United States of America, Plaintiff v. Archie J. Pugh, Jr., and Theodore Pugh, each individually and d/b/a Archie's Tax & Accounting Service, Defendants.

U.S. District Court, East. Dist. N.Y.; Civ. 1:07-cv-02456-NGG-VVP , November 12, 2007.

[ Code Sec. 7402]


Two tax return preparers and their accounting services organization was permanently enjoined from using abusive tax shelter schemes to unlawfully evade the assessment and collection of taxes and making fraudulent tax returns. The preparers promoted an abusive tax shelter program and provided false tax advice to their customers that interfered with the enforcement of the internal revenue laws. The promotion of their tax evasion scheme and false tax activities, unless enjoined, caused irreparable harm to their customers, the government and the public.




[ Code Sec. 7407]


Two tax return preparers and their accounting services organization were permanently enjoined from preparing federal tax returns under Code Sec. 7407 because they continually and repeatedly engaged in conduct subject to penalty under Code Secs. 6694 and 6695. The preparers' falsified numerous forms to support false and fictitious claims for refund on behalf of their customers and advanced unrealistic positions deducting from income the amount paid to their customers for wages based on their frivolous tax schemes. Also, they prepared their customers' income tax returns but failed to sign or identify themselves as return preparers.




[ Code Sec. 7408]



The tax return preparers were permanently enjoined under Code Sec. 7408 because they engaged in conduct subject to penalty under Code Secs. 6700 and 6701. The preparers organized and marketed the scheme that assisted their customers in preparing false tax returns. They falsely stated that those who participated in the scheme had a right to exclude compensation for personal services or labor from taxation. Moreover, the preparers had knowledge that their representations and advice were false or fraudulent and the documents prepared by them would be used to understate their customers' correct tax liabilities. Additionally, there was no indication that the preparers would not engage in violation of the tax code.




ORDER OF DEFAULT JUDGMENT OF PERMANENT INJUNCTION


NICHOLAS, District Court: This matter come before the Court on plaintiff's motion for Default Judgement of Permanent Injunction. Defendants Archie J. Pugh, Jr., and Theodore Pugh were properly served and have failed to appear in this matter. Entry of Default was made against them on August 27, 2007. (Docket No. 6). Having reviewed the record in this case, the Court makes the following findings of fact and conclusions of law and enters this permanent injunction against Archie J. Pugh, Jr., and Theodore Pugh.




FINDINGS OF FACT


Defendants Archie J. Pugh, Jr., and Theodore Pugh are marketing the so-called "Claim of Right" tax-evasion scheme. Accordingly to the complaint, the Pughs falsely claim that all compensation or earnings are deemed nontaxable. Moreover, defendants also prepare income tax returns for customers based on the fraudulent Claim of Right program. Defendants market the Claim of Right program to customers of Archie's Tax and Accounting Service. The Pughs charge customers $250 to have the Claim of Right tax returns prepared.

As part of the scheme, defendants falsely tell their customers that they have a common-law and constitutional right (under the Fourteenth Amendment to the United States Constitution) to exclude from taxation all compensation for personal services or labor rendered. Defendants falsely state that I.R.C. §1341 codifies this so-called common-law or constitutional right and entitles their customers to take a deduction in the amount of compensation earned, which in most cases eliminates a participant's tax liability. Defendants state that this can be done by claiming an itemized deduction to offset wages reported on W-2 forms, or by taking a Schedule C deduction to offset any net income from self-employment.

As part of their marketing ploy, defendants make numerous false or fraudulent statements in support of their abusive program, including:


Ÿ Compensation earned is immune from taxation.



Ÿ Money earned in exchange for personal labor or services does not constitute taxable income and may be deducted.



Ÿ Income earned for labor is a not for profit activity and thus deductible on tax returns.



Ÿ Their "claim of right" claim is a "mandatory deduction allowed by United States law."


Defendants' claims regarding the tax benefits associated with their Claim of Right program are false. In addition, the tax returns defendants have prepared based on the Claim of Right tax-evasion scheme are fraudulent, and understate their customers' income based on this false, discredited concept.

Moreover, defendants know or have reason to know that the tax-fraud scheme they promote is unlawful and that their statements to customers about the scheme's tax benefits are false. Indeed, other federal courts have permanently enjoined other persons from promoting similar Claim of Right tax-fraud schemes, such as United States v. Lloyd [ 2006-2 USTC ¶50,617], 2005 U.S. Dist. LEXIS 32747 (M.D. N.C. 2005), aff'd, 2006 U.S. App. LEXIS 16254 (4 th Cir. 2006). (Cmplt. ¶¶21-23.)




