Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 6. Preparer, Promoter Penalties (Cont. 1)

• 20.1.6.3 Preparer Conduct Penalties:IRC Section 6694
• 20.1.6.4 Other Assessable PenaltiesIRC Section 6695Background
• 20.1.6.5 Penalty for Promoting Abusive Tax SheltersIRC Section 6700
• 20.1.6.6 Penalties for Aiding and AbettingIRC Section 6701Legislative Overview

1. Although the development of the penalty case will depend on specific facts and circumstances, examiners should, at a minimum, observe the following:
   1. When the taxpayer is questioned in the course of the examination on items that relate to a potential preparer penalty, the questions will be phrased narrowly and directly without having to introduce or define a preparer penalty issue per se.
   2. Examiners should question taxpayers concerning conversations with and information given to the preparer. If available, copies of the relevant documents, including the return containing the understatement, should be incorporated into the case file. Care should be taken in interpreting these conversations. For example, the statement, mileage claimed was for commuting between home and the office does not affix preparer culpability for the disallowed expense. However, if the preparer specifically questioned the taxpayer about business-related travel and received the above response without qualifying or explaining the term business-related to the taxpayer or without further questioning the taxpayer concerning the nature of this travel, a penalty may be warranted.
   3. If, after evaluating the information gathered, the examiner determines that a penalty is warranted, the examiner should prepare Form 6459, Return Preparer's Checksheet, and secure the group manager's approval.
2. After securing approval and the client case is closed out, examiners should contact the preparer to fully develop the facts regarding the preparation of the income tax return. The following areas should be developed:
   1. The preparer's education, training, and experience;
   2. The office procedures, if any, that were employed by the preparer to insure that a correct return was prepared; and
   3. The preparer's explanation regarding the errors found by the examiner.

1. Once managerial approval is secured, examiners should prepare Form 5809, Preparer Penalty Case Control Card, and distribute it as follows:
   1. Original - Stays with case file.
   2. Copy A - Retained in group for control purposes.
   3. Copy B - Send to Return Preparer Coordinator.
2. Use the following activity codes on Form 5809:
   1. Activity Code 501/500 for IRC section 6694(a) cases
   2. Activity Code 502/500 for IRC section 6694(b) cases.

1. The following information should be included in the case file:
   1. The first two pages of the related income tax return, and any schedules related to the understatement.
   2. Copy of the related income tax report.
   3. An affidavit secured from the taxpayer, whenever appropriate. This affidavit should clearly indicate exactly when and what information was provided to the preparer and the content of any pertinent conversations between the taxpayer and the preparer. (See IRM 20.1.6.1.7, Affidavits, above regarding content of affidavits.)
   4. Copies of relevant workpapers from the income tax case file and additional information sufficient to enable Case Processing Support Staff or Appeals to determine the following:
      1. What information was provided to the preparer by the taxpayer.
      2. Why the preparer's action or inaction warranted the application of the penalty
      3. The preparer's position regarding the penalty.

1. Note: The Return Preparer Penalty account is not established on AIMS.
2. The case file will include a copy of the report of proposed adjustments, the tax return, and relevant workpapers. The Form 5816, Report of Income Tax Return Preparer Penalty Case, is used for agreed and unagreed cases. See Exhibit 20.1.6-1, Forms used in the Preparer Penalty Case File, for a list of forms that should be included in the preparer penalty case file when appropriate.

1. For unagreed cases, Form 5816, Report of Income Tax Return Preparer Penalty Case, and a statement of reasons for asserting the penalty will accompany Letter 1125 (DO), Transmittal of Examination Report
2. For all unagreed cases, Letter 1125 (DO) will advise the preparer of his/her appeal rights. The preparer has 30 days to ask for Appeals consideration and to file any protest required.
3. Upon receipt of a protest, the case will be reviewed for adequacy of the protest, development of the issue, and managerial involvement.
4. If the related income tax case is unagreed, the preparer penalty case may not be submitted to Appeals before the income tax case is submitted to Appeals. An unagreed preparer penalty case may not be submitted to Appeals if there are less than 180 days remaining on the statute of limitations, when received by Appeals. In these instances, for IRC section 6694(a) and 6695 penalties, examiners will first solicit an extension on Form 872D, Consent to Extend the Time On Assessment of Tax Return Preparer Penalty.
   Note:

   Where the statute of limitations for the assessment of penalties may expire without adequate opportunity for pre-assessment appeal rights, before assessment of these penalties, the examiner will send the preparer a copy of Form 5816, Report of Income Tax Return Preparer Penalty Case, along with an explanation of the reason for the quick assessment and the preparer's appeal rights.

