SECTION 6694 PROPOSED REGULATIONS
DEPARTMENT OF THE TREASURY
Internal Revenue Service (IRS)
26 CFR Parts 1, 20, 25, 26, 31, 40, 41, 44, 53, 54, 55, 56, 156, 157, and 301
[REG-129243-07]
RIN 1545-BG83
Tax Return Preparer Penalties under Sections 6694 and 6695
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations implementing amendments to
the tax return preparer penalties under sections 6694 and 6695 of the Internal
Revenue Code (Code) and related provisions under sections 6060, 6107, 6109,
6696, and 7701(a)(36) reflecting amendments to the Code made by section 8246 of
the Small Business and Work Opportunity Tax Act of 2007. The proposed
regulations affect tax return preparers and provide guidance regarding the
amended provisions. This document also provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments must be received by [INSERT DATE
THAT IS 60 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER] . Outlines of topics to be discussed at the public hearing scheduled for
Monday, August 18, 2008, must be received by Monday, August 4, 2008.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-129243- 07), room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC
20044. Submissions may be hand delivered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-129243-07), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C., or
sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov/Regs (IRS REG-129243-07). The public hearing will be held in the IRS Auditorium,
Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, D.C.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Michael
E. Hara, (202) 622-4910, and Matthew S. Cooper, (202) 622-4940; concerning
submissions of comments, the hearing, and/or to be placed on the building
access list to attend the hearing, Regina Johnson, (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed rulemaking
has been submitted to the Office of Management and Budget in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the
collection of information should be sent to the Office of Management and
Budget, Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of
information should be received by [INSERT DATE THAT IS 60 DAYS AFTER
PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER ]. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the proper
performance of the functions of the IRS, including whether the information will
have practical utility;
The accuracy of the estimated burden associated with the proposed collection of
information;
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collection of information may be
minimized, including through the application of automated collection techniques
or other forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
The collection of information in this proposed regulation is in
§§1.6060-1(a)(1), 1.6107-1, 1.6694- 2(c)(3), 20.6060-1(a)(1), 20.6107-1,
25.6060-1(a)(1), 25.6107-1, 26.6060-1(a)(1), 26.6107-1, 31.6060-1(a)(1),
31.6107-1, 40.6060-1(a)(1), 40.6107-1, 41.6060-1(a)(1), 41.6107-1,
44.6060-1(a)(1), 44.6107-1, 53.6060-1(a)(1), 53.6107-1, 54.6060-1(a)(1),
54.6107-1, 55.6060-1(a)(1), 55.6107-1, 56.6060-1(a)(1), 56.6107-1,
156.6060-1(a)(1), 156.6107-1, 157.6060-1(a)(1), and 157.6107-1. This
information is necessary to make the record of the name, taxpayer
identification number, and principal place of work of each tax return preparer,
make each return or claim for refund prepared available for inspection by the
Commissioner of Internal Revenue, and to document that the tax return preparer
advised the taxpayer of the penalty standards applicable to the taxpayer in
order for the tax return preparer to avoid penalties under section 6694. The
collection of information is required to comply with the provisions of section
8246 of the Small Business and Work Opportunity Tax Act of 2007. The likely
respondents are tax return preparers and their employers.
Estimated total annual reporting burden: 10,679,320 hours.
Estimated average annual burden per respondent: 15.6 hours.
Estimated number of respondents: 684,268.
Estimated frequency of responses: 127,801,426.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a valid control number
assigned by the Office of Management and Budget.
Background
This document contains proposed amendments to the Income Tax Regulations (26
CFR part 1), the Estate Tax Regulations (26 CFR part 20), the Gift Tax
Regulations (26 CFR part 25), the Generation-Skipping Transfer Tax Regulations
(26 CFR part 26), the Employment Tax and Collection of Income Tax at Source
Regulations (26 CFR part 31), the Excise Tax Procedural Regulations (26 CFR
part 40), the Highway Use Tax Regulations, (26 CFR part 41), the Wagering Tax
Regulations (26 CFR part 44), the Foundation and Similar Excise Tax Regulations
(26 CFR part 53), the Pension Excise Tax Regulations (26 CFR part 54), the
Excise Tax on Real Estate Investment Trusts and Regulated Investment Companies
Regulations (26 CFR part 55), the Public Charity Excise Tax Regulations (26 CFR
part 56), the Excise Tax on Greenmail Regulations (26 CFR part 156), the Excise
Tax on Structured Settlement Factoring Transactions Regulations (26 CFR part
157), and the Regulations on Procedure and Administration (26 CFR part 301)
implementing the amendments to tax return preparer penalties under sections
6694 and 6695 (and the related provisions under sections 6060, 6107, 6109,
6696, and 7701(a)(36)) made by section 8246 of the Small Business and Work
Opportunity Tax Act of 2007, Public Law 110-28 (121 Stat. 190) (May 25, 2007)
(the 2007 Act).
In accordance with the 2007 Act, these proposed regulations amend existing
regulations defining income tax return preparers to broaden the scope of that
definition to include preparers of estate, gift, and generation-skipping
transfer tax returns, employment tax returns, excise tax returns, and returns
of exempt organizations. These proposed regulations also revise current regulations
to amend the standards of conduct that must be met to avoid imposition of the
tax return preparer penalty under section 6694. In addition, these proposed
regulations reflect changes to the computation of the section 6694 tax return
preparer penalty made by the 2007 Act. These regulations also amend current
regulations under the penalty provisions of section 6695 to conform them with
changes made by the 2007 Act expanding the scope of that statute beyond income
tax returns. The Treasury Department and the IRS intend to finalize these
proposed regulations by the end of 2008, with the expectation that the final
regulations will be applicable to returns and claims for refund filed (and
advice given) after the date that final regulations are published in the Federal
Register , but in no event sooner than December 31, 2008.
History of the Tax Return Preparer Penalty Provisions
The 2007 Act amended section 6694 to expand the definition of tax return
preparer, broaden the scope of the tax return preparer penalties to include
preparers of returns other than income tax returns, revise the standards of
conduct that tax return preparers must meet to avoid imposition of penalties,
and change the computation of the tax return preparer penalties. The 2007 Act did
not amend a number of other Code sections related to tax return preparer
conduct, nor did it directly address the tax regulations, published guidance,
and case law that have developed since enactment of the preparer penalty regime
as part of the Tax Reform Act of 1976, Public Law 94-455 (90 Stat. 1688)
(October 4, 1976) (the 1976 Act).
The Treasury Department and the IRS believe that the recent amendments to the
tax return preparer penalty provisions necessitate a comprehensive review and
overhaul of all the tax return preparer penalties and related regulatory
provisions. These proposed regulations are the first significant step in this
process. Because the proposed regulations were drafted with consideration of
the existing regulations and the legislative history of the statutory
provisions that were amended by the 2007 Act, a brief review of the legislative
and regulatory history leading up to the recent amendments is appropriate in
order to place the proposed regulatory changes reflecting the 2007 Act amendments
in context.
The Tax Reform Act Of 1976
The provisions in section 7701(a)(36) defining income tax return preparers, and
the provisions in sections 6694, and 6695, imposing various penalties on income
tax return preparers, were first enacted by the 1976 Act. Sections 6107 and
6109, imposing an obligation on return preparers to furnish and maintain copies
of returns and include an identifying number on those returns, were also
enacted by the 1976 Act.
