4.25.7 Estate and Gift Tax Penalty and Fraud Procedures

Manual Transmittal

July 23, 2018

Purpose

(1) This transmits revised IRM 4.25.7, Estate and Gift Tax, Estate and Gift Tax Penalty and Fraud Procedures.

Material Changes

(1) A new IRM 4.25.7.1 was added to comply with the new internal control requirements set forth in IRM 1.11.2.2.5, IRM Standards, Address Management and Internal Controls. New subsections were added to provide the necessary background, authority, program objectives and review, terms/definitions/acronyms, and related resources required by IRM 1.11.2.2.5. The addition of the new IRM 4.25.7.1 resulted in the renumbering of all subsequent IRM subsections.

(2) IRM 4.25.7.1(10) was moved to a separate subsection IRM 4.25.7.3, Immediate Supervisor Approval for Assessment of Penalties.

(3) IRM 4.25.7.4(2) provides a citation to the new IRM 20.1.6. IRM 4.25.7.4 paragraphs (3) and (4) are new paragraphs that explain the role of WSD Appraiser/Return Preparer Coordinator.

(4) IRM 4.25.7.4(14)(e)-(g) were revised to remove discussion of the RPC role. The RPC roles are discussed in IRM 4.25.3. IRM 4.25.7.4(15)(a) was revised to remove discussion of the RPC role. The RPC roles are discussed in IRM 4.25.3. IRM 4.25.7.4(16) was revised to correct cross references and IRM citations. The bullet list was also removed. The content described within the bullet list is located in the cited IRM 20.1.6.21.

(5) IRM 4.25.7.5(1) was revised with updated legal summaries and citations.

(6) IRM 4.25.7.5(2)(a) – (8) were removed. New paragraphs (3) through (5) were added to provide updated cross references to new IRM subsections in 4.25.3 and 20.1.12.

(7) IRM 4.25.7.8 is a new IRM subsection that provides guidance on the assessment or non-assessment of the IRC 6271 and 6722 information return penalties to the Form 8971 and Schedule A.

(8) Editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary.

Effect on Other Documents

IRM 4.25.7 dated July 29, 2016 is superseded.

Audience

This section contains instructions and guidelines for Small Business/Self-Employed Estate and Gift Tax Specialty Programs employees.

Effective Date

(07-23-2018)

Daniel R. Lauer
Director Examination-Specialty Policy
Small Business/Self-Employed

Program Scope and Objectives

  1. General Overview - This IRM provides information about estate and gift related penalties and procedures.

  2. Purpose - This IRM explains Estate and Gift penalty analysis and assessment responsibilities so that managers, senior-level officials and estate, gift and generation-skipping transfer tax return examiners will be better equipped to prepare and submit accurate an appropriate penalty assessments.

  3. Audience - This IRM is for Estate and Gift Specialty Tax managers, examiners and personnel at the campus who process estate, gift and generation-skipping transfer tax returns, refunds and claims.

  4. Policy Owner - Director, Examination - Specialty Policy is responsible for the administration, procedures and updates related to the technical guidance and information processing steps and methods specific to Estate and Gift Tax examiner responsibilities, IRM subsections, and forms created for the examination of returns and claims.

  5. Program Owner - Director, Examination - Specialty Examination owns Estate and Gift Tax Examination.

  6. Primary Stakeholders - Advisory Collections, Appeals, Counsel, Estate and Gift Tax Workload Selection and Delivery, Specialty Examination, and SB/SE Examination Quality & Technical Support are the primary stakeholders for this IRM.

Background

  1. This section provides policies and procedures relating to estate and gift tax program specific penalty analysis, managerial approval, assessment and abatement.

Authority

  1. Every function in the IRS has a role in proper penalty administration. It is essential that each function conducts 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. IRM 1.2.20.1.1, Policy Statement 20-1 (Formerly P—1—18) provides guidance relating to the use of penalties to encourage voluntary compliance.

  2. Estate and gift tax examiners and managers assigned to examine and oversee the examination of estate and gift tax returns and issues are responsible for complying with servicewide policies and authorities set forth in IRM 1.2.13, Servicewide Policies and Authorities, Policy Statements for the Examining Process.

  3. Examination of estate and gift tax returns should be conducted in a manner that will promote public confidence as stated in the Mission of the Service. See IRM 1.2.10.2, and Policy Statement 1-1.

  4. Section 3504 of P.L. 106-206 requires the Service to include an explanation of the examination and collection process, as well as information about assistance from the Taxpayer Advocate with any first report/notice of proposed deficiency. Pub 3498, The Examination Process, will be used for this purpose.

  5. The following Internal Revenue Code sections authorize the penalties most frequently assessed and abated by Estate and Gift tax examiners:

    • IRC 6651, Failure to File and Failure to Pay

    • 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 6721, Failure to File Correct Information Returns

    • IRC 6722, Failure to Furnish Correct Payee Statements

    • IRC 6723, Failure to Comply with other Information Reporting Requirements

    • IRC 6724, Reasonable Cause waiver, definitions of information returns, and special rules

    • IRC 7407, Action to Enjoin Tax Return Preparers

Program Objectives and Review

  1. The National Quality Review System (NQRS) is a web-based review system used by Estate and Gift Tax Policy, Estate and Gift Tax Examination Management and Estate and Gift Tax Quality Measures and Analysis (QMA) to generate and review reports analyzing national quality performance based upon standardized quality attributes set forth in Document 12499, Estate and Gift Tax Examination Embedded Quality Job Aid. NQRS report data is compiled by QMA on a quarterly basis, but ad hoc reports may be obtained monthly. The use of NQRS is explained in additional detail in IRM 4.25.1.8, Manager Embedded Quality Review and Specialty Exam National Embedded Quality Review Programs.

  2. Operational Reviews and related NQRS reports are conducted by Territory Managers and the Chief of Estate and Gift to measure national adherence to quality standards and managerial performance and/or oversight.

  3. Customer (i.e. taxpayer) satisfaction reports are generated by SB/SE Operation Support Research on a quarterly basis. These reports provide masked taxpayer narratives that are responsive to a pre-defined set of survey questions. The quarterly survey reports are to be used to identify areas for examination quality improvement.

  4. Frequent Front-line manager reviews are conducted under the Examination Quality Review System (EQRS), with the frequency based on annual personnel requirements.

