25,500 maximum $50 per return or claim; $25,500 maximum
6695(d) Failure to Retain Copy or List $50 per return or claim; $25,000 maximum $50 per return or claim; $25,000 maximum $50 per return or claim; $25,500 maximum $50 per return or claim; $25,500 maximum
6695(e) Failure to File Correct Information Returns $50 per return and item in return; $25,000 maximum $50 per return and item in return; $25,000 maximum $50 per return and item in return; $25,500 maximum $50 per return and item in return; $25,500 maximum
6695(f) Negotiation of Check $500 per check; No maximum $505 per check; No maximum $510 per check; No maximum $510 per check; No maximum
6695(g) Failure to Exercise Due Diligence $500 per return or item in return; No maximum $505 per return or item in return; No maximum $510 per return or item in return; No maximum $510 per return or item in return; No maximum