As originally enacted, section 7701(a)(36)(A) defined the term income tax
return preparer to mean any person who prepared for compensation, or who
employed one or more persons to prepare for compensation, any income tax return
or income tax claim for refund, or a "substantial portion" of such
return or claim. Section 7701(a)(36)(B) excluded from the definition of income
tax return preparer persons who merely provided mechanical assistance in the
preparation of a return or claim for refund, or who prepared returns and claims
as an employee of the taxpayer or in a fiduciary capacity. The legislative
history to the 1976 Act explained that whether or not a portion of a return
constituted a substantial portion of a tax return was to be determined by
examining both the length and complexity of that particular portion of the
return and the amount of tax liability involved. The legislative history noted,
however, that the filling out of a single schedule would generally not be
considered a substantial portion of that return unless that particular schedule
was the dominant portion of the entire tax return. The legislative history also
provided that a person who prepared a return for compensation may be an income
tax return preparer even though that person did not actually place figures on a
taxpayer's return. See S. Rep. No. 94-938, 94th Cong., 2d Sess. 349-359 (1976).
As originally enacted, section 6694(a) imposed a "first tier" penalty
of $100 if any part of an understatement was due to the negligent or
intentional disregard of rules or regulations by an income tax return preparer.
Section 6694(b) imposed a "second tier" penalty of $500 if any part
of an understatement was due to a willful attempt in any manner to understate
tax liability by an income tax return preparer. Section 6695(b) imposed a penalty
of $25 if an income tax return preparer failed to sign a return or claim for
refund in the manner prescribed by regulations. Sections 6695(a), (c), (d), and
(e) also imposed penalties of $25 if an income tax return preparer failed to
comply with the various identification rules in sections 6107(a), 6109(a)(4),
6107(b) and 6060.
The House and Senate Reports to the 1976 Act, H. Rep. No. 94-658, 94th Cong., 1st Sess. at 274 (1975) and S. Rep. No. 94-938 at 349-50, and
the Joint Committee on Taxation's General Explanation of the Tax Reform Act of
1976, 94th Cong., 2d Sess. at 346 (1976), explained the
need for the new tax return preparer penalty regime by noting the significant
number of fraudulent returns and tax return preparers engaged in abusive
practices. The legislative history further explained that, under prior law, it
was often difficult for the IRS to detect any individual case of improper
return preparation. This was because the IRS generally had no way of knowing
whether the return was prepared by the taxpayer or by a tax return preparer who
may have engaged in abusive practices involving a number of returns. Further,
even when the IRS could trace the improper preparation of tax returns to an
individual tax return preparer, the only sanctions available were criminal
penalties, which were often considered inappropriate, cumbersome, and
ineffective deterrents because of the cost and length of time involved in
prosecuting those cases. The legislative history makes clear that Congress
intended the tax return preparer penalties to aid the IRS in detecting returns
that were incorrectly prepared and to deter tax return preparers from engaging
in improper conduct. See S. Rep. No. 94-938, at 350-51 (1976).
Regulations implementing certain of the amendments made by the 1976 Act were
published on December 29, 1976, as TD 7451, 41 FR 56631, and later amended on
March 31, 1977, by TD 7473, 42 FR 17124. Additional regulations were published
on April 1, 1977, as TD 7475, 42 FR 17452, and November 23, 1977, as TD 7519,
42 FR 17452 (the November 1977 final regulations).
The November 1977 final regulations applied the tax return preparer penalty
provisions to persons who did not sign the return or claim for refund, or make
or control the entries on the return or claim for refund, including tax
professionals who rendered advice that was directly related to the
determination of the existence, characterization, or amount, of an entry on a
return or claim for refund. By including a broad definition of tax return
preparer, the Treasury Department and the IRS intended the regulations to
increase advisor care and to monitor careless or deceptive members of the
profession. The November 1977 final regulations reflected the considered view
that excluding nonsigning tax professionals from the reach of section 6694
could result in a lack of accountability for positions taken on a return, as
taxpayers could escape penalty liability because they employed tax return
preparers, tax return preparers could escape liability because they relied on nonsigning
tax professionals' opinions, and nonsigning tax professionals could escape
liability because they would not be considered tax return preparers. The
November 1977 final regulations also reflected a concern with the possible
exemption of tax attorneys and other professionals involved in preparing more
complex returns while at the same time subjecting to penalties preparers of
less sophisticated returns who did not rely on the work of others.
The November 1977 final regulations also adopted the safe harbor provisions of
§301.7701-15(b)(2), which excluded from the definition of a tax return preparer
persons providing tax advice (other than those signing the return) if the
amounts of gross income, deductions, or credits giving rise to the understatement
were less than $2,000; or less than $100,000 and also less than 20 percent of
the gross income (or, for an individual, the individual's adjusted gross
income) shown on the return or claim for refund.
Omnibus Budget Reconciliation Act of 1989
Sections 6694 and 6695 were amended by the Improved Penalty Administration and
Compliance Tax Act of 1989, enacted as title G of the Omnibus Budget
Reconciliation Act of 1989 (OBRA 1989), Public Law 101-239 (103 Stat. 2106)
(December 19, 1989). The OBRA 1989 amended section 6694(a) to remove the prior
link to negligence or intentional disregard of rules or regulations and instead
impose a $250 penalty on an income tax return preparer who understated a
taxpayer's tax liability on an income tax return or claim for refund if the
understatement was due to a position for which there was not a "realistic
possibility" of being sustained on its merits, and the tax return preparer
knew or reasonably should have known of such position. The revised section
6694(a) penalty did not apply, however, if the position was "not
frivolous" and was adequately disclosed, or if there was reasonable cause
for the position taken and the tax return preparer acted in good faith. The
OBRA 1989 also amended section 6694(b) to impose a $1,000 penalty on a tax
return preparer who understated a taxpayer's tax liability on an income tax
return or claim for refund if the understatement was due to the tax return
preparer's willful attempt to understate tax liability or the tax return
preparer's reckless or intentional disregard of rules or regulations.
The OBRA 1989 also made uniform the tax return preparer penalties that apply
for each failure by a tax return preparer to: (1) furnish a copy of a return or
claim for refund to the taxpayer under section 6695(a); (2) sign the return or
claim for refund under section 6695(b); (3) furnish his or her identification
number under section 6695(c); or (4) file a correct information return under
section 6695(e). The unified penalty amount was $50 for each failure, with a
limit of $25,000 for the total amount of penalties that could be imposed for
any single type of failure.
The OBRA 1989 also consolidated the negligence, substantial understatement and
valuation misstatement penalties applicable to taxpayers. These penalties were
consolidated into a single accuracy-related penalty regime under section 6662.
The new accuracy-related penalty for a substantial understatement of income tax
generally would not be imposed, however, if (1) there was "substantial authority"
for the taxpayer's treatment of the item giving rise to the understatement, or
(2) relevant facts affecting the tax treatment of the item were adequately
disclosed in the return or in a statement attached to the return and there was
a "reasonable basis" for the tax treatment of the item.
By adopting the "realistic possibility" standard for tax return
preparers, and the higher "substantial authority" standard for
taxpayers with respect to undisclosed positions, OBRA 1989 created a disparity
between the penalty treatment of tax return preparers and most taxpayers
subject to income tax.
Regulations were published on December 31, 1991, as TD 8382, 56 FR 67509, which
amended the regulations under section 6694 to conform the income tax return
preparer regulations with the statutory changes made by OBRA 1989 and to make
other changes.
The Small Business and Work Opportunity Tax Act of 2007
Section 8246 of the 2007 Act amended sections 6694 and 7701(a)(36) and made
conforming changes to other Code provisions to make tax return preparer
penalties applicable to a broader range of tax returns. The 2007 Act's
amendments to section 6694 also changed the standards of conduct that tax
return preparers must meet in order to avoid imposition of penalties in the
event that a return prepared results in an understatement of tax. For
undisclosed positions, the 2007 Act replaced the "realistic
possibility" standard with a standard requiring the tax return preparer to
"reasonably believe that the tax treatment of the position is more likely
than not" the proper treatment. For disclosed positions, the 2007 Act
replaced the "not-frivolous" standard with a standard requiring the
tax return preparer to have a "reasonable basis" for the tax
treatment of the position.