Terms/Definitions/Acronyms

  1. The following table sets forth acronyms used in this IRM:

    Term Acronym
    Document Locator Number DLN
    Estate and Gift Tax Embedded Quality Review System EQRS or EQ
    Estate and Gift Tax Exam Process and Documentation EPD
    Estate and Gift Tax Notebook Job Aid Notebook
    Failure to File Penalty FTF
    Failure to Pay Penalty FTP
    Fraud Technical Advisor FTA
    Generation-Skipping Transfer Tax GSTT
    Issue Management System IMS
    National Quality Review System (NQRS) NQRS or NQ
    Office of Professional Responsibility OPR
    Plan to Close Meeting PTC
    Substitute for a Return SFR
    Return Preparer Coordinator RPC
    Workload Selection and Delivery WSD

Related Resources

  1. The Estate and Gift Tax program is required to follow all servicewide examination procedures and those set forth in SB/SE examining process IRM. The following IRM subsections provide additional information relating to the processing, classification and examination of Estate and Gift Tax program returns and claims:

    • IRM 4.25.1, Estate and Gift Tax, Estate and Gift Tax Examinations

    • IRM 4.25.2, Campus Procedures for Estate Tax

    • IRM 4.25.3, Planning, Classification and Selection

    • IRM 4.25.4, International Estate and Gift Tax Examinations

    • IRM 4.25.5, Technical Guidelines for Estate and Gift Tax Issues

    • IRM 4.25.6, Estate and Gift Tax Report Writing Procedures

    • IRM 4.25.8, Delinquent Returns and SFR Procedures

    • IRM 4.25.9, Requests for Abatement, Claims for Refund and Doubt as to Liability in Estate and Gift Tax Cases

    • IRM 4.25.10, Case Closing Procedures

    • IRM 4.25.11, Special Examination Procedures

    • IRM 4.25.12, Valuation Assistance

    • IRM 4.25.13, Appeals, Mediation and Settlement Procedures

    • IRM 4.25.14, Miscellaneous Procedures

    • IRM 4.10.8, Examining Process, Examination of Returns, Report Writing

    • IRM 4.10.6, Examining Process, Examination of Returns, Penalty Considerations

    • IRM 20.1.10, Penalty Handbook

  2. Document 12499, Estate and Gift Tax Examination Embedded Quality Job Aid, is issued by Estate and Gift Tax Policy, and is relied upon for the application and interpretation of the quality attributes. The Job Aid includes complete instructions, definitions, and examples of how cases should be evaluated.

  3. The Penalties Knowledge Management Base is owned and maintained by the Office of Servicewide Penalties, and provides guidance, resources and information for all employees that consider the assessment and/or abatement of civil penalties.

Assessing or Abating Penalties in Estate and Gift Tax Cases

  1. Consider the applicability and non-applicability of penalties in every case and document consideration of penalties whenever an examination adjustment results in a deficiency. The case file workpapers should contain fully developed facts supporting the application or non-application of penalties. A consideration of penalties should be made anytime an adjustment that results in a deficiency is made to the return. Any penalty consideration will be made based on the merits of that particular issue, i.e., the imposition of the penalty provision will not be the subject of bargaining in order to achieve agreement on the case. Documentation should include the procedures used, information obtained, and conclusions reached in deciding whether to recommend applicable penalties. Penalties should not be asserted without an explanation. See Commissioner's Policy Statement 20-1 (formerly P-1-18) (effective 06/29/2004). IRM 1.2.20.1.1. See also, IRM 20.1.1.2, Purpose of Penalties

  2. Any assertion of a penalty must be reflected in the workpapers, report recommendations, and on the Form 3198. Document the consideration, assertion, or non-assertion and computation of all applicable penalties using the case specific mandatory lead sheet, and applicable worksheets, or lead sheets.

  3. The examiner should verify the case transcripts to determine whether the service center assessed or abated penalties prior to an examination of the return. The amount and applicability of previously assessed penalties should be verified by the examiner using the Estate and Gift Notebook Job Aid (Notebook) as the amount of the applicable penalty may change as a result of recommended adjustments. See IRM 4.25.6,Report Writing Guide For Estate and Gift Tax Examinations.

  4. If a case is in Status 10 (assigned but not yet opened by an examiner) or Status 12 (opened by an examiner), any request for penalty abatement must be handled by the examiner to whom the case is assigned.

    1. If the request is submitted to Estate and Gift Operations at the Campus (Campus), a secure mail notification of the abatement request will be transmitted to the field group manager responsible for such case.

    2. Even if there are no other issues, the case cannot be surveyed after assignment. It must be made the subject of an examination, limited to the penalty abatement request.

    3. Under no circumstances will a request be made by the examiner to the Campus for consideration of the penalty for returns assigned to the field.

    4. Conversely, if a case is no longer assigned to a field group, then any request for abatement must be referred to the Supervisory Attorney, Estate and Gift Tax (Campus) for consideration.

    5. The taxpayer may agree to the tax adjustment, but may not agree to the penalty adjustment. In situations where the taxpayer does not agree to the penalty adjustment the examiner should follow the appropriate 30-day or 90-day unagreed procedures set forth in IRM 4.25.10, Case Closing Procedures.

  5. If a case has been assigned to a group (Status 10) and not yet to an examiner, the group manager will assign the case if a request for abatement of any penalty is in the file or is received to associate with the file.

  6. If a return is selected for examination, the examiner will determine whether or not to reassert a penalty if:

    1. The Campus clearly erred as a matter of law in its decision to abate a penalty, or

    2. The fact situation was not as represented to the Campus.

      Note:

      In the interest of taxpayer relations, care should be taken to ensure that either (a) or (b) applies before reversing the decision of the Campus.

  7. Penalties should be verified or calculated in Notebook. See IRM 4.25.6, Report Writing Guide for Estate and Gift Tax Examinations.

    1. There are rules for computing the amount of the underpayment for the accuracy-related and fraud penalties. Under the computational method explained in IRM 4.25.6, Notebook will calculate the portion of an underpayment subject to the current penalty and tax rates.

  8. If a return is selected for examination, the examiner will determine whether or not to reassert a penalty if:

    1. The Campus clearly erred as a matter of law in its decision to abate a penalty, or

    2. The fact situation was not as represented to the Campus.

      Note:

      In the interest of taxpayer relations, care should be taken to ensure that either (a) or (b) applies before reversing the decision of the Campus.

  9. Penalties should be verified or calculated in Notebook. See IRM 4.25.6, Report Writing Guide for Estate and Gift Tax Examinations.

    1. There are rules for computing the amount of the underpayment for the accuracy-related and fraud penalties. Under the computational method explained in IRM 4.25.6, Notebook will calculate the portion of an underpayment subject to the current penalty and tax rates.

  10. When submitting cases for closure, (including substitute for return and non-filer project cases) verify that all appropriate penalties have been considered, correctly assessed, and documented in the case file and on case closing documents.

    1. The Form 3198, Special Handling Notice for Examination Case Processing, should clearly indicate any determination to not assess penalties or to abate previously assessed penalties. This is particularly necessary when penalties might otherwise be automatically assessed. For example, an examiner should include a written statement at the bottom indicating that the decision not to assess a Failure to Pay penalty on substitute for return or non-filer project cases was intentional. If appropriate, provide additional instructions on Form 3198. This will help avoid the inadvertent assessment of penalties that later require the Field to contact the Campus to remove or abate penalties.

    2. For additional case closing procedures including, issues regarding penalties, refer to IRM 4.25.10, Case Closing Procedures.

Reasonable Cause

  1. While not all penalty abatement is based on reasonable cause, it is a commonly raised defense in estate and gift tax cases. The taxpayer may raise several other defenses to the assertion of penalties including, but not limited to statutory and regulatory exceptions, administrative waivers, or corrections of Service error. See IRM 20.1.1.3.3.1, Statutory and Regulatory Exceptions, IRM 20.1.1.3.3.2, Administrative Waivers, and IRM 20.1.1.3.4, Corrections of Service Error for additional information. Examiners may use the Reasonable Cause Lead Sheet to document their analysis of the reasonable cause defense.