CONCLUSIONS OF LAW




A. Default Judgment Standard

Rule 55 of the Federal Rules of Civil Procedure provides that where a party fails to plead or otherwise defend against a complaint, and after entry of default, default judgment may be entered against such person. Upon entry of default, the well-pleaded allegations of the complaint relating to a defendant's liability are taken as true, with the exception of the allegations as to the amount of damages, which is not an issue here because the United States is seeking injunctive, not monetary, relief. 1 Default judgment should not be different in kind than what is sought in the complaint. 2 Here, the United States seeks only the injunctive relief requested in the complaint.



B. The United States' Substantive Claims Set Forth in its Complaint Satisfy the Standards for a Permanent Injunction Under IRC §7407.

Section 7407 authorizes the Court to enjoin a federal-tax-return preparer from engaging in conduct subject to penalty under I.R.C. §§6694 or 6695 if the Court finds that injunctive relief is appropriate. 3 Where a return preparer's conduct subjecting them to penalty under IRC §§6694 or 6695 has been continual or repeated, the Court may enjoin them from preparing any federal returns if the Court finds that a more narrow injunction prohibiting only specific misconduct would be insufficient to prevent further interference with the administration of the internal revenue laws. 4 Because the Pughs are continually and repeatedly engaging in conduct subject to penalty under both IRC §§6694 and 6695, the Court finds that a permanent injunction under IRC §7407 is necessary to bar them from preparing federal tax returns. 5



1. Defendants Have Continually and Repeatedly Engaged in Conduct Subject to Penalty Under IRC §6694.

Section 6694 penalizes preparers on two grounds. First, under §6694(a), a preparer is subject to penalty for negligently understating a customer's tax liability due to unrealistic positions. Second, under §6694(b), a preparer is subject to penalty for any willful attempt to understate the tax liability of customer or any reckless or intentional disregard of rules or regulations.



a. Negligently Understating a Customer's Tax Liability Due to Unrealistic Positions under IRC §6694(a).

A return preparer is subject to penalty under IRC §6694(a) if (1) the preparer submits a return that contains an understatement of liability; (2) the understatement is based upon a position taken for which there was not a realistic possibility of being sustained. These elements are met. The Pughs have prepared numerous false Forms 1040, Forms 1041, and Schedules C in order to support false and fictitious claims for refund on behalf of customers. Moreover, they have advanced unrealistic positions deducting from income the amount paid to their customers' for wages --based on the frivolous "claim of right" scheme. 6



b. Willful Understatement of Tax Liability or Intentional or Reckless Disregard of Rules and Regulations under IRC §6694(b).

A return preparer is subject to penalty under Code §6694(b) if any part of an understatement of a tax liability is due to (1) "a willful attempt in any manner to understate the liability for tax by a person who is an income tax return preparer with respect to such return or claim" or (2) "any reckless or intentional disregard of rules or regulations." In this case, defendants deduct wages from income under their frivolous Claim of Right program, thus subjecting them to penalty under §6694(b).



2. Defendants Have Continually and Repeatedly Engaged in Conduct Subject to Penalty Under IRC §6695.

IRC §6695(b)-(c) penalizes a return preparer who fails to list his trade name or other identifying information, or sign returns. See IRC §6695(b)-(c) & 6109(a)(4). Here, the Pughs prepared, but failed to sign their customers' income returns or identify themselves as the income tax return preparer. Their failure to do so subjects them to penalty under IRC §6695(b)-(c).



3. Defendants Have Repeatedly Engaged in Conduct Proscribed by IRC §7407(b).

Defendants have also engaged in conduct proscribed by IRC §7407(b). The Pughs have engaged in conduct proscribed by Section 7407(b)(1)(D) by asserting the frivolous Claim-of-Right deductions on numerous returns for customers, and by failing to present completed copies of returns to customers before filing with the IRS. 7 Moreover, defendants' fraudulent and deceptive conduct has interfered with the internal revenue laws and the IRS conservatively estimates that they have cost the U.S. Treasury roughly $2.4 million.



4. Defendants Are Barred from Preparing Federal Tax Returns.

Since a narrow injunction would not prevent the Pugh's conduct, they should be barred from preparing returns altogether. 8 Defendants entire return preparation business is focused on preparing fraudulent returns that interfere with the administration of the internal revenue laws. Moreover, the Pugh's fraudulent returns limited to misuse of a single IRS form, or a single factual misrepresentation. Rather, the Pugh's have falsified Forms 1040, Forms 1041A, and Schedules C. For these reasons, the Court enjoins them from preparing all federal tax returns.



C. The United States is Entitled to Injunctive Relief under IRC §7408

An injunction under IRC §7408 is warranted to enjoin a person from further engaging in conduct subject to penalty under IRC §§6700 or 6701. The facts in this case establish that defendants engaged in such conduct and that injunctive relief is appropriate to prevent recurrence of that conduct.