The 2007 Act also increased the first-tier penalty under section 6694(a) from
$250 to the greater of $1,000 or 50 percent of the income derived (or to be
derived) by the tax return preparer from the preparation of a return or claim
for refund with respect to which the penalty was imposed. In addition, the 2007
Act increased the secondtier penalty under section 6694(b) from $1,000 to the
greater of $5,000 or 50 percent of the income derived (or to be derived) by the
tax return preparer. The amendments made by the 2007 Act are effective for tax
returns prepared after the date of enactment, May 25, 2007.
Notice 2008-13
Notice 2008-13 (2008-3 IRB 282) was released on December 31, 2007 and provided
interim guidance under the 2007 Act regarding: (1) the relevant categories of
tax returns or claims for refund for purposes of applying the penalty under
section 6694(a); (2) the definition of "tax return preparer" under
sections 6694 and 7701(a)(36); (3) the date a return is deemed prepared; (4)
the standards of conduct applicable to tax return preparers for disclosed and
undisclosed positions taken on tax returns; and (5) the penalty compliance
obligations applicable to tax return preparers. Additional guidance was
provided in Notice 2008-12 (2008-3 IRB 280) with respect to the implementation
of the tax return preparer signature requirement of section 6695(b), and in
Notice 2008-11 (2008-3 IRB 279), which clarified the earlier transition relief
provided in Notice 2007-54 (2007-27 IRB 12 (July 2, 2007)). Notice 2008-46
(2008-18 IRB 868) was released on April 16, 2008 and added certain returns and
documents to Exhibits 1, 2, and 3 of Notice 2008-13.
Explanation of Provisions
In developing these proposed regulations, the Treasury Department and the IRS
recognize that the majority of tax return preparers serve the interests of
their clients and the tax system by preparing complete and accurate returns.
Tax return preparers are critical to ensuring compliance with the Federal tax
laws and are an important component in the IRS's administration of those laws.
The proposed regulations intend to balance the interests of the IRS in
curtailing the activities of noncompliant tax return preparers against the
burden imposed on all tax return preparers in complying with the requirements
imposed by the 2007 Act and these proposed regulations.
The Treasury Department and the IRS also recognize that the government has a
number of tools to monitor and sanction tax return preparers, and will continue
to coordinate the application of penalties under sections 6694, 6695, 6695A,
6700, 6701, 6702, and Circular 230, as well as other applicable penalties and
criminal sanctions.
The IRS will assess penalties under section 6694 in appropriate cases. In
keeping with a balanced enforcement program for tax return preparers, the IRS
intends to modify its internal guidance so that a referral by revenue agents to
the IRS Office of Professional Responsibility (OPR) will not be per se
mandatory when the IRS assesses a tax return preparer penalty under section 6694(a)
against a tax return preparer who is also a practitioner within the meaning of
Circular 230. This change is consistent with the general administrative
recommendations made in the legislative history of the amendments made by OBRA
1989 to the section 6694 penalty. See H.R. Conf. Rep. 101-386, 101st Cong., 1st Sess. at 662 (1989). In matters involving non-willful
conduct, the IRS will generally look for a pattern of failing to meet the
required penalty standards under section 6694(a) before making a referral to
OPR, although any egregious conduct subjecting a tax return preparer to penalty
may also form a basis for a referral to OPR.
Proposed Changes
The following is a summary of the proposed changes to the existing regulations
affecting tax return preparers. The changes included in these proposed
regulations are discussed in order of the Code sections to which they relate.
When appropriate, cross-references to definitional sections are included.
Significantly, the definition of tax return preparer, which maintains the
concepts in the existing regulations of signing and nonsigning tax return
preparers, is located at the end of these proposed regulations in §301.7701-15,
and that section is crossreferenced in the relevant sections of the regulations
under sections 6694 and 6695.
Furnishing of Copy of the Tax Return
Section 1.6107-1(a), which requires signing tax return preparers to furnish the
taxpayer a copy of the prepared return, is proposed to be amended to provide
that for electronically filed Forms 1040EZ, "Income Tax Return for Single
Filers and Joint Filers With No Dependents," and Forms 1040A, "U.S.
Individual Income Tax Return," filed for the 2009, 2010 and 2011 taxable
years, the return information may be provided on a replica of a Form 1040,
"U.S. Individual Income Tax Return," that provides all of the return
information. For other electronically filed returns, the information may be
provided on a replica of an official form that provides all of the information.
This amendment addresses the IRS' transitional issues in implementing the
Modernized e-File platform for the Form 1040 series of returns.
Date Return is Prepared
Proposed §1.6694-1(a)(2) defines the date a return or claim for refund is
prepared as the date it is signed by the tax return preparer, and also provides
that if the tax return preparer fails to sign the return when otherwise
required to do so, the date the return is deemed prepared is the date the
return is filed. In the case of a nonsigning tax return preparer, the relevant
date is the date the person provides the advice on the position that results in
the understatement. This date will be determined based on all the facts and
circumstances.
Defining the Preparer Within a Firm
Current §1.6694-1(b)(1) provides a "one preparer per firm" rule.
Specifically, if a signing tax return preparer is associated with a firm, that
individual, and no other individual in the firm, is treated as a tax return
preparer with respect to the return or claim for purposes of section 6694. Under
the current regulations, if two or more individuals associated with a firm are
tax return preparers with respect to a return or claim for refund, and none of
them is the signing tax return preparer, only one of the individuals is a
nonsigning tax return preparer with respect to that return or claim for
purposes of section 6694. In such a case, ordinarily, the individual who is a
tax return preparer for purposes of section 6694 is the individual with overall
supervisory responsibility for the advice given by the firm with respect to the
return or claim. The "one preparer per firm" rule and the corollary
rule included in §1.6694-2(d)(5) of the current regulations precluding a tax
return preparer from relying on the advice of an individual associated with the
tax return preparer's same firm for purposes of penalty protection were
intended to eliminate the administrative difficulty of attempting to apply the
section 6694 penalty on an intra-firm basis.
The Treasury Department and the IRS believe that the amendments to section 6694
made by the 2007 Act, together with the evolution in existing business
practices and the increased complexity of the Federal tax law that has created
an increased need for specialization, require reconsideration of the "one
preparer per firm" rule. Specifically, the Treasury Department and the IRS
believe this evolution requires the adoption of a framework that centers on the
return or claim for refund on a position-byposition basis, with the focus of
any penalty on the position(s) giving rise to the understatement on the return
or claim for refund and any responsible parties with respect to such
position(s). Thus the Treasury Department and the IRS believe that the
"one preparer per firm" rule is no longer appropriate and have
proposed to adopt a framework defining a preparer-per-position within a firm.
Under both the current and the proposed regulations, an individual is a tax
return preparer subject to section 6694 if the individual is primarily
responsible for the position on the return or claim for refund giving rise to
the understatement.
Under proposed §1.6694-1(b)(1), only one person within a firm will be
considered primarily responsible for each position giving rise to an
understatement and, accordingly, be subject to the penalty. In the course of
identifying the individual who is primarily responsible for the position, the
IRS may advise multiple individuals within the firm that it may be concluded
that they are the individual within the firm who is primarily responsible. In some
circumstances, there may be more than one tax return preparer who is primarily
responsible for the position(s) giving rise to an understatement if multiple
tax return preparers are employed by, or associated with, different firms.