  2. Reliance on a preparer's advice may satisfy the IRC 6664(c) reasonable cause exception to any accuracy-related penalty. See CFR 1.6664-4(c). Advice includes any communication setting forth an analysis or conclusion by a person other than the taxpayer, and on which the taxpayer relied in preparing the return. Advice does not have to be in any particular form. The reasonable cause and good faith exception may be satisfied if the taxpayer reasonably relied on advice that was based upon an objectively reasonable, factual or legal assumption. The Penalty Handbook provides additional information relating to a finding of reasonable cause. See IRM 20.1.5.9.7.1, Penalty Relief, Reasonable Cause and IRM 20.1.1.3.2, Criteria for Relief from Penalties, Reasonable Cause.

    1. In addition, the taxpayer's representation of reasonable cause or justification must be reflected in written format, preferably given under the penalty of perjury. If a taxpayer makes an oral or unsigned request for penalty relief see IRM 20.1.1.3.1, Unsigned or Oral Requests for Penalty Relief.

  3. Reasonable cause criteria include but are not limited to the following:

    1. Unavoidable postal delays (See IRC 7502)

    2. The taxpayer's timely filing of a return with the wrong IRS office (See IRC 6091)

    3. The taxpayer's reliance on the erroneous advice of an IRS officer or employee

    4. The death or serious illness of the taxpayer (executor) or a member of his immediate family. See United States v. Boyle, 469 U.S. 241 (1985)

    5. The taxpayer's unavoidable absence

    6. Destruction by casualty of the taxpayer's records or place of business

    7. Failure of the IRS to furnish the taxpayer with the necessary forms in a timely fashion

    8. The inability of an IRS representative to meet with the taxpayer when the taxpayer makes a timely visit to an IRS office in an attempt to secure information, or aid in preparation of a return

  4. When penalties are not asserted due to reliance on a third party, the examiner should document the case file by updating their workpapers or the Reasonable Cause Lead Sheet with the additional facts, analysis, and conclusions reached regarding the reasonable cause exception.

    1. If an accuracy-related penalty is not asserted due to reliance on advice, the penalty workpapers in the case file must document that the advisor was contacted to confirm that the advice was provided and that the standard for the reasonable cause exception was met. See IRM 20.1.5.6, Penalty Relief (for all penalty relief provisions generally) and IRM 20.1.1.3.2, Reasonable Cause.

    2. If the preparer of the return was not the person who prepared or provided the advice, contact with both individuals may be necessary.

Immediate Supervisor Approval for Assessment of Penalties

  1. IRC 6751(b), Approval of Assessment states, in general, that no penalty under the IRC 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. See IRM 20.1.5.4, Managerial Approval of Penalties. See IRM 20.1.1.2.3, Penalty Handbook Introduction and Penalty Relief, Managerial Approval for Penalty Assessments. The examiner should also document all managerial involvement regarding penalties in the Form 9984, Case Activity Record.

Return Preparer Penalties

  1. The purpose of proposing and assessing penalties on return preparers, pursuant to IRC 6694, is to increase voluntary compliance. When examining a return prepared by a tax return preparer, it is an examiner’s responsibility to ensure that the identification and conduct provisions of the Code are followed. If the provisions are not followed, it is the examiner’s responsibility to assert the penalties. During every examination, examiners should determine whether return preparer violations exist. This determination will be made based on oral testimony and/or written evidence during the examination process.

  2. IRM 20.1.6, Preparer, Promoter and Material Advisor Penalties, provides servicewide policy and procedures for the administration of return preparer penalties, promoter penalties, and material advisor penalties.

  3. Prior to pursuing the return preparer penalty or penalties, examiners must obtain the immediate supervisor’s approval and engage in a Workload Selection and Delivery (WSD) Appraiser/Return Preparer Coordinator consultation. The contact information is available on the Estate and Gift Tax intranet page.

  4. Return preparer case referrals are also routed to examiners through WSD. The WSD Return Preparer Coordinator will classify and conduct the necessary case building for accepted referrals and send the case to a field examiner for development of the penalty case. See IRM 4.25.3.9.2.8, Return Preparer Referrals for an explanation of the WSD Return Preparer Coordinator’s role and responsibilities.

  5. Statute of Limitations: The statute of limitations on assessment for IRC 6694(a) and IRC 6695 expires three years from the date the related return or claim for refund was filed. See IRC 6696(d). See IRM 20.1.12.4

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

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

      Note:

      Extending the statute on a taxpayer’s return with a Form 872 does not extend the statute for the return preparer penalty case. See Form 872-D,Consent to Extend the Time on Assessment of Tax Return Preparer Penalty.

  6. No return preparer penalty will be proposed until the estate or gift tax examination is completed at the group level. If the estate or gift tax case is unagreed, the examiner may pursue the preparer penalty after the unagreed estate or gift tax case is submitted at the group level. The determination and settlement of the estate or gift tax examination will at all times proceed without regard to the return preparer penalty issue.

    Note:

    The requirement that the underlying estate or gift tax case be closed may affect the decision whether to initiate a return preparer investigation. Also, note that IRC 6694(d) provides that the IRC 6694 penalty must be abated where there is a final administrative determination or final judicial determination that there was no understatement of liability.

  7. Each estate or gift tax examination is separate and distinct from the return preparer penalty case relating to the estate or gift tax examination. Examiners will not propose or discuss conduct penalties in the presence of the taxpayer.

  8. A comprehensive interview with the taxpayer during the underlying examination is the method used to identify misconduct by a tax return preparer. During the interview process, the examiner should pose questions to the taxpayer regarding the return preparation to assist in determining whether a preparer penalty is applicable. The pursuit of a return preparer penalty should not be specifically discussed in the presence of the taxpayer. Some examples of questions are listed below:

    • Did you meet with the preparer?

    • Did you complete a questionnaire and/or have a face to face meeting with the preparer?

    • What documentation was provided to the preparer?

    • Did you receive a copy of the return?

    • Was the preparer compensated?

  9. While examiners are required to ask basic interview questions, crucial information may be provided in the responses to the follow-up questions. The questions that the examiner asks of the preparer are important to determine if any misconduct transpired during the return preparation. If the preparer is also the representative, the examiner should ask follow up questions about:

    • The interview with the taxpayer

    • What documentation was provided to prepare the return

    • What authorities were relied upon

    • Whether a copy of the return was provided to the taxpayer

    • Whether the preparer is aware of any errors, omissions or mistakes on the return under examination

    • Whether they were compensated

  10. Representatives will often review the return and the taxpayer client’s records prior to the interview. If there is an error, they will probably know in advance. While representatives are not required to disclose the error, they may reveal the information to establish their credibility. As you continue to work your case, the extent of the representative’s knowledge will become apparent.

  11. While it is not appropriate to discuss a preparer penalty issue with the taxpayer, the interview with the taxpayer may help to establish a factual background used in developing a separate preparer penalty case. When interviewing the taxpayer or preparer ask if any other services have been provided by the preparer’s firm and how long the preparer has been preparing returns for the taxpayer. These questions will give the examiner an idea of the extent of the preparer’s knowledge regarding the taxpayer’s financial situation/status and alert the examiner as to the applicability of penalties. A tax return preparer who has been providing estate planning services may be more knowledgeable than a preparer who has not been providing any other services.

    Example:

    Did they prepare previous gift tax returns, or did they prepare Form 706 for the predeceased spouse?