5. In agreed and unagreed cases, Form 5808, Return Preparer Penalty Follow-up, and Copy D of Form 5809, Preparer Penalty Case Control Card, will be forwarded by the examiner to the local RPC.
6. If an examiner determines that no penalty is warranted, the no-change Letter 1120 will be prepared at the group level and left undated in the file. Technical Services will date and issue the letter if the case is selected for sample review, otherwise the letter will be issued according to Area policy.
7. After mailing Letter 1120, no-change case files will be forwarded to the local RPC. Pertinent information from the file will be recorded on Form 5808 and retained by the local RPC for not less than one year. The balance of a no-change case file is not retained.
8. Preparer penalty cases are not subject to mandatory review. Groups will close cases through the RPC to Centralized Case Processing (CCP) for processing using Form 3198, following Area guidelines. In the special feature section of Form 3198, notate that the case is a preparer penalty case. The group clerk will update the return preparer case on ERCS (Examination Returns Control System) to status 41 and use Form 3210 to mail the case file to the respective RPC in Planning & Special Programs (PSP).

1. See IRM 20.1.6.1.4 above.

1. The statute of limitations on assessment for IRC section 6694(a) penalties expires three years from the due date of the related return or the date the return is filed, whichever is later. See IRM 20.1.6.1.8, Statute of Limitations.
2. There is no statute of limitations on assessment for IRC section 6694(b) penalties.

1. See IRM 20.1.6.2.1, Referral to the Office of Professional Responsibility

1. The IRC section 6695 penalties only apply to income tax return preparers. For the definition of "income tax return preparer," see IRC section 7701(a)(36).
   1. For IRC section 6695(a), (b) and (c) penalties, the maximum amount is $25,000 per person per year;
   2. For IRC section 6695(d) penalty, the maximum amount is $25,000 per person for any return period;
   3. For IRC section 6695(e) penalty, the maximum amount is $25,000 per person for any return period;
   4. For IRC section 6695(f) penalty, there is no maximum amount; and
   5. For IRC section 6695(g) penalty, there is no maximum amount.

1. The IRC section 6695(a) penalty applies if the preparer fails to comply with IRC section 6107(a), Furnishing Copy to Taxpayer. Under IRC section 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.
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. Treas. Reg. 1.61071(c).
3. The IRC section 6695(a) penalties do 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 because:
   1. A person is a preparer under Treas. Reg. 301.770115(a)(2) and (b), on account of having given advice on specific issues of law; or
   2. A person is a preparer under Treas. Reg. 301.770115(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 section 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 their official duties, has arranged their affairs so that they have less than full knowledge of the property they hold or of the debts for which they are responsible. (See Treas. Reg. 1.66951(a)(2))