Proposed §1.6694-1(b)(2) provides that the individual who signs the return or
claim for refund as the tax return preparer will generally be considered the
person that is primarily responsible for all of the positions on the return or
claim for refund giving rise to an understatement. The "one preparer per
firm" rule, however, is revised by these proposed regulations if it is
concluded based upon information received from the signing tax return preparer
(or other relevant information from a source other than the signing tax return
preparer) that another person within the signing tax return preparer's same
firm was primarily responsible for the position(s) giving rise to the
understatement. In this situation, the "one preparer per firm" rule
in the current regulations could unduly limit the IRS to assessing the penalty
against a person who may have overall responsibility in terms of signing the
return, but who may lack detailed knowledge of, or responsibility for, a
problematic return position, and who reasonably relied on another professional
at the same firm with greater knowledge of, and responsibility for, the
accuracy of a position giving rise to the understatement.
The Treasury Department and the IRS believe that amending the regulations to
better target the person or persons responsible for the position(s) giving rise
to the understatement will further compliance and result in more equitable
administration of the tax return preparer penalty regime.
Proposed §1.6694-1(b)(3) establishes a similar rule for situations when there
are one or more nonsigning tax return preparers at the same firm. If there are
one or more nonsigning tax return preparers at the firm and no signing tax
return preparer within the firm, the individual within the firm with overall
supervisory responsibility for the position(s) giving rise to the
understatement is the tax return preparer who is primarily responsible for the
position for purposes of section 6694. Additionally, if after the application
of proposed §1.6694-1(b)(2) it is concluded that the signer is not primarily
responsible for the position or the IRS cannot conclude which individual (as
between the signing tax return preparer and other persons within the firm) is
primarily responsible for the position, the individual nonsigning tax return preparer
within the firm with overall supervisory responsibility for the position(s) is
the tax return preparer who is primarily responsible for the position(s) giving
rise to the understatement.
This rule in proposed §1.6694-1(b)(3) is intended to address the potential for
uncertainty regarding the identification of the primarily responsible tax
return preparer prior to the time of the expiration of the period of
limitations on making an assessment under section 6694(a). The proposed rule is
distinguished from the current "one preparer per firm" rule in the
current regulations because under the proposed rule the IRS may assess the
penalty against either the signing tax return preparer or the nonsigning tax
return preparer with overall supervisory responsibility for the position(s)
giving rise to an understatement depending on the facts and circumstances.
Specifically, when the facts indicate that the signing tax return preparer is
the primarily responsible tax return preparer under proposed §1.6694-1(b)(1) and
(b)(2), the IRS may assess the section 6694 penalty against that individual
when appropriate under the statute and regulations. In situations when the
facts indicate that the nonsigning tax return preparer with overall supervisory
responsibility is the primarily responsible tax return preparer under proposed
§1.6694-1(b)(1) and (b)(3), the IRS may assess the section 6694 penalty against
that individual when appropriate. In situations when it is unclear which
individual, as between the signer and other nonsigning tax return preparers at
the firm, the IRS may assess the section 6694 penalty against the nonsigning
tax return preparer with overall supervisory responsibility with respect to the
position giving rise to the understatement when appropriate. The Treasury
Department and the IRS specifically request comments regarding the approach
taken in these proposed regulations and any recommendations to improve this
rule.
As described in this preamble, conforming rules are included in §1.6694-1(f) of
the proposed regulations regarding computation of the "income derived (or
to be derived)" from the firm and the individual(s) associated with the
firm, in order to ensure that the same income is not counted twice in
determining the amount of income subject to the section 6694 penalty.
Reliance on Information Provided
Section 1.6694-1(e) of the current regulations allows a tax return preparer
generally to rely in good faith without verification upon information furnished
by the taxpayer. Proposed §1.6694-1(e) allows similar reliance, but provides
that a tax return preparer may not rely on information provided by taxpayers
with respect to legal conclusions on Federal tax issues.
The proposed regulations expand on the current regulations to provide that a
tax return preparer may rely in good faith and without verification on
information furnished by another advisor, another tax return preparer, or other
party (even when the advisor or tax return preparer is within the tax return
preparer's same firm). Similarly, a tax return preparer may rely in good faith
without verification upon a tax return that has been previously prepared by a
taxpayer or another tax return preparer and filed with the IRS. The tax return
preparer, however, may not ignore the implications of information furnished to
the tax return preparer or actually known by the tax return preparer, and must
make reasonable inquiries if the information as furnished appears to be
incorrect or incomplete. The Treasury Department and the IRS believe that this
expansion of the current rules regarding reliance is necessary given the
heightened standards imposed on tax return preparers by the 2007 Act and the
increased complexity of the tax law, which often requires signing and
nonsigning tax return preparers to rely on the work of others in ensuring
compliance.
Income Derived Determination in Computing Penalty Amount
Proposed §1.6694-1(f) defines "income derived (or to be derived)"
with respect to a return or claim for refund as all compensation the tax return
preparer receives or expects to receive with respect to the engagement of
preparing the return or claim for refund or providing tax advice (including
research and consultation) with respect to the position(s) taken on the return
or claim for refund that gave rise to the understatement. In the situation of a
tax return preparer who is not compensated directly by the taxpayer, but rather
by a firm that employs the tax return preparer or with whom the tax return
preparer is associated, income derived (or to be derived) means all
compensation the tax return preparer receives from the firm that can be
reasonably allocated to the engagement of preparing the return or claim for
refund or providing tax advice (including research and consultation) with
respect to the position(s) taken on the return or claim for refund that gave
rise to the understatement. In the situation where a firm that employs the
individual tax return preparer (or the firm with which the individual tax
return preparer is associated) is subject to a penalty under section 6694(a) or
(b), income derived (or to be derived) means all compensation the firm receives
or expects to receive with respect to the engagement of preparing the return or
claim for refund or providing tax advice (including research and consultation)
with respect to the position(s) taken on the return or claim for refund that
gave rise to the understatement.
If the tax return preparer or the tax return preparer's firm has multiple
engagements related to the same return or claim for refund, only those
engagements relating to the position(s) taken on the return or claim for refund
that gave rise to the understatement are considered for purposes of computing
the income derived (or to be derived). In the situation of a tax return
preparer who is not compensated directly by the taxpayer, but rather by a firm
that employs the tax return preparer or with whom the tax return preparer is
associated, income derived (or to be derived) means all compensation the tax
return preparer receives from the firm that can be reasonably allocated to the
relevant firm engagements.
The proposed regulations also provide that only compensation for time spent on
tax advice that is given with respect to events that have occurred at the time
the advice is rendered and that relates to the position(s) giving rise to the
understatement will be taken into account for purposes of calculating the
section 6694 penalty. This rule is intended to be consistent with the
definition of tax return preparer in §301.7701-15(b)(2)(i).
The proposed regulations provide that it may be concluded, based upon
information received from the tax return preparer, that an appropriate
allocation of compensation attributable to the position(s) giving rise to the
understatement on the return or claim for refund is less than the total amount
of compensation associated with the engagement. For example, it may be
concluded that the number of hours of the engagement spent on the position(s)
giving rise to the understatement may be less than the total hours associated
with the engagement. If this is concluded, the amount of the penalty will be
calculated based upon the compensation attributable to the position(s) giving
rise to the understatement. Otherwise, the total amount of compensation from
the engagement will be the amount of income derived for purposes of calculating
the penalty under section 6694.