  12. The examiner should document the case file following the conversation with the taxpayer and/or Power of Attorney (POA). While each examiner has their own interview style, examiners should be consistent in the documentation of the facts. Use of the examination lead sheets, workpapers and Activity Record should ensure consistency in documentation.

    Note:

    All information on the return preparer's activities and the applicability of any penalties relating to the return preparer should be separated from the taxpayer's case file. A return preparer penalty case file should be created and the taxpayer's answers to these inquiries as well as a separate activity record should be included in this case file and not included in the taxpayer's case file.

    Caution:

    Do not include any information about the return preparer’s conduct gathered from other sources or conclusions about the assertion or non assertion of the preparer penalty in the underlying case file. The taxpayer’s case file should only reflect the fact that the required inquiries on the return preparer issues were completed.

  13. A preparer penalty determination action is an individual federal tax matter of the preparer. As with any individual tax matter, an examiner may disclose federal tax information to that individual (the preparer in this instance), in accordance with IRC 6103(e)(1)(A)(i) or to the preparer’s duly authorized power of attorney (also known as an "attorney in fact" ), as permitted by IRC 6103(e)(6).

    1. Return preparer penalty case files may include copies of tax returns or portions of tax returns prepared by the preparer who is being considered for the penalty. The case files may also include other information taken from examination case files, including workpapers and transcripts of account of the taxpayers whose returns were prepared by the preparer, as well as information received directly from the preparer.

    2. Information taken from the returns or copies of returns prepared by the preparer and information from the examination files related to such returns may be incorporated into the return preparer penalty case file. Such information may be disclosed to the preparer or authorized power of attorney if the information relates to the resolution of the penalty issue. See IRC 6103(h)(4). These disclosures may be made by the examiner during the course of the penalty determination or subsequent tax administration activity.

    3. Remember that an examiner may disclose information about the prepared returns because that information relates to the penalty determination, not because the preparer prepared the return or may have had a power of attorney to represent the taxpayer. If there is any information in the return preparer penalty case file that does not relate to the penalty determination, such as the taxpayer’s current address or current employer, that information may not be disclosed to the preparer or the preparer's authorized power of attorney.

    4. If the return preparer penalty case file includes information that would seriously impair federal tax administration if disclosed, that information must be withheld by the examiner’s manager in accordance with the manager’s authority to withhold information in accordance with IRC 6103(e)(7). See Delegation Order 11-2.

  14. After obtaining the group manager and WSD Appraiser/Return Preparer Coordinator’s approval:

    1. Prepare Form 5809,Preparer Penalty Case Control Card.

    2. Form 5809 must remain in the Return Preparer Penalty Case File.

    3. If the Estate and Gift group manager does not approve, the examiner should not pursue the penalty issue.

    4. If the Estate and Gift group manager approves Form 5809 then the manager must obtain additional approval of the WSD Return Preparer Coordinator (RPC).

    5. The manager must forward the Penalty Lead Sheet to the WSD RPC electronically or by fax.

  15. Opening A Return Preparer Penalty Case File.

    1. The examiner establishes ERCS control using Form 5809 as the ERCS input document. These cases are not controlled on AIMS. In addition to the information concerning the preparer, record the relevant information from the taxpayer’s tax return on Form 5809. Use of this document allows the establishment of the non-AIMS case on ERCS for purposes of time application and is a means of keeping a manual record of penalty action on the Preparer. Use the return preparer’s TIN and name to prepare the Form 5809.

      Note:

      Form 5345-D, - ERCS (Examination Returns Control System) Users, is NOT used to establish a preparer penalty on ERCS.

    2. Most of these penalty cases will derive from Form 706 or Form 709 selected for audit. Some cases may come from the Campus because the cases involve a questionable tax practitioner. If cases are sent from the Campus in this manner, source code 49 should be used only for the primary return (estate or gift tax return) selected as part of the Program Action Case (PAC) client sample originating from the Campus. If multi-year cases are developed in the Campus for delivery to the field groups, only the primary return should reflect source code 49.

    3. Aging reason code 49 should be added to all return preparer program returns including the primary and multiple-year returns.

    4. Establish a separate ERCS record for each client/year/proposed penalty combination (if establishing a separate case, with one or more penalties against the same preparer, establish a different ERCS record) using the following guidelines: Record the SSN or EIN of the preparer in the TIN field; Record the Preparer's Name in the name field; Record the tax period of the client's return in the tax period field; in the statute field, record the statute of the client's return (P2 penalties should be assigned an alpha statute of "XX" , and in the Activity Code (ActCd) field, record one of the following codes:

      Activity Code IRC Section MFT
      ActCd 501 Section 6694(a) penalty MFT P1
      ActCd 502 Section 6694(b) penalty MFT P2
      ActCd 503 Section 6695(f) penalty MFT P3
      ActCd 504 Section 6695(a), (b), (c), (d), or (e) MFT P4
      ActCd 505 Section 7407 injunctions MFT P5

      Note:

      Use Activity Code 828 (Indirect Exam Time) for closing the Return Preparer Penalty Case File when the only time charged is for unsuccessful attempts to locate the preparer.

    5. Place a copy of the signed Penalty Lead Sheet in the return preparer penalty case file.

  16. If the remaining assessment statute of limitations is greater than 365 days then proceed to paragraph (17).There must be a minimum of 12 months (365 days) remaining on the statute at the date when the case reaches the Office of Appeals. See IRM 25.6.23.8.1, Minimum Time Remaining on ASED. Guidance for reviewing and extending the return preparer penalty assessment statute is provided in IRM 20.1.6.21 , Statute of Limitations.

  17. To charge time to the preparer penalty case, use one of the penalty specific SAIN codes available in IMS. See IRM 4.25.5.3.1.4, Standard Audit Index Number (SAIN) Codes.

  18. Forward a copy of the completed Form 5809 (Copy B) to the RPC at the start of the penalty investigation.

  19. Contact preparer and conduct comprehensive interview - Use Letter 4523, Preparer Contact Letter, to contact the return preparer to schedule the initial appointment (include Publication 1).

  20. If preparer penalties are not warranted, proceed by using the following instructions:

    1. Close the case no change. The group manager will review the return preparer penalty case file and document concurrence.

    2. The examiner will prepare Letter 1120, No Change Letter- Preparer's Penalty, mail the original to the preparer and include a copy in the case file. Show only the last four digits of the taxpayer’s identification number.

    3. The examiner will complete Form 5809 Preparer Penalty Case Control Card.

    4. The examiner will note on the Penalty Lead Sheet that the case is being closed No Change.

    5. The group will update ERCS to status 41 and forward the case, marked "Closed No Change," to the RPC for review. The RPC will extract pertinent information from the file to be retained for at least one year. The balance of the no-change case file does not need to be retained.

  21. If preparer penalties are warranted, proceed by using the following instructions:

    1. The preparer should be afforded an opportunity to meet with the group manager to resolve the issues.

    2. Document the actions taken on Form 4665, Report Transmittal, if the preparer does not agree with the penalty proposal.

    3. If penalties are being proposed during a conference with the preparer, the examiner provides the preparer with Form 5816, Report of Tax Return Preparer Penalty Case, and Form 886-A , Explanation of Items.

    4. When penalties are based on many different prepared returns, attach a list of client names, SSNs, EINs and tax periods. Use a separate form for each year return combination.