1. The IRC section 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/claim for refund using the appropriate method prescribed by the Secretary after it is completed and before it is presented to the taxpayer for signature. See IRM 3.42.5.16.1.2, for signatures on electronically filed returns.
2. IRC section 6695(b) no longer requires a manual signature. The signature requirement may be satisfied if the preparer used a computer program to sign the return or claim for refund, or if the preparer signs the completed return, makes a photocopy of the return, and the taxpayer signs and files the photocopy. (Rev. Rul. 78370, 19782 C.B. 336)
3. If a preparer is physically unable to sign a return because of a temporary or permanent disability, the IRC section 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. (Rev. Proc. 797, Forms and Instructions,19791 C.B. 486)
4. In general, a facsimile signature stamp or signed gummed label will not be acceptable. The exceptions to this rule are:
   1. A preparer of a return or claim for refund for a nonresident alien may use a facsimile signature to sign as preparer if the preparer is authorized to sign for the taxpayer using a facsimile signature. However, the conditions prescribed in Treas. Reg. 1.66951(b)(4) must be met; or
   2. A preparer of Forms 1041 may use a facsimile signature to sign the Forms 1041 if the conditions in Notice 8948, 19891 C.B. 688,are met. This exception only applies to Forms 1041 filed for taxable years ending after 12/31/87, and on or before further guidance is issued.
5. If the preparer required to sign the return/claim for refund is unavailable to sign, another preparer must review the return/claim for refund and then manually sign the return/claim for refund.
6. If more than one preparer is involved in the preparation of the return/claim for refund, the preparer with primary responsibility for the overall substantive accuracy of the return/claim for refund is the preparer who must sign the return/claim for refund. Treas. Reg. 1.66951(b)(2), (Rev. Rul. 81246, 1981-2 C.B. 249.)
7. If the mechanical preparation of the return/claim for refund is done by a computer not under the control of the individual preparer, the signature requirement may be satisfied by a signed attestation by the individual preparer that all the information in the return was obtained from the taxpayer and is true and correct to the best of the preparer's knowledge. The attestation must be attached to the return/claim for refund and the information contained in the return or claim for refund must not be altered by another person.
8. A preparer is not required to sign and affix an identification number to the taxpayer's copy of the return. (Rev. Rul. 78317, 1978-2 C.B. 335,
9. The IRC section 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 in substantiation of the preparer's claim of reasonable cause. The penalty for failure to sign will not be imposed solely because:
   1. A person is a preparer under Treas. Reg. 301.770115(a)(2) and (b), on account of having given advice on specific issues of law;
   2. A person is a preparer under Treas. Reg. 301.770115(b)(3) because 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).

1. The IRC section 6695(c) penalty applies if the preparer fails to comply with IRC section 6109(a)(4), Furnishing identifying number of income return preparer. Under IRC section 6109(a)(4) and the regulations thereunder, the return/claim for refund must contain:
   1. The identifying number of the preparer required to sign the return/claim for refund under IRC section 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. The IRC section 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 solely because:
   1. A person is a preparer under Treas. Reg. 301.770115(a)(2) and (b), because of giving advice on specific issues of law;
   2. A person is a preparer under Treas. Reg. 301.770115(b)(3) because 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).
3. IRC section 6695(c) penalties will not be imposed against:
   1. A preparer who is employed or engaged by a person who is also a preparer of the return/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.
4. No more than one penalty of $50 may be imposed with respect to a single return/claim for refund.

1. The IRC section 6695(d) penalty applies if the preparer fails to comply with IRC section 6107(b), Copy or List to Be Retained by Income Tax Return Preparer. Under IRC section 6107(b) and the regulations thereunder, a preparer must:
   1. Retain a completed copy of the return/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/claims for refund prepared.
   2. Retain a record (by copy of the return/claim for refund or by a list, card file, electronically, or otherwise) of the name of the preparer required to sign the return/claim for refund under IRC section 6695(b) for each return/claim for refund presented to the taxpayer.
   3. Make such copy or list available for inspection upon request by the IRS for a 3-year period following the close of the return period (See IRC section 6060(c) for the definition of "return period" ).
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 other preparers. Similarly, if there is a partnership arrangement, the requirement to retain a copy or list only applies to the partnership. Treas. Reg. 1.61071(c).
3. The IRC section 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 solely because:
   1. A person is a preparer under Treas. Reg. 301.770115(a)(2) and (b), because of giving advice on specific issues of law.
   2. A person is a preparer under Treas. Reg. 301.770115(b)(3) because 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).

1. The IRC section 6695(e) penalty applies if the preparer fails to comply with IRC section 6060, Information Returns of Income Tax Return Preparers. Under IRC section 6060(a) and the regulations thereunder, each person who employs (or engages) one or more income tax return preparers must retain a record of the name, taxpayer identification number and place of work of each income tax return preparer employed (or engaged) by him. For purposes of IRC section 6060, a partnership is treated as the employer of the partners.
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 income tax return preparers during that period.
3. The record must be retained and made available for inspection for a 3-year period following the close of the return period to which it relates. The term "return period" means the 12-month period beginning on July 1st of each year.
4. If an income tax return preparer is not employed by another preparer, such preparer is treated as his own employer for purposes of this penalty. Therefore, if a preparer is a sole proprietor, he/she must retain and make available a record with respect to himself/herself.
5. The IRC section 6695(e) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect.
6. The IRC section 6695(e) penalty must be assessed within 3 years after the return of claim for refund was filed.
7. The penalty is $50 for each failure to file a return as required by IRC section 6060 and $50 for each failure to include a required item in the return. The maximum amount of the penalty imposed on any person for any calendar year is $25,000.