The proposed regulations also clarify that the amount of penalties assessed
against the individual and the firm shall not exceed 50 percent of the income
derived (or to be derived) by the firm from the relevant engagement(s) relating
to the position(s) giving rise to an understatement. The portion of the total
amount of penalty assessed against the individual tax return preparer shall not
exceed 50 percent of the individual's compensation attributable to the
engagement that relates to the position(s) giving rise to an understatement. In
other words, the same income will not be taken into consideration more than
once in calculating the penalty against an individual tax return preparer and
the individual tax return preparer's firm. The Treasury Department and the IRS
also anticipate that Circular 230 will be revised to state that the IRS
generally will not stack the section 6694 penalty and monetary penalties under
31 U.S.C. section 330 with respect to the same conduct.
Firm Liability
Proposed §§1.6694-2(a)(2) and 1.6694-3(a)(2) are the same as §§1.6694-2(a)(2)
and 1.6694-3(a)(2) of the current regulations regarding when a firm is liable
for the section 6694(a) or (b) penalty with one exception. Proposed
§§1.6694-2(a)(2)(iii) and 1.6694-3(a)(2)(iii) provide that a firm is also
subject to the penalty when the firm's review procedures were disregarded by
the firm through willfulness, recklessness, or gross indifference (including
ignoring facts that would lead a person of reasonable prudence and competence
to investigate or ascertain) in the formulation of the advice, or the
preparation of the return or claim for refund, that included the position for
which the penalty is imposed.
Reasonable Belief of More Likely Than Not
Proposed §1.6694-2(b)(1) provides that the "reasonable belief that the
position would more likely than not be sustained on its merits" standard
will be satisfied if the tax return preparer analyzes the pertinent facts and
authorities and, in reliance upon that analysis, reasonably concludes in good
faith that the position has a greater than 50 percent likelihood of being
sustained on its merits. Whether a tax return preparer meets this standard will
be determined based upon all facts and circumstances, including the tax return
preparer's due diligence. In determining the level of diligence in a particular
case, the IRS will take into account the tax return preparer's experience with
the area of tax law and familiarity with the taxpayer's affairs, as well as the
complexity of the issues and facts in the case. The proposed regulations also
provide that a tax return preparer may meet the "reasonable belief that
the position would more likely than not be sustained on its merits"
standard if a position is supported by a well-reasoned construction of the
applicable statutory provision despite the absence of other types of authority,
or if the tax return preparer relies on information or advice furnished by a
taxpayer, advisor, another tax return preparer, or other party (even when the
advisor or tax return preparer is within the tax return preparer's same firm),
as provided in proposed §1.6694-1(e).
Proposed §1.6694-2(b)(2) provides that a tax return preparer may not rely on
unreasonable assumptions, while proposed §1.6694-2(b)(3) states that the
authorities contained in §1.6662-4(d)(3)(iii) (or any successor provision) are
to be considered in determining whether a position satisfies the "more likely
than not" standard. Proposed §1.6694-2(b)(4) also provides examples that
illustrate positions meeting the "reasonable belief that the position
would more likely than not be sustained on its merits" standard.
Reasonable Basis
Proposed §§1.6694-2(c)(1) and (2) establish that the "reasonable
basis" standard that must be met for disclosed positions is the same
standard as defined in §1.6662-3(b)(3) (or any successor provision). The
proposed regulations also provide that, to meet the "reasonable
basis" standard, a tax return preparer may rely in good faith, without
verification, upon information furnished by a taxpayer, advisor, another tax
return preparer, or other party (even when the advisor or tax return preparer
is within the tax return preparer's same firm), as provided in proposed
§1.6694-1(e).
Adequate Disclosure
Section 1.6694-2(c)(3) builds on the current regulations and the interim
guidance provided in Notice 2008-13 and provides the rules for disclosure of a
position for which there is a "reasonable basis" but for which the
tax return preparer does not have a "reasonable belief that the position
would more likely than not be sustained on its merits."
For a signing tax return preparer within the meaning of §301.7701-15(b)(1), the
proposed regulations provide that a position may be disclosed in one of five
ways. First, the position may be disclosed on a properly completed and filed
Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure
Statement, as appropriate, or on the tax return in accordance with the annual
revenue procedure. See Revenue Procedure 2008-14 (2008-7 IRB 435 (February 19,
2008)). Second, for income tax returns, if the position does not meet the
"substantial authority" standard described in §1.6662-4(d),
disclosure of the position is adequate if the tax return preparer provides the
taxpayer with a prepared tax return that includes the appropriate disclosure.
Third, for income tax returns, if the position meets the "substantial
authority" standard, disclosure of the position is adequate if the tax
return preparer advises the taxpayer of all of the penalty standards applicable
to the taxpayer under section 6662. Fourth, for income tax returns, if the
position may be described as a tax shelter under section 6662(d)(2)(C) or a
reportable transaction to which section 6662A applies, disclosure of the
position is adequate if the tax return preparer advises the taxpayer that there
needs to be at a minimum "substantial authority" for the position, that
the taxpayer must possess a "reasonable belief that the tax treatment was
more likely than not" the proper treatment, and that disclosure will not
protect the taxpayer from assessment of an accuracy-related penalty. Fifth, for
tax returns or claims for refund that are subject to penalties other than the
accuracy-related penalty for substantial understatements under sections
6662(b)(2) and (d), the tax return preparer advises the taxpayer of the penalty
standards applicable to the taxpayer under section 6662. This fifth rule is
intended to address the situation when the penalty standard applicable to the
taxpayer is based on compliance with requirements other than disclosure on the
return (for example, section 6662(e)). In order to establish that the tax
return preparer's disclosure obligation was satisfied, the tax return preparer
must document contemporaneously in the tax return preparer's files that the
information or advice required by the proposed regulations was provided.
In the case of a nonsigning tax return preparer within the meaning of
§301.7701-15(b)(2), the position may be disclosed in one of three ways. First,
the position may be disclosed on a properly completed and filed Form 8275,
"Disclosure Statement," or Form 8275-R, "Regulation Disclosure
Statement," as appropriate, or on the tax return in accordance with the
annual revenue procedure. Second, a nonsigning tax return preparer may meet the
disclosure standards if the nonsigning tax return preparer advises the taxpayer
of all opportunities to avoid penalties under section 6662 that could apply to
the position and advises the taxpayer of the standards for disclosure to the
extent applicable. Third, disclosure of a position is adequate if a nonsigning
tax return preparer advises another tax return preparer that disclosure under
section 6694(a) may be required. The nonsigning tax return preparer must
document contemporaneously in the tax return preparer's files that this advice
required by the proposed regulations was provided.
In order to satisfy the disclosure standards when the position is not disclosed
on or with the return, each return position for which there is a
"reasonable basis" but for which the tax return preparer does not
have a "reasonable belief that the position would more likely than not be
sustained on the merits" must be addressed by the tax return preparer.
Thus, the advice to the taxpayer with respect to each position must be
particular to the taxpayer and tailored to the taxpayer's facts and
circumstances. No form of a general boilerplate disclaimer will satisfy these
standards. Proposed §1.6694-2(c)(iv) provides that disclosure in the case of
items attributable to a passthrough entity is adequate if made at the entity
level in accordance with the rules in §1.6662-4(f)(5). For example, a tax
return preparer of a partnership tax return need only advise the partnership in
order to satisfy any of the above disclosure rules and does not need to advise
each individual partner in the partnership of the applicable penalties.
Reasonable Cause
Proposed §1.6694-2(d) maintains the rules in the current regulations regarding
reasonable cause and good faith, except that §1.6694-2(d) is proposed to be
revised to provide that whether a position is supported by a generally accepted
administrative or industry practice is an additional factor to consider in
determining whether the tax return preparer acted with reasonable cause and
good faith. This provision is intended to address situations in the absence of
published guidance when administrative or industry practice has developed that
would not reasonably be subject to challenge by the IRS.