    5. If penalties are being proposed via mail, send Letter 1125, Transmittal of Examination Report, Form 5816, Report of Tax Return Preparer Penalty Case, Form 886-A, Explanation of Items, Publication 5 , Your Appeal Rights and How to Prepare a Protest if You Do Not Agree, and Publication 594, The IRS Collection Process.

  22. If this is an agreed case, proceed using the following instructions:

    1. Preparer signs Form 5816. Solicit payment from preparer and if the preparer pays, prepare Form 3244-A, Payment Posting Voucher – Examination.

    2. Complete Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

    3. When more than one penalty under different IRC sections will be assessed against the same preparer for the same period, complete a separate Form 8278 for each penalty.

    4. Prepare Letter 1195, Acceptance Letter - Agreed Preparer Penalty Case, and addressed envelope and include in the case file. Attach Form 3198, Special Handling Notice, to each case file, identifying it as a return preparer penalty case in the "Other" section and referencing the applicable IRC section.

    5. Notify the RPC of the potential penalty case and upload the required case information to IMS in a separate case file.

    6. On Form 3198, indicate Letter 1195. Prepare letter and envelope. Enclose the letter and envelope in the administrative case file.

    7. The group secretary or clerk will update the return preparer case on ERCS to status 41 and use Form 3210 to mail the case for normal closing through CCP.

    8. Notify the RPC via secure e-mail of the final results.

  23. If this is an unagreed case and the remaining assessment statute is greater than 365 days when received by Appeals, proceed using the following instructions:

    1. The examiner provides the preparer with: Letter 1125, Transmittal of Examination Report, Form 5816, Report of Tax Return Preparer Penalty Case, with the bottom part of the form removed, Form 886-A, Explanation of Items, Publication 594 and Publication 5.

    2. The case then goes into suspense for 30 days, during which time the preparer may agree or protest.

    3. If the response is agreed or there is no response, process as an agreed case.

    4. If the preparer submits a pre-assessment protest (written) within 30 days, the case file will be reviewed for adequacy of the protest, development of the issue(s) and managerial involvement.

    5. The examiner will prepare an assessment document, Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. When more than one penalty under different IRC sections will be assessed against the same preparer for the same period, complete a separate Form 8278 for each penalty.

    6. The group secretary will then update ERCS to Status 41 and forward the case marked UNAGREED, to the RPC for review.

      Note:

      Appeals and Unagreed Closings: If the taxpayer's examination case is unagreed, the unagreed preparer penalty case file cannot be submitted to Appeals before the tax examination case file.

      Note:

      An unagreed preparer penalty case file cannot be submitted to Appeals for pre-assessment consideration if there is shorter than 365 days remaining on the assessment statute of limitations. There must be a minimum time of 12 months (365 days) remaining on the ASED at the date when the case reaches the Office of Appeals. See IRM 25.6.23.8.1 and IRM 4.20.5.2.1. Form 872-D is used to extend the original statute in a preparer penalty investigation. If the statute is not extended and there is shorter than 365 days remaining on the assessment statute, proceed to paragraph (25).

    7. After review, Centralized Case Processing (CCP) then updates ERCS to Status 21 and forwards the case through Technical Services to Appeals (use Form 3210).

  24. If this is an unagreed case and the remaining assessment statute is shorter than 365 days, request the statute extension from the preparer:

    • The statute on a return preparer penalty case under IRC section 6694(a) and IRC section 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.

    • Use Letter 907-P,Return Preparer Penalty Statute Extension Request to send Form 872-D to the preparer.

    • A transcript of the return on which the preparer penalty is based should be included in the case file for accurate monitoring of the expiration date.

    • Since the case is unagreed, regular unagreed case closing procedures should be followed. See IRM 4.25.10.5.6 .

      Note:

      There must be a minimum time of 12 months (365 days) remaining on ASED at the date when the case reaches the Office of Appeals. See IRM 25.6.23.8.1 and IRM 4.20.5.2.1.

  25. If the extension is requested and the preparer does not agree to extend the statute, follow the instructions below.

    • Send the preparer a Form 5816, Report of Tax Return Preparer Penalty Case, with the bottom part of the report removed along with an explanation of the reason for the quick assessment and a discussion of the preparer’s Appeals rights.

      Note:

      Letter 1125, Transmittal of Examination Report is NOT sent to the preparer.

    • Forward to the Return Preparer Coordinator (RPC) a copy of Form 5816 along with a completed Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties and Form 2859, Request for Quick or Prompt Assessment.

    • Annotate Form 3198 with "Quick Assessment " on the Other line in the Expedite section.

    • Centralized Case Processing (CCP) will direct immediate assessment of the penalty.

    • The Return Preparer Penalty Case File should be forwarded to the Return Preparer Coordinator when completed.

    • Upon request, the preparer will be provided the same Appeals rights post-assessment as would have been provided if the request for Appeals consideration were received before the assessment.

  26. Referral to the Director of the Office of Professional Responsibility: The Office of Professional Responsibility (OPR) exercises jurisdiction over Attorneys, CPAs, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers. Examiners should exercise discretion in making referrals of specific cases. In matters involving non-willful conduct, a referral should only be made when it can be established that the preparer has a pattern of failing to meet the required standards of Circular 230. An isolated instance in which a penalty may apply should not, in and of itself, require a referral unless willful conduct is involved. Accordingly, the imposition of penalties under IRC 6694(a) and IRC 6695(a) through IRC 6695(e) should not automatically generate a referral to the Director of OPR. See IRM 4.11.55.4.2, Referral to Office of Professional Responsibility (OPR). Referrals of asserted IRC 6694(a) and/or IRC 6695(a) through (g) penalties to OPR should be based on a pattern of behavior or penalties across multiple taxpayers, tax issues or tax years. See IRM 4.11.55.4.2, Referral to Office of Professional Responsibility (OPR).

    1. When making a referral to OPR, examiners will prepare Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, and obtain signature approval of their manager and send the completed Form 8484 to the Office of Professional Responsibility.

      Office of Professional Responsibility

      SE: OPR—Room 7238-IR

      1111 Constitution Avenue NW

      Washington, DC 20224

      Telephone: (202) 317–6338

  27. In cases in which a referral is not prepared but was considered, a comment should be made on the Examination Planning and Work Paper Index and/or the Penalty Lead Sheet explaining why the referral was not made.

  28. A Quick Reference Guide regarding forms and letter preparation for return preparer cases is attached. See Exhibit 4.25.7-1 .

Appraiser Penalties

  1. Section 1219 of the Pension Protection Act of 2006 added IRC 6695A , Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals. This penalty provision allows the Service to assert a penalty against any person who prepared an appraisal of the value of property and who knew, or reasonably should have known, the appraisal would be used in connection with a return or claim for refund and that appraisal results in a substantial valuation misstatement (within the meaning of IRC 6662(e) ), a substantial estate or gift tax valuation understatement (within the meaning of IRC 6662(g)) , or a gross valuation misstatement (within the meaning of IRC 6662(h)) with respect to such property.