1. The IRC section 6695(f) penalty generally applies if the preparer endorses or otherwise negotiates (directly or through an agent) a refund check issued to a taxpayer (other than the preparer). For certain limited exceptions see (3) below.
2. A person in a business other than tax return preparation who fills out or reviews returns for its customers may be a preparer and, thus, subject to the IRC section 6695(f) penalty if such person endorses or otherwise negotiates the customer's refund check. (Rev. Rul. 8655, 19861 C.B. 373)
3. 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:
   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. Endorse or negotiate a refund check as part of the check clearing process after initial endorsement or negotiation. See Treas. Reg. 1.66951(f)(2).
4. There is no reasonable cause exception to this penalty.

1. The IRC section 6695(g) penalty applies if an income 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. 1.66952(b), the preparer must comply with the following due diligence requirements:
   1. Complete an eligibility checklist. They 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 1040/1040A/1040EZ instructions, Publication 596, Earned Income Credit, or their own worksheet that contains the same information.
   3. Have no knowledge or reason to know that any information used to determine the taxpayer's eligibility for the credit and the credit amount is incorrect.
   4. Retain copies of Form 8867 (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 3 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.
3. Any return preparer who fails to comply with the requirement of IRC section 6695(g) will be charged a $100 penalty for each failure.
4. The penalty will not apply if the preparer can show that their normal office procedures are developed and followed to ensure compliance with IRC section 6695(g) and that the failure to comply with respect to a particular return or claim for refund was isolated and inadvertent.
5. Refer to IRM 22.21.1.2.3, Earned Income Tax Credit (EITC) Preparer Outreach Program, for more information.

1. Examination. Revenue Agents and Tax Auditors in the Area.
2. Collection. Revenue Officers may assert only IRC section 6695(a), (b), and (c) penalties.

1. Of the seven identification penalties listed under IRC section 6695, (a), (b), (c), and (f) may be discovered by the examiner during an examination interview or site visitation. These Code sections all relate to questions examiners ask in initial interviews under required filling checks or during a site visit.
2. The penalties under IRC section 6695(d), (e)(1), and (e)(2) would arise if a project were being done on a preparer. These penalties generally would not be discovered during an income tax examination of a taxpayer.
3. To assert this penalty the examiner should prepare Form 6459, Return Preparer's Checksheet, and secure the group manager's approval. Once managerial approval is secured, examiners should refer to the procedures in IRM 20.1.6.3.3, Asserting the IRC 6694 Penalties , above.
4. Examiners may charge time to the penalty case using Activity Code 503500 for IRC section 6695(f) penalties, and Activity Code 504500 for IRC section 6695(a) through (e) and 6695(g) penalties.

1. When Collection employees secure delinquent returns or claims, and determine that a preparer has not complied with the provisions of IRC section 6695 for signing a prepared income tax return or claim, for placing his/her Taxpayer Identification Number (TIN) or Preparer Tax Identification Number (PTIN) on the prepared return or claim, or for providing the taxpayer with a completed copy of the prepared return or claim, 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. The return preparer may be contacted if relevant information is needed.
3. Form 8278, Computation and Assessment of Miscellaneous Penalties, is used to assert preparer penalties. Form 8278 will be forwarded to Collection Support function for input.

1. Except for the IRC section 6695(f) and 6695(g) penalties, all of the IRC section 6695 penalties provide that the penalty will not be imposed if the failure is due to reasonable cause and not due to willful neglect.
2. An example of what constitutes reasonable cause is when the preparer claims substantial compliance (i.e., despite exercising reasonable precautions, certain required preparer data were omitted because of human error).
3. For other examples, see the IRM section on the specific IRC section 6695 penalties above.