The reasonable cause factor regarding reliance on advice of another tax return
preparer is also expanded to allow a tax return preparer to reasonably rely on
information or advice furnished by a taxpayer, advisor, another tax return
preparer, or other party (even when the advisor or tax return preparer is
within the tax return preparer's same firm), as provided in proposed
§1.6694-1(e).
Electronically Signed Returns
Proposed §1.6695-1(b)(2) provides that, in the case of an electronically signed
tax return, a tax return preparer need not sign the return prior to presenting
a completed copy of the return to the taxpayer. The tax return preparer,
however, must furnish all of the information to the taxpayer contemporaneously
with furnishing the Form 8879, IRS e-file Signature Authorization, or similar
IRS efile signature form. The information may be furnished on a replica of an
official form that provides all of the information.
Due Diligence for Earned Income Credit
Proposed §1.6695-2(b)(3) establishes a reasonableness standard for signing tax
return preparers' due diligence requirements with respect to determining
eligibility for the earned income credit and adds examples.
Claims for Refund or Credit by Tax Return Preparers or Appraisers
Proposed §1.6696-1, discussing the procedures for filing claims for credit or
refund for penalties assessed against tax return preparers under sections 6694
or 6695, is revised to also cover the new appraiser penalty under section
6695A. Section 6695A was enacted by section 1219 of the Pension Protection Act
of 2006 (Public Law 109-280 (120 Stat. 780, 1084- 86) (August 17, 2006)), as
amended by the Tax Technical Corrections Act of 2007 (Public Law 110-172 (121
Stat. 2473, 2474) December 29, 2007)). A separate regulation project will
provide guidance under section 6695A.
Definition of Tax Return Preparer
Proposed §§301.7701-15(b)(1) and (2) add to the section 7701 regulations the
definitions of "signing tax return preparer" and "nonsigning tax
return preparer" that are included in §1.6694-1 of the current
regulations. Proposed §301.7701-15(b)(1) provides that a signing tax return
preparer is any tax return preparer who signs or who is required to sign a
return or claim for refund as a tax return preparer pursuant to §1.6695-1(b).
Proposed §301.7701-15(b)(2) provides that a nonsigning tax return preparer is any tax return preparer who is not a signing tax return preparer but who prepares
all or a substantial portion of a return or claim for refund within the meaning
of §301.7701-15(b)(3) with respect to events that have occurred at the time the
advice is rendered. In determining whether an individual is a nonsigning tax
return preparer, the proposed regulations provide that any time spent on advice
that is given with respect to events that have occurred, which is less than 5
percent of the aggregate time incurred by the person with respect to the
position(s) giving rise to the understatement will not be taken into account in
determining whether an individual is a nonsigning tax return preparer. The
Treasury Department and the IRS believe that this less than 5 percent test will
encourage tax professionals who principally rendered advice regarding events
that had not yet occurred to provide follow-up advice requested by a taxpayer
without the concern that, by providing such advice to a taxpayer, the advisor
would become a tax return preparer under proposed §301.7701-15(b)(2) and (3).
Consistent with the current regulations and the legislative history of the 1976
Act, proposed §301.7701- 15(b)(3)(i) clarifies that whether a schedule, entry,
or other portion of a return or claim for refund is a substantial portion is
determined based upon all facts and circumstances, and a single tax entry may
constitute a substantial portion of the tax required to be shown on a return.
The proposed regulations include additional factors to consider in determining
whether a schedule, entry, or other portion of a return or claim for refund is
a substantial portion, such as the size and complexity of the item relative to
the taxpayer's gross income and the size of the understatement attributable to
the item compared to the taxpayer's reported tax liability.
Proposed §301.7701-15(b)(3)(ii) increases the de minimis exception in
determining a substantial portion of a return or claim for refund for
nonsigning tax return preparers. Under the proposed regulations, the de minimis
exception applies if the item giving rise to the understatement is (i) less
than $10,000, or (ii) less than $400,000 if the item is also less than 20
percent of the taxpayer's gross income (or, for an individual, the individual's
adjusted gross income). This de minimis rule does not apply for signing tax
return preparers within the meaning of §301.7701-15(b)(1). This change to the
regulations updates the current de minimis amounts to reflect the passage of
time since those amounts were set in 1977. The Treasury Department and the IRS
are considering whether other de minimis rules applicable to nonsigning tax
return preparers of non-income tax returns are warranted.
Consistent with the interim guidance set forth in Notice 2008-13,
§301.7701-15(b)(4) is proposed to be amended by revising the definitions of
"return" and "claim for refund" to only include preparers
of returns and claims for refund that are specifically identified in published
guidance in the Internal Revenue Bulletin. The Treasury Department and the IRS
will publish this guidance simultaneously with the publication of final
regulations and will likely maintain the three tiered approach used in the
exhibits to Notice 2008-13, subject to any appropriate modifications. Under the
substantial portion rule in section 7701(a)(36)(A), preparation of a broad
range of information returns, schedules, and other documents can subject a
person to the section 6694 penalties even though the documents may not
themselves give rise to an understatement. Accordingly, the Treasury Department
and the IRS believe that including a list of returns or other documents, the
preparation of which may subject a tax return preparer to penalties, will
further compliance by not unduly increasing the burden on persons preparing
information returns and other documents.
Cross-References
Conforming changes are made in §§1.6060-1, 1.6107-1, 1.6109-2, 1.6694-0,
1.6694-1, 1.6694-4, 1.6695-1, 1.6695-2, 1.6696-1, and 301.7701-15 to replace
references to income tax return preparers with references to tax return
preparers, consistent with the provisions of the 2007 Act. Conforming cross
references are also made to Part 20, Estate Tax; Estates of Decedents Dying
After August 16, 1954; Part 25, Gift Tax; Gifts Made After December 31, 1954;
Part 26, Generation-Skipping Transfer Tax Under the Tax Reform Act of 1986;
Part 31, Employment Taxes and Collection of Income Tax at Source; Part 40,
Procedural Excise Tax; Part 41, Highway Use Tax; Part 44, Wagering Tax; Part
53, Foundation and Similar Excise Taxes; Part 54, Pension Excise Taxes; Part
55, Excise Tax on Real Estate Investment Trusts and Regulated Investment
Company Taxes; Part 56, Public Charity Excise Taxes; Part 156, Excise Tax on
Greenmail; and Part 157, Excise Tax on Structured Settlement Factoring
Transactions; to conform these parts with the provisions in Parts 1 and 301,
consistent with the provisions of the 2007 Act.
Availability of IRS Documents
The IRS notices referred to in this preamble are published in the Internal
Revenue Bulletin and are available at http://www.irs.gov.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a
significant regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It also has been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply
to these regulations.
When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (5
U.S.C. chapter 6), requires the agency to "prepare and make available for
public comment an initial regulatory flexibility analysis" that will
"describe the impact of the proposed rule on small entities." (5
U.S.C. 603(a)). Section 605 of the RFA provides an exception to this
requirement if the agency certifies that the proposed rulemaking will not have
a significant economic impact on a substantial number of small entities.
The proposed rules affect tax return preparers. The IRS estimates there are
38,566 tax return preparation firms and 260,338 self-employed tax return
preparers that qualify as small entities. Therefore, the IRS has determined
that these proposed rules will have an impact on a substantial number of small
entities.