  2. An IRC 6695A appraiser penalty case must be conducted as a separate and distinct case from the related estate or gift tax examination. During the related gift or estate tax examination, the examiner should evaluate the facts and circumstances to determine whether or not an IRC 6695A appraiser penalty case should be opened. Appraiser penalties must not be discussed with the taxpayer, the preparer, or the taxpayer’s authorized Power of Attorney. An IRC 6695A penalty against an appraiser will not be proposed until the related tax examination is completed at the group level. The appraiser penalty case can proceed when the related tax examination case is closed agreed, closed no response after default, or is in Appeals or Tax Court.

  3. Prior to pursuing the appraiser penalty, examiners must obtain the group manager and engage in a Appraiser/Return Preparer Coordinator consultations by contacting the WSD Appraiser/Return Preparer Coordinator. The contact information is available on the Estate and Gift Tax intranet page.

  4. Appraiser penalty referrals are also routed to examiners through Estate and Gift Tax Workload Selection and Delivery (WSD). The WSD Return Appraiser/Preparer Coordinator will classify and conduct the necessary case building for accepted referrals, and send the case to a field examiner for development of the penalty case. See IRM 4.25.3.9.2.8, Return Preparer Referrals for an explanation of the WSD Return Appraiser/Preparer Coordinator’s role and responsibilities.

  5. IRM 20.1.12, Penalties Applicable to Incorrect Appraisals, provides servicewide policy and procedure for the administration of incorrect appraisal penalties.

Referrals to SBSE Lead Development Center and OPR

  1. This section provides guidance and procedures for Referrals to SBSE Lead Development Center (LDC) and Office of Professional Responsibility (OPR).

Referrals to SBSE Lead Development Center

  1. The SBSE Lead Development Center (LDC) LDC website, acts as the national clearing house to identify and deter individuals from promoting abusive tax schemes and/or preparing abusive returns. The LDC evaluates and develops information from both internal and external referral sources.

  2. The LDC also evaluates leads on appraisers who may have contributed to valuation misstatements or who may have participated in a scheme involving valuation issues. In certain cases, appraisers may be subject to the aiding and abetting penalty under IRC 6701. A referral must be prepared and submitted to the SBSE Lead Development Center if, in making determinations regarding the appropriate value of assets for estate and gift tax purposes, the appraiser’s methodology and accuracy of appraisal(s) suggests aiding and abetting under IRC 6701.

  3. If an examiner identifies a new or unique abusive promotion or transaction during an examination, the case will be discussed with the group manager and a decision by the group manager should be made regarding whether a LDC referral is warranted.

  4. LDC Referrals are made by sending Form 14242, Report Suspected Abusive Tax Promotions or Preparers, to the LDC by fax (if shorter than 10 pages), by e-mail, or by regular mail. The LDC’s telephone number, fax number, and mailing address are listed on Form 14242.

  5. Form 14242 is designed to capture the basic facts about the promotion or preparer’s behavior. Referrals should include a brief overview explaining the elements of the scheme and how the scheme is used. If available, examiners should include the following items with the referral:

    • Copies or originals of marketing or promotional materials or a prospectus on the scheme

    • Opinion letters issued about the promotion

    • A list of any known participants

    • An estimate of the scope and potential harm to the government

    • Copies of tax returns used in the scheme

    • Affidavits, correspondence or statements from witnesses or participants

    • Copies of Revenue Agent Reports (RAR) from the examination of participants

    • Names, addresses, and TINs for sub-promoters

    • Copies of any correspondence between sub-promoters

  6. Examiners should not take any action that would begin the actual promoter investigation prior to the authorization of the investigation by the LDC. Examiners preparing referrals are allowed to conduct only enough research to submit the referral to the LDC.

  7. Examiners making referrals to the LDC should charge time to activity code 593000 for promoter activity under IRC 6701 or activity code 594000 for preparer activity under IRC 6700.

  8. SBSE Lead Development has an extensive abusive tax website which was created to assist employees conducting promoter investigations and the related participant examinations. Its web pages describe specific tax schemes, provide job aids, and include contact information for further assistance. IRM 4.32, Abusive Transactions, discusses procedures for cross-functional development of abusive tax schemes and promoter cases. IRM 5.20.1, Abusive Tax Avoidance Transaction Program, discusses SB/SE Collection’s cross-functional role working abusive tax avoidance collection issues.

Referrals to OPR

  1. The Office of Professional Responsibility (OPR) is responsible for reviewing, investigating, and resolving alleged violations of the professional standards of competence, conduct, and integrity by tax practitioners who represent taxpayers before the IRS. OPR identifies and resolves alleged violations of the applicable professional standards enumerated by Treasury Department Circular 230, Regulations Governing Practice Before the Internal Revenue Service.

  2. Procedures for Referrals of Practitioner or Appraiser Misconduct

    1. In cases of practitioner misconduct, such as when a practitioner fails to exercise due diligence or causes unreasonable delay in the prompt disposition of a matter before the IRS, a referral should be made to OPR. Practitioners, who are defined as attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents, are subject to the regulations contained in Treasury Department Circular 230 (Rev. 8-2011).

    2. In cases of appraiser misconduct, a referral of the appraiser for possible disciplinary action should be made to the Office of Professional Responsibility (OPR). The assessment of an IRC 6701(a) penalty is not a prerequisite to making a referral to OPR.

  3. Referrals of appraisers and practitioners to OPR shall include:

    • The Estate Tax group manager's approval.

    • Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, or a written report in any other format. The written report must contain all information required by the Form 8484 and its instructions

    • A referral and supporting documents can be submitted to OPR by fax or can be mailed to the OPR Washington, DC office.

  4. In matters involving non-willful conduct, examiners should exercise discretion in making referrals of specific cases. A referral should only be made when it can be established that the preparer has a pattern of failing to meet the required standards of Circular 230. An isolated instance in which a penalty may apply should not, in and of itself, require a referral unless willful conduct is involved. Accordingly, the imposition of penalties under IRC 6694(a) and IRC 6695(a) through (g) should not automatically generate a referral to the Director of the OPR. For a further discussion regarding referral criteria, see IRM 4.11.55.4.2.2, When Should a Referral Be Made to the Office of Professional Responsibility (OPR)?

  5. Examiners may consider referring to OPR the original advisor or preparer of a return where they sustain the tax adjustment but abate the accuracy-related penalty based on the taxpayer's reasonable reliance on the original advisor or preparer. OPR will independently review original advisor or preparer’s actions for competence and other Circular 230 violations. Consideration need not be given to whether the tax advice was good or bad, but rather whether there might be Circular 230 issues such as conflict of interest, failure to exercise the appropriate level of due diligence, evidence that the practitioner counseled or encouraged the taxpayer to violate tax statutes, or participated in presenting the position on the tax return in a manner designed to mislead the agency.

  6. Additional referral procedures are found at IRM 4.11.55.4.

Fraud

  1. The discovery and development of fraud are the result of effective investigative techniques. Techniques employed by compliance employees should be designed to disclose not only errors in accounting and application of tax law, but also irregularities that indicate the possibility of fraud. See IRM 25.1.2.3, Indicators of Fraud. Some common indicators of fraud in estate and gift tax cases include but are not limited to:

    • Significant unreported asset(s)

    • Significant unreported gift(s)

    • Non-filed return(s) or indications of willful failure to file returns (see IRC 6651(f) and IRM 20.1.2.2.7.5, Fraudulent Failure to File –IRC 6651(f))

    • Significant undervaluation

    • Substantial overstatement of deductions

    • Claiming fictitious deductions

    • False statement about a material fact involved in the examination

    • Attempts to hinder the examination. For example, failure to answer pertinent questions, repeated cancellations of appointments, refusal to provide records, threatening potential witnesses, including the examiner, or assaulting the examiner.