1. IRC section 6695 identification penalties may be asserted with any other penalties including, but not limited to, IRC section 6694, IRC section 6701, and IRC section 6662 asserted against the taxpayer.

1. See IRM 20.1.6.1.5, Claims for Refund,and 20.1.6.1.5.1, Campus Claim Processing,above.

1. See IRM 20.1.6.3.3.6, Assembly of Case File,and 20.1.6.3.4, Group Processing,above.

1. Prompt assessment procedures apply, when applicable, to IRC section 6695. The preparer will have post-assessment appeal rights.
2. See IRM 4.4.25.1, Quick Assessments, and IRM 5.1.4.12,Prompt Assessments, for further information on quick/prompt assessments.

1. See IRM 20.1.6.1.4, Appeal Rights,above.

1. The statute of limitations on assessment for IRC 6695 penalties expires three years from the due date of the related return or the date filed, whichever is later. (See IRM 20.1.6.1.8, Statute of Limitations.)

1. A referral to the Office of Professional Responsibility must be made when an IRC section 6695(f) penalty is assessed against an attorney, CPA, enrolled agent or enrolled actuary. (See IRM 20.1.6.2.1, Referral to the Office of Professional Responsibility.)

1. See IRM 20.1.6.1.1, Definitions, above for definition of terms.

1. Prior to enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA 1982), investors in abusive tax shelters were penalized through the assertion of the negligence and valuation overstatement penalties.
   Similarly, promoters were subject to:
   1. Civil penalties for the false or fraudulent preparation of a return or other document, or
   2. Criminal penalties for aiding, assisting, or advising with the preparation or presentation of false or fraudulent returns or other documents.
2. However, such investor-targeted penalties did little to discourage the continued conception and promotion of abusive shelters.
3. TEFRA 1982 enacted IRC section 6700, Promoting Abusive Tax Shelters, etc.,to permit the IRS to assert penalties against promoters of abusive tax shelters.
4. As enacted by TEFRA 1982, the IRC section 6700 penalty amount was the greater of $1,000 or 10 percent of the gross income derived from the promotion of the abusive shelter. As originally enacted, the penalty applies to any person who organizes, assists in the organization of, or participates in the sale of any interest in any plan or arrangement, and who, in connection with such sale or organization, either:
   1. Makes or furnishes a false or fraudulent statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any tax benefit by reason of participating in the entity, plan or arrangement; or
   2. Makes or furnishes a gross valuation overstatement as to any material matter.
5. The IRC section 6700 penalty applies to activities occurring after September 3, 1982.
6. The Deficit Reduction Act of 1984 (DRA 1984) increased the IRC section 6700 penalty amount to the greater of $1,000 or 20 percent of the gross income derived from the activity. This penalty rate applies to activities occurring after July 19, 1984.
7. The Omnibus Budget Reconciliation Act of 1989 (OBRA 1989) made a number of changes to IRC section 6700. These changes apply to activities occurring after December 31, 1989.
   1. OBRA 1989 changed the penalty rate to the lesser of $1,000 per activity or 100 percent of the gross income derived from the activity.
   2. OBRA 1989 clarified that those who indirectly participate in the sale of an interest in the shelter and those who cause another person to make false statements or gross overvaluation may be subject to the penalty.
8. Abusive tax shelters are now also referred to as abusive tax avoidance transactions.

1. IRM 4.32.2.1, Overview of Abusive Tax Avoidance Transaction (ATAT), contains an overview of the IRC section 6700/IRC section 6701 penalty program concerning the promoters of abusive tax avoidance transactions (ATAT), and the examination of taxpayer participants.
2. Currently, the Small Business/Self-Employed Division Lead Development Center (LDC) processes referrals concerning promoters of abusive tax avoidance transactions. The LDC evaluates referrals based on established criteria and authorizes IRC section 6700 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate Areas Planning and Special Procedures Programs (PSP) unit for assignment to the field.
3. In the Large and Mid-Sized Business (LMSB) Division, the Office of Tax Shelter Analysis (OTSA) processes all leads of potential promoters of tax shelters. LMSB Financial Services is responsible for the field assignments of all approved promoter investigations.