The IRS has determined, however, that the impact on entities affected by the
proposed rule will not be significant. The statute and proposed regulations
would require entities that employ tax return preparers to retain a record of
the name, taxpayer identification number and principal place of work of each
tax return preparer employed. The IRS estimates that this would not require
purchase of additional software and would take five minutes per tax return
preparer employed. The statute and proposed regulations would also require tax
return preparers to retain a complete copy of a return (or claim for refund) or
a list of the name, taxpayer identification number and taxable year for each
return (or claim for refund) and the name of the tax return preparer required
to sign the return or claim for refund. Many tax return preparers have copying
machines or scanners and already make copies of the returns prepared, and the
IRS estimates this would not require the purchase of additional equipment. The
IRS estimates that it would take an average of five minutes to make copies or
prepare a record of the returns prepared. Accordingly, the burden on employers
of tax return preparers to make a record of the name, taxpayer identification
number, and principal place of work of each employed tax return preparer, and a
copy of each return or claim for refund prepared, or a record, is
insignificant.
The proposed regulations also allow the tax return preparer to generally avoid
imposition of the tax return preparer penalties under section 6694 in cases
when a tax return position meets the "substantial authority" standard
but not the "reasonable belief that the position would more likely than
not be sustained on its merits" standard if the tax return preparer
advises the taxpayer of the penalty standards applicable to the taxpayer, and
contemporaneously documents in the tax return preparer's files that this
information or advice was provided. Often, tax return preparers will choose not
to advise the taxpayer of the applicable penalty standards and will instead
disclose the position on a properly completed and filed Form 8275,
"Disclosure Statement," or Form 8275-R, "Regulation Disclosure
Statement," as appropriate, or on the tax return in accordance with the
annual revenue procedure. In those instances when the tax return preparer
elects to advise the taxpayer of the penalty standards, the IRS estimates that
it would take an average of 15 minutes to document this advice. Accordingly,
the burden on those who choose this option is insignificant.
Although the proposed regulations also conform the standards of conduct and tax
return preparer penalties to the provisions of the 2007 Act, tax return
preparers already enroll in educational seminars or training programs to keep
up to date with the latest changes to the Code, and the provisions of the 2007
Act and the proposed regulations will generally be part of that training.
Moreover, these proposed regulations are required to comply with the provisions
of section 8246 of the 2007 Act and flow directly from amendments to the Code
contained in the 2007 Act.
Based on these facts, the IRS hereby certifies that the collection of
information contained in these regulations will not have a significant economic
impact on a substantial number of small entities. Accordingly, a Regulatory
Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Code, these regulations have been submitted
to the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight (8)
copies) or electronic comments that are submitted timely to the IRS. The IRS
and the Treasury Department request comments on the clarity of the proposed
regulations and how they can be made easier to understand. Comments are
requested on the examples in the proposed regulations, and commentators are
specifically invited to suggest changes to these examples or to suggest new
examples that they believe would better illustrate the principles that should
be included in the final regulations. The IRS and the Treasury Department also
request comments on the accuracy of the certification that the regulations in
this document will not have a significant economic impact on a substantial
number of small entities. All comments will be available for public inspection
and copying.
A public hearing has been scheduled for Monday, August 18, 2008, at 10:00 a.m.
in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW,
Washington, DC. Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present photo
identification to enter the building. Because of access restrictions, visitors
will not be admitted beyond the immediate entrance area more than 30 minutes
before the hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the "FOR FURTHER
INFORMATION CONTACT" section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to
present oral comments at the hearing must submit written or electronic comments
by [INSERT DATE 60 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL
REGISTER ] and an outline of the topics to be discussed and the time to
be devoted to each topic (a signed original and eight (8) copies) by Monday,
August 4, 2008. A period of 10 minutes will be allotted to each person for
making comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these proposed regulations are Matthew S. Cooper and
Michael E. Hara, Office of the Associate Chief Counsel (Procedure and
Administration).
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
26 CFR Part 25
Gift taxes, Reporting and recordkeeping requirements.
26 CFR Part 26
Estate taxes, Reporting and recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad Retirement,
Reporting and recordkeeping requirements, Social security, Unemployment
compensation.
26 CFR Part 40
Excise taxes, Reporting and recordkeeping requirements.
26 CFR Part 41
Excise, Motor vehicles, Reporting and recordkeeping requirements.
26 CFR Part 44
Excise, Gambling, Reporting and recordkeeping requirements.
26 CFR Part 53
Excise taxes, Foundations, Investments, Lobbying, Reporting and recordkeeping
requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and recordkeeping requirements.
26 CFR Part 55
Excise taxes, Investments, Reporting and recordkeeping requirements.
26 CFR Part 56
Excise taxes, Lobbying, Nonprofit organizations, Reporting and recordkeeping
requirements.
26 CFR Part 156
Excise taxes, Reporting and recordkeeping requirements.
26 CFR Part 157
Excise taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1, 20, 25, 26, 31, 40, 41, 44, 53, 54, 55, 56, 156,
157, and 301 are proposed to be amended as follows:
PART 1 --INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6060-1 also issued under 26 U.S.C. 6060(a).
* * *
Section 1.6109-2 also issued under 26 U.S.C. 6109(a).
* * *
Section 1.6695-1 also issued under 26 U.S.C. 6695(b).
* * *
Section 1.6695-2 also issued under 26 U.S.C. 6695(g).
* * *
Par. 2. Section 1.6060-1 is amended by revising the section heading and
paragraphs (a) and (c) and adding paragraph (d) to read as follows:
§1.6060-1 Reporting requirements for tax return preparers .
(a) In general . (1) Each person who employs one or more signing tax
return preparers to prepare any return of tax or claim for refund of tax, other
than for the person, at any time during a return period shall satisfy the
requirements of section 6060 of the Internal Revenue Code by --
(i) Retaining a record of the name, taxpayer identification number, and
principal place of work during the return period of each tax return preparer
employed by the person at any time during that period; and
(ii) Making that record available for inspection upon request by the
Commissioner.
(2) The record described in this paragraph (a) must be retained and kept
available for inspection for the 3-year period following the close of the
return period to which that record relates.
(3) The person may choose any form of documentation to be used under this
section as a record of the signing tax return preparers employed during a
return period. However, the record must disclose on its face which individuals
were employed as tax return preparers during that period.
(4) For the definition of the term "signing tax return preparer," see
section 7701(a)(36) and §301.7701-15(b)(1) of this chapter. For the definition
of the term "return period," see paragraph (b) of this section.
(5)(i) For purposes of this section, any individual who, in acting as a signing
tax return preparer, is not employed by another tax return preparer shall be
treated as his or her own employer. Thus, a sole proprietor shall retain and
make available a record with respect to himself (or herself) as provided in
this section.
(ii) A partnership shall, for purposes of this section, be treated as the
employer of the partners of the partnership and shall retain and make available
a record with respect to the partners and others employed by the partnership as
provided in this section.
* * * * *
(c) Penalty . For the civil penalty for failure to retain and make
available a record of the tax return preparers employed during a return period
as required under this section, or for failure to include an item in the record
required to be retained and made available under this section, see
§1.6695-1(e).
(d) Effective/applicability date . This section is applicable to returns
and claims for refund filed after the date that final regulations are published
in the Federal Register.
Par. 3. Section 1.6107-1 is revised to read as follows:
§1.6107-1 Tax return preparer must furnish copy of return to taxpayer and
must retain a copy or record .
(a) Furnishing copy to taxpayer . A person who is a signing tax return
preparer of any return of tax or claim for refund of tax under the Internal
Revenue Code shall furnish a completed copy of the return or claim for refund
to the taxpayer (or nontaxable entity) not later than the time the return or
claim for refund is presented for the signature of the taxpayer (or nontaxable
entity). For electronically filed Forms 1040EZ, "Income Tax Return for Single
Filers and Joint Filers With No Dependents," and Form 1040A, "U.S.
Individual Income Tax Return," filed for the 2009, 2010 and 2011 taxable
years, the information may be provided on a replica of a Form 1040, "U.S.