    • Failure to follow the advice of accountant or attorney

    • Failure to make full disclosure of relevant facts to the accountant

    • Destruction of books and records, especially if just after examination was started

    • Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials, executors, or trustees, and/or use of secret bank accounts

  2. Once fraud indicators (badges) are uncovered, the examiner must document the fraud indicators in the case and have discussion(s) with their group manager about the uncovered fraud indicators. If the group manager concurs there are indicators of fraud warranting fraud development, the fraud technical advisor (FTA) assigned to that area should be contacted to help further develop the fraud case. See IRM 25.1.2.2, Fraud Development Procedures and FTA List.

  3. A civil fraud penalty case may be developed based on facts and circumstances of a civil examination or result from a Criminal Investigation (CI) initiated case. Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Specific guidance on fraud indicators and the development of fraud may be found in IRM 25.1.1, Overview and Definitions IRM 25.1.2, Recognizing and Developing Fraud and IRM 25.1.6, Civil Fraud.

    1. Upon concurrence of the group manager and FTA, cases being developed for civil fraud, including write-up and review of the civil fraud penalty and/or the fraudulent failure to file penalty, should be updated on AIMS to status code 17 (Fraud Development), via Form 11661, Fraud Development Recommendation - Examination.

    2. Civil fraud no longer requires a referral to CI. A determination of the civil penalty is the shared responsibility of the examiner, the group manager and the Fraud Technical Advisor (FTA). If an agreement cannot be reached regarding assertion of the civil fraud penalty, the decision will rest with the group manager. Area Counsel must approve the civil fraud penalty before the issuance of a Statutory Notice of Deficiency (90-day letter).

    3. In cases where fraud was considered and the civil fraud penalty is not being recommended, the examiner must explain in the work papers why the penalty was not asserted.

  4. A criminal fraud referral to Criminal Investigation is warranted if affirmative acts (firm indications) of fraud/willfulness exist, and criminal criteria are met. If affirmative acts of fraud/willfulness exist the estate tax attorney will refer the case through the Fraud Technical Advisor (FTA) to Criminal Investigation (CI) using Form 2797, Referral Report of Potential Criminal Fraud Cases. The FTA is available to assist in determining if firm indications of fraud/willfulness are present, criminal criteria have been met, etc. See IRM 25.1.3, Criminal Referrals.

  5. IRM 25.1, Fraud Handbook, provides detailed guidance in identifying indicators of fraud, and establishes processes for developing those indicators into referrals to Criminal Investigation or recommendations to assert civil fraud penalties, where appropriate. In addition, the Fraud Development Lead Sheet, found in the Notebook, should be used to document the examiner’s case actions.

Form 8971 and Schedule(s) A — Information Return Related Penalties

  1. The information return penalties discussed in this IRM are for information returns defined under IRC 6724(d), or 26 CFR 301.6721-1(g) and 26 CFR 301.6722-1(d). There are two potential penalties applicable to the late or incomplete filing of the Form 8971 and Schedule(s) A. For guidance in reviewing the filing requirements, timeliness, and completeness of a Form 8971 and related Schedule(s) A see the following sources of information:

    1. IRB 2016-12, Proposed Regulations for Consistent Basis Reporting Between Estate and Person Acquiring Property From Decedent

    2. Instructions for Form 8971 Information Regarding Beneficiaries Acquiring Property From a Decedent and Schedule A

  2. IRM 20.1.7.8, Failure to File Correct Information Returns IRC 6721 provides Servicewide policy and procedures for the assessment or abatement of the IRC 6721 penalty. The IRC 6721 failure to file an information return applies to the filing of Form 8971 with the IRS by the due date applies if there is a failure to:

    1. File timely;

    2. Include all the information required to be shown on the form or schedule;

    3. Include correct information, or

    4. File a correct supplemental form and/or schedule by the due date, when required

  3. IRM 20.1.7.9, Failure to File Correct Payee Statements IRC 6722 provides Servicewide policy and procedures for the assessment or abatement of the IRC 6722 penalty. The IRC 6722 failure to file a correct payee statement applies to the filing for the Form 8971 related Schedule(s) A.

  4. The time spent reviewing books and records to determine if taxpayers are in compliance with various filing requirements is charged to the key/primary Form 706 case. Once the examiner determines that these miscellaneous penalties should be considered as a separate case, the time spent related to the penalty case from that point forward should be established as a separate case and charged to Activity Code 506, Other Penalties - Form 8278.

Return Preparer Penalty Forms and Letter Preparation

Return Preparer Penalty Quick Reference Guide to Forms and Letter Preparation
Form 6459 (Return Preparers Checksheet (IRC 6694 and IRC 6695))
Note the entries that are required in Part II, specifically, the Name and Address of the Return Preparer along with the SSN/EIN. The Manager’s signature is required to pursue the Return Preparer Penalty investigation. If the Manager signs the form, then the form must be included with the Return Preparer Penalty case.
Form 886-A (Explanation of Items)
This form is used as a schedule or exhibit in examination reports and as a continuation sheet for Form 886-A.
Form 872-D (Consent to Extend the Time on Assessment of Tax Return Preparer Penalty)
The statute of the Return Preparer Penalty case is the statute of the taxpayer’s return. As noted previously, the taxpayer is the estate or gift taxpayer that precipitated the preparer investigation.
Form 5816 (Report of Income Tax Return Preparer Penalty Case)
The information that is included in the top part of the Form 5816 is that of the preparer including the Name and Address and SSN or EIN. The second part of the form that begins with "The following information identifies the tax return…" This relates to the taxpayer's return on which the penalty was based. When penalties are based on many different prepared returns, attach a list of client names, SSNs / EINs and tax periods. Use a separate form for each year / return combination. If the case is agreed, then the preparer signs the Form at the bottom. If the case is going to go unagreed, then the bottom part of the form needs to be removed at the dotted line. Please note that this form is prepared somewhat differently than the Form 5809, Preparer Penalty Case Control Card.
Form 8278 (Assessment and Abatement of Miscellaneous Civil Penalties)
The information requested in Items 1, 2, and 7 (Name, Address and SSN or EIN) relate to the Return Preparer. The information requested in items 5 and 6 (Year and Statute Date) refer to the taxpayer return that prompted the penalty. When completing Form 8278, originators will enter in red and initial:
(1) The applicable statute of limitations on assessment expiration date in Item 6 (or, if applicable, enter "No Statute" in Item 4).
(2) The date the Form 8278 was completed by the originator in Item 9 or 11.
When the same penalties for the same period apply to a preparer for more than one return and the statute of limitations on the preparer penalty is determined by the statute of limitations for the return, complete Form 8278 using the earliest statute of limitations date. See IRM 20.1.6.21, Statute of Limitations. When more than one penalty under different IRC sections will be assessed against the same preparer for the same period, a separate Form 8278 has to be completed for each penalty. A Form 8278 must be filled out for each penalty assessment period.
Form 8484 (Report of Suspected Practitioner Misconduct)
Once it has been determined that a referral is necessary, a referral package to the Office of Professional Responsibility must be prepared and closed separately from the related case. Include in the referral package:
  • Completed Form 8484 to the Office of Professional Responsibility, including status of the case (agreed, unagreed)

  • A complete copy of the tax return

  • A complete copy of the estate tax or gift tax report (including explanation of items and workpapers)

  • Letters, Memoranda, copies of Form 2311, Affidavit or similar attested document, and Form 2797, Referral Report for Potential Criminal Fraud Cases, if applicable

  • Penalty summary from the report of estate examination or report of gift tax examination

  • Form 2848, if available

  • Also include an explanatory memorandum, which details all of the pertinent facts. The actions of the return preparer must be described and documented in sufficient detail to develop a substantial position for disciplinary action. Include documentation and exhibits from the tax file. Include a statement regarding the preparer's appearance before the Service (a record of contacts and activity of the preparer). Document the preparer's position, whether an appeal will be made, and the extent the preparer practices before the Service.