1. There are two types of conduct subject to the IRC section 6700 penalty.
2. The penalty may be asserted against a promoter who makes, furnishes or causes another to make or furnish a statement, in connection with the sale or organization of an entity, plan, or arrangement, when the statement relates to the allowability of any deduction or credit, the excludability of any income, or the securing of any tax benefit by reason of participating in the entity, plan or arrangement when the person knows or has reason to know that the statement is false or fraudulent as to any material matter.
3. The penalty may also be asserted when a promoter makes, furnishes or causes another to make or furnish a statement, in connection with the sale or organization of an entity, plan, or arrangement, when the statement contains a gross valuation overstatement as to any material matter.

1. Examiners assert the penalty. Also refer to IRM 4.32.2.11, Penalty Assessment.

1. See IRM 4.32.2.11.6, Computation of IRC 6700 Penalties.
2. Section 818 of The American Jobs Creation Act of 2004 amended the penalty amount to equal 50 percent of the gross income derived by the person from the activity for which the penalty is imposed. The new penalty rate applies to any activity, occurring after October 23, 2004, that involves a statement regarding 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. The amount of the penalty remains unchanged for gross valuation overstatement violations under IRC section 6700(a)(2)(B) and equals $1,000 (or if the person established that it is less, 100 percent of the gross income derived or to be derived by the person from such activity).

1. This penalty is in addition to all other penalties that may be imposed under the Code. However, under IRC section 6701(f)(3), no penalty may be assessed under section 6700 on any person with respect to any document for which a penalty is assessed on such person under IRC section 6701. This provision allows the IRS to chose 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. (See the discussion in IRM 20.1.6.6.4., Coordination with Other Penalties).
2. IRC section 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 section 6700 may also be subject to the penalty under IRC section 6694(b).
3. IRC section 7206(2) relates to any person who willfully aids or assists in making fraudulent or false statements. In some cases, promoters might be criminally prosecuted under IRC section 7206(2) for assisting, procuring, or advising the preparation or presentation of a return or other document which is fraudulent or false.
4. IRC section 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 section 6700. The promoter penalty under IRC section 6700 and the injunction actions under IRC section 7408 are more effective when applied prior to the time investors file their returns. Therefore, abusive tax avoidance transactions should be identified and IRC section 6700 penalty investigations that have been authorized by the Lead Development Center should be initiated promptly. Also refer to IRM 4.32.2.5, Case Control / Case Assignment Procedures.

1. After the SB/SE Lead Development Center (LDC) or LMSB Office of Tax Shelter Analysis (OTSA) for LMSB taxpayers authorizes an IRC section 6700 investigation and the case is assigned to the field, assigned examiners:
   1. Complete a request to Area Counsel for the assistance of an SB/SE trial attorney.
      i) LMSB agents request assistance from their LMSB local Counsel.
   2. Develop facts and circumstances to determine the applicability of the penalty.
   3. Decide in conjunction with Area Counsel when/if pre-filing notification letters are warranted by reviewing any false and fraudulent statements as to material matters and any assets overvalued within the meaning of IRC section 6700(b).
      i) LMSB agents request assistance from their LMSB local Counsel.
   4. Periodically review, with Area Counsels assistance, the applicability of injunctive relief under IRC section 7408.
      i) LMSB agents request assistance from their LMSB local Counsel.
2. These penalty assertion procedures do not apply to grand jury investigations.

1. Refer to IRM 4.32.2.7, Investigation Guidelines, for in-depth guidelines on conducting promoter investigations.
2. Also refer to IRM 4.32.2.5, Case Control / Case Assignment Procedures, regarding case control procedures and IRM 4.32.2.6, Parallel Investigations, regarding parallel investigation procedures. Parallel IRC section 6700 investigation procedures are used when case files received by examiners, from the SB/SE Lead Development Center, indicate the presence of an ongoing criminal investigation that in some way involves the subject of the IRC section 6700 investigation.