Individual Income Tax Return," that provides all of the information. For
other electronically filed returns, the information may be provided on a
replica of an official form that provides all of the information. The signing
tax return preparer may, at its option, request a receipt or other evidence
from the taxpayer (or nontaxable entity) sufficient to show satisfaction of the
requirement of this paragraph (a).
(b) Copy or record to be retained . (1) A person who is a signing tax
return preparer of any return or claim for refund shall --
(i)(A) Retain a completed copy of the return or claim for refund; or
(B) Retain a record, by list, card file, or otherwise of the name, taxpayer
identification number, and taxable year of the taxpayer (or nontaxable entity)
for whom the return or claim for refund was prepared, and the type of return or
claim for refund prepared;
(ii) Retain a record, by retention of a copy of the return or claim for refund,
maintenance of a list or card file, or otherwise, for each return or claim for
refund presented to the taxpayer (or nontaxable entity), of the name of the
individual tax return preparer required to sign the return or claim for refund
pursuant to §1.6695-1(b); and
(iii) Make the copy or record of returns and claims for refund and record of
the individuals required to sign available for inspection upon request by the
Commissioner.
(2) The material described in this paragraph (b) shall be retained and kept
available for inspection for the 3- year period following the close of the
return period during which the return or claim for refund was presented for
signature to the taxpayer (or nontaxable entity). In the case of a return that
becomes due (with extensions, if any) during a return period following the
return period during which the return was presented for signature, the material
shall be retained and kept available for inspection for the 3-year period
following the close of the later return period in which the return became due.
For the definition of "return period," see section 6060(c). If the
person subject to the record retention requirement of this paragraph (b) is a
corporation or a partnership that is dissolved before completion of the 3-year
period, then all persons who are responsible for the winding up of the affairs
of the corporation or partnership under state law shall be subject, on behalf
of the corporation or partnership, to these record retention requirements until
completion of the 3-year period. If state law does not specify any person or
persons as responsible for winding up, then, collectively, the directors or
general partners shall be subject, on behalf of the corporation or partnership,
to the record retention requirements of this paragraph (b). For purposes of the
penalty imposed by section 6695(d), such designated persons shall be deemed to
be the tax return preparer and will be jointly and severally liable for each
failure.
(c) Tax return preparer . For the definition of "signing tax return
preparer," see section 7701(a)(36) and §301.7701-15(b)(1) of this chapter.
For purposes of applying this section, in the case of --
(1) An arrangement between two or more signing tax return preparers, the person
who employs one or more other signing tax return preparers to prepare any
return or claim for refund for compensation other than for the person shall be
considered to be the sole signing tax return preparer; and
(2) A partnership arrangement for the preparation of returns and claims for
refund, the partnership shall be considered to be the sole signing tax return
preparer.
(d) Penalties . (1) For the civil penalty for failure to furnish a copy
of the return or claim for refund to the taxpayers (or nontaxable entity) as
required under paragraphs (a) of this section, see section 6695(a) and
§1.6695-1(a).
(2) For the civil penalty for failure to retain a copy of the return or claim
for refund, or to retain a record as required under paragraphs (b) of this
section, see section 6695(d) and §1.6695-1(d).
(e) Effective/applicability date . This section is applicable to returns
and claims for refund filed on the date that final regulations are published in
the Federal Register.
Par. 4. Section 1.6109-2 is amended by revising the section heading and
paragraphs (a) and (d) to read as follows:
§1.6109-2 Tax return preparers furnishing identifying numbers for returns
or claims for refund filed after December 31, 2008 .
(a) Furnishing identifying number . (1) Each return of tax or claim for
refund of tax under the Internal Revenue Code prepared by one or more tax
return preparers must include the identifying number of the tax return preparer
required by §1.6695-1(b) to sign the return or claim for refund. In addition,
if there is an employment arrangement or association between the individual tax
return preparer and another person (except to the extent the return prepared is
for the person), the identifying number of the other person must also appear on
the return or claim for refund. For the definition of the term "tax return
preparer," see section 7701(a)(36) and §301.7701-15 of this chapter.
(2) The identifying number of an individual tax return preparer is that
individual's social security account number, or such alternative number as may
be prescribed by the Internal Revenue Service in forms, instructions, or other
appropriate guidance.
(3) If an individual tax return preparer described in paragraph (a)(2) of this
section is employed by, or associated with, a person (whether an individual or
entity) and prepares the return or claim for refund (other than a return
prepared for the person), the identifying number is the person's employer
identification number.
* * * * *
(d) Effective/applicability date . Paragraph (a) of this section is
applicable to returns and claims for refund filed after the date that final
regulations are published in the Federal Register , but no sooner than
December 31, 2008. For returns or claims for refund filed before January 1,
2000, see §1.6109-2A(a).
Par 5. Section 1.6694-0 is revised to read as follows:
§1.6694-0 Table of contents .
This section lists the captions that appear in §§1.6694-1 through 1.6694-4.
§1.6694-1 Section 6694 penalties applicable to tax return preparers .
(a) Overview.
(1) In general.
(2) Date return is deemed prepared.
(b) Tax return preparer.
(1) In general.
(2) Responsibility of signing tax return preparer.
(3) Responsibility of nonsigning tax return preparer.
(4) Tax return preparer and firm responsibility.
(5) Examples.
(c) Understatement of liability.
(d) Abatement of penalty where taxpayer's liability not understated.
(e) Verification of information furnished by taxpayer or other third party.
(1) In general.
(2) Verification of information on previously filed returns.
(3) Examples.
(f) Income derived (or to be derived) with respect to the return or claim for
refund.
(1) In general.
(2) Compensation.
(i) Multiple engagements.
(ii) Reasonable allocation.
(iii) Fee refunds.
(iv) Reduction of compensation.
(3) Individual and firm allocation.
(4) Examples.
(g) Effective/applicability date.
§1.6694-2 Penalty for understatement due to an unreasonable position .
(a) In general.
(1) Proscribed conduct.
(2) Special rule for corporations, partnerships, and other firms.
(b) Reasonable belief that the position would more likely than not be sustained
on its merits.
(1) In general.
(2) No unreasonable assumptions.
(3) Authorities.
(4) Examples.
(5) Written determinations.
(6) When more likely than not standard must be satisfied.
(c) Exception for adequate disclosure of positions with a reasonable basis.
(1) In general.
(2) Reasonable basis.
(3) Adequate disclosure.
(i) Signing tax return preparers.
(ii) Nonsigning tax return preparers.
(A) Advice to taxpayers.
(B) Advice to another tax return preparer.
(iii) Requirements for advice.
(iv) Pass-through entities.
(v) Examples.
(d) Exception for reasonable cause and good faith.
(1) Nature of the error causing the understatement.
(2) Frequency of errors.
(3) Materiality of errors.
(4) Tax return preparer's normal office practice.
(5) Reliance on advice of others.
(6) Reliance on generally accepted administrative or industry practice.
(e) Burden of proof.
(f) Effective/applicability date.
§1.6694-3 Penalty for understatement due to willful, reckless, or
intentional conduct .
(a) In general.
(1) Proscribed conduct.
(2) Special rule for corporations, partnerships, and other firms.
(b) Willful attempt to understate liability.
(c) Reckless or intentional disregard.
(d) Examples.
(e) Rules or regulations.
(f) Section 6694(b) penalty reduced by section 6694(a) penalty.
(g) Burden of proof.
(h) Effective/applicability date.
§1.6694-4 Extension of period of collection when tax return preparer pays
15 percent of a penalty for understatement of taxpayer's liability and certain
other procedural matters .
(a) In general.
(b) Tax return preparer must bring suit in district court to determine
liability for penalty.
(c) Suspension of running of period of limitations on collection.
(d) Effective/applicability date.