  • The name and TIN of the related case(s) should be noted in the referral package.

The Penalty Lead Sheet for the related estate or gift tax case should note the referral was prepared and forwarded to the Office of Professional Responsibility.
In cases in which a referral is not prepared but was considered, a comment should be made on the appropriate workpaper and penalty lead sheet to include an explanation regarding why the referral was not made.
Form 4665 (Report Transmittal)
This form is used to summarize unagreed issues and present information of a confidential nature for Appeals. The information should supplement, not duplicate, or replace information in the case file. On field cases, this form is used in conjunction with Form 9984 to document managerial involvement.
Form 3244-A (A Payment Posting Voucher-Examination)
Upon acceptance of an advance payment (tendered before or after a deficiency has been determined and an agreement has been secured from the taxpayer), the responsible examiner will complete a separate Form 3244-A for each tax period and class of tax involved. The General Information section will be completed as follows:
  • SSN/EIN— Enter the preparer's identification number

  • Form No./MFT— Form numbers and MFT codes can be found in the ADP and Document 6209

  • Tax Period —Enter "YYYYMM" . The tax period corresponds to the tax period of the client’s income tax return.

  • Transaction/Received Date— Enter the date the remittance was received by the responsible examiner, e.g., June 30, 2010 will be shown 0630- 2010

  • Taxpayer— Enter the preparer’s full name, address, and ZIP code.

  • Transaction Data—Enter the total amount of the payment opposite the transaction Code.


The Remarks Section of the Form 3244-A should be completed as follows:
  • The amount of payment allocated for the penalty and interest as well as any special instructions.

  • If the agreement date precedes the advance payment date by more than 30 days, enter the agreement date.

  • Where first payment is not for full amount of deficiency enter "Partial Payment" ; or if partial payment is other than the first payment, designate the payment, e.g., "2nd Payment."

  • If a payment is received that will be applied to more than one period, indicate "split remittance."

  • Prepared By— Enter the two-digit area office code, the preparer's office symbol, name and telephone number (including area code) so that the preparer of Form 3244-A may be contacted if necessary.


Forwarding Form 3244-A should be performed as follows:
  • Forward Part 1 & the taxpayer's remittance to the Cincinnati Campus on the same day, or following the day of receipt. Attach Part 2 to the face of the appropriate return.


Use Form 3210, Document Transmittal, to transmit form and payment. Parts 1 and 3 of Form 3210 will be forwarded to the Campus with the Form 3244-A. Part 4 of Form 3210 will be retained by the originator. Part 2 may be discarded.
Form 2859 (Request for Quick or Prompt Assessment)
Requests for quick assessments will be made to the Campus Accounting Branch, Accounting and Control Section, Journal and Ledger Unit on Form 2859.
Instructions for completing Form 2859 are on the back of Part 4 of the form. In addition:
  • Indicate in "Remarks" if billing needs to be withheld.

  • Enter the 23C Date and the DLN assigned.

  • Enter an agreement date only if the taxpayer signed an agreement and interest is being assessed with TC 190.


Do NOT compute interest on civil penalty assessments.
Fax quick assessments using the following procedures:
  • Prepare Form 2859 following procedures as described.

  • Assign a control number for each Form 2859 that is faxed, i.e., Fax 59-0551. The 1st and 2nd digits are the area office code; the 3rd, 4th and 5th digits are the Julian date that the Form 2859 is actually faxed; the last digit(s) is the number of the Form 2859. The control number will continue sequentially throughout the calendar year and will start over each January 1st. The control number should be entered in bold print on the top of each Form 2859.

  • Prepare Form 3210 for each type of tax return. List the following: Name Control, MFT, TIN, Tax Period. In the remarks area, the 23C date and the note "FAX QUICK ASSESSMENT" . Address the Form 3210 to the appropriate function. Include the originator's complete address, mail stop and FAX number in the "From" section for faxing back the receipted Form 3210.

  • Fax in the following order: Form 3210, Form 2859, Form(s) 5344A or 5403 or 8278 pertaining to Form 2859.

Form 5809 (Preparer Penalty Case Control Card)
Establish ERCS Controls using Form 5809, Preparer Penalty Case Control Card, as the ERCS input document. Preparer penalty investigations are not controlled on AIMS.

Note:

Form 5345, Examination Request Master File, ("Blue Card" ) is not used to establish a preparer penalty on ERCS.


Establish a separate ERCS record for each client / year / proposed penalty combination using the following guidelines:
  • In the TIN field, record the SSN or EIN of the Preparer or Client.

  • In the Name field, record the "Preparer’s Name"

  • In the Tax Period field, record the tax period of the client’s return.

  • In the Statute field, record the statute of the client’s return – P2 penalties should be assigned an alpha statute of "OO" .

  • In the Activity Code (ActCd) field, record one of the following codes included in IRM 4.25.14.11.

Form 3198 (Special Handling Notice)
In all cases, notate that the case should be forwarded to the RPC for review. Examiners will attach Form 3198, Special Handling Notice, to each preparer penalty case file, identifying it as a return preparer penalty case and referencing the applicable IRC section. Annotate with "Return Preparer Penalty Case," in the "Other" section and reference the applicable IRC Section(s).
If the preparer filed a joint tax return, annotate with either "Assess on Primary SSN" or "Assess on Secondary SSN" in the "Other" section to identify the individual against whom the penalty is to be asserted.
Annotate Form 3198 with "Quick Assessment" on the "Other" line in the "Expedite" section if the case is being closed expedited.
If applicable, annotate the Form 3198 to indicate Letter 1195, Acceptance Letter - Agreed Preparer Penalty Case, and addressed envelope is enclosed in the case file.
Letter 4523 (Initial Preparer Penalty Contact Letter)
Initial contact letter sent to Return Preparer regarding the start of a Return Preparer investigation into the preparation of a client(s) return.
Letter 1120 (Preparer Penalty No-Change Case Letter)
After review by the group manager, mail the original to the preparer and include a copy in the case file.
Letter 1195 (Acceptance Letter – Agreed Preparer Penalty Case)
This letter transmits the agreed return preparer penalty report to the return preparer.
Letter 1125 (Preparer Penalty 30-day Letter)
At the conclusion of the return preparer penalty investigation, this letter is used to inform the return preparer of proposed return preparer penalties and instructions for proceeding forward. It also advises the return preparer of their appeals rights.
Letter 970-P (Request for Statute Extension)
This letter is used to request a statute extension from the return preparer.