1. The accuracy-related penalty under IRC section 6662 can be applied to the individual returns of the participants if the criteria apply. If Pre-filing Notification Letters have been sent to the participants and the penalty is subsequently assessed for taking the position identified in the letters, the penalty can only be abated with the concurrence of Area Counsel.
2. If the participant is a witness in either an IRS grand jury investigation or an administrative criminal investigation, advise Criminal Investigation before assessing the accuracy-related penalty.

1. After Area Director's approval, the pre-filing notification letter will be sent.
2. PFN letters will not be sent to participants when a determination is made after July 15 of the subsequent year.
3. The Area office forwards to the Campus where the participant filed, the following items:
   1. A list of all PFN letters,
   2. Each investor's PFN,
   3. The Area Director's letter of approval,
   4. The pro forma RAR that relates to each of the investor's returns, and
   5. Any RARs for subsequent years.
4. Taxpayers sent PFN letters will be identified and the portion of any credits relating to the abusive tax avoidance transaction will be disallowed. If this proportion cannot be determined, all credits will be disallowed.
5. Campus Pre-filing Coordinators are responsible for administering the PFN program and monitoring its effectiveness.

1. See IRM 20.1.6.1.4 Appeal Rightsabove.

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

1. See IRM 20.1.6.2.1, Referral to the Office of Professional Responsibility,above.

1. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) added IRC section 6701 to the Code to penalize persons who knowingly aid and abet in the understatement of the tax liability of another person. The Tax Reform Act of 1984 included the IRC section 6701 penalty under the provisions of IRC section 7408 permitting the U.S. to seek injunctive relief barring a person aiding and abetting others in understating tax liabilities from further engaging in such activity.
2. The Omnibus Budget Reconciliation Act of 1989 (OBRA 89) expanded the scope of the penalty to individuals "who have reason to know " that they are aiding or abetting in the understatement of a tax liability of another person.
   1. After December 31, 1989, the penalty has been broadened to cover the people who only have reason to believe that the document will be used in connection with a material matter arising under the tax laws.
   2. Prior to amendment, the penalty required that the person have actual knowledge that the document would be used in connection with a material matter arising under the tax laws. In addition, OBRA '89 coordinated this penalty with IRC sections 6694 and IRC section 6700. (See IRM 20.1.6.6.1, When the Penalty Applies, below.)
3. The burden of proof for this penalty is on 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.

1. IRC section 6701 imposes a $1,000 penalty ($10,000 if the prohibited conduct relates to a corporation's tax return) for aiding or assisting in the understatement of tax. The penalty is imposed on a person who:
   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 know) 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 used) would result in an understatement of another person's tax liability.
2. Activities Subject to the Penalty. The 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, targets of the penalty are tax counselors who advise clients to take unsupported filing positions or to file false or fraudulent returns.
   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 subordinate to act, or does not prevent their participation in actions that person knows will produce an understatement, is subject to the penalty under IRC section 6701.
3. Aid, Assist, Procure, or Advise.
   1. The term "procures" in the statute 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. "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. The Senate Report adds that such direction, etc., 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.
   4. Mechanical Assistance. 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.
4. The Actor's Requisite Knowledge.
   1. For activities occurring before January 1, 1990, the actor must know that a document (the preparation or presentation of which he or she was in some way instrumental) will be used in connection with a material matter arising under the tax laws and will result in an understatement of tax liability. For example, if an individual assists another in procuring a forged birth certificate, he will not be liable for the penalty unless he knows that the birth certificate will be used for a tax matter, such as to obtain a benefit under the Code and that the use of such benefit will result in an understatement of tax.
   2. For activities occurring after December 31, 1989, the actor can be held liable for the penalty if he or she knows or has reason to believe that the document will be used in connection with any material matter arising under the tax laws. However, the statute still requires that the actor have actual knowledge that the document will result in an understatement of tax liability.
5. 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. The Senate Report also states that 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.
6. 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 section 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 section 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.
   3. Example: 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 K1 for 10 individual partners would be subject to a $10,000 penalty.

1. Since the government has the burden of proof with respect to this penalty, it can be assessed only by employees who have the requisite knowledge of the facts giving rise to the penalty. Therefore, this penalty normally will be assessed by examiners at an IRS Area office as a result of an examination of a tax return or document.
2. See IRM 4.32.2.11, Penalty Assessment.