1. Defendants Engaged in Conduct Subject to Penalty under IRC §6700

Section 7408 authorizes a court to enjoin persons who have engaged in any conduct subject to penalty under §6700 if the Court finds that injunctive relief is appropriate to prevent the recurrence of such conduct. Under §6700, any plan or arrangement "having some connection to taxes can serve as a 'tax shelter' and will be an 'abusive' tax shelter if the defendant makes the requisite false or fraudulent statements concerning the tax benefits of participation." 9 To establish a violation of §6700 warranting an injunction under §7408, the United States must show that:


(1) the defendant organized or sold, or participated in the organization or sale of, an entity, plan, or arrangement; (2) he made or caused to be made, false or fraudulent statements concerning the tax benefits to be derived from the entity, plan, or arrangement; (3) he knew or had reason to know that the statements were false or fraudulent; (4) the false or fraudulent statements pertained to a material matter; and (5) an injunction is necessary to prevent recurrence of this conduct. 10


This Court has the authority to grant the requested injunction if the Government establishes that defendant engaged in conduct subject to penalty under §6700 and injunctive relief is appropriate to prevent the recurrence of such conduct. The record submitted with this motion makes that showing.



a. Defendant organized and sold a plan or arrangement.

There is no question that defendants organized and sold a plan or arrangement. The Claim of Right program is organized and marketed by the defendants through word-of mouth, and defendants assist customers in preparing false income tax returns based on the scheme. Moreover, defendants charge for participation in the program. Thus, defendants organized and marketed the Claim of Right program within the meaning of IRC §6700. 11



b. Defendant made false or fraudulent statements regarding the tax benefits associated with their "claim of right" program.

Defendants also misrepresent the tax benefits of the Claim of Right program. The Pughs falsely states that participants have a right to exclude compensation for personal services or labor from taxation. They maintain that participants are entitled to a "Claim of Right" deduction on their federal income tax returns in the amount of compensation earned on their labor, and that the deduction is based on IRC §§183, 212 or 1341.

The Pugh's purported reliance on §1341 is groundless. 12 IRC §1341 applies only to those situations where a taxpayer properly reports income in one year and later repays all or a portion of it in a later year because the taxpayer, in fact, did not have an unrestricted right to that income. The section allows the taxpayer to take a deduction in the later year for the amount repaid. (It is not a mechanism for amending the previous year's return.) See Wicor, Inc. v. United States [ 2001-2 USTC ¶50,576], 263 F.3d 659, 661 (7th Cir. 2001); Rev. Rul. 2004-29, 2004-12 I.R.B. 627. It does not apply unless it is "established after the close of [the] prior taxable year (or years) that the taxpayer did not have an unrestricted right to such [income]." IRC §1341(a)(2). There is simply no "Claim of Right" doctrine under that IRC section or any other statute that allows an individual to take the position espoused by the Pughs that neither the individual nor the individual's income is subject to federal income taxes.

Furthermore, IRC §1341 requires a taxpayer to return the funds that he previously reported as taxable income before he can claim a deduction. See Chernin v. United States [ 98-2 USTC ¶50,551], 149 F.3d 805, 815-16 (8th Cir. 1998); Treas. Reg. 1-1341-1(a). The Pugh's are certainly not telling customers that they have to return their earned income to their employers in order to participate in the tax scheme. IRC §1341 has no application to the defendant's frivolous Claim of Right program.

The Pughs also rely on IRC §§183 and 212 for their Claim of Right program. The purported reliance on §§183 and 212 is equally groundless. IRC §183 prohibits an individual taxpayer from deducting expenses attributable to an activity that is not engaged in for profit. "Activity not engaged in for profit" includes all activities other than those with respect to which deductions are allowable, inter alia, under §212 as expenses incurred in the production of income or for management, conservation or maintenance of property held for production of income. IRC §183(a). Earnings from employment cannot qualify as expenses incurred in the "production or collection" of that same income. Neither §183 nor §212, nor any combination thereof, stands for the proposition that income or compensation for services rendered is deductible.

In simple terms, the Claim of Right program is a rehash of the oft-rejected anti-tax argument that wages and other compensation for services rendered are not subject to income tax. For federal income tax purposes, "gross income" means all income from whatever source derived and includes compensation for services. See IRC §61. Any income, from whatever source, is presumed to be income under §61, unless the taxpayer can prove that it is specifically exempt or excluded. Reese v. United States [ 94-1 USTC ¶50,232], 24 F.3d 228, 230 (Fed. Cir. 1994). If a taxpayer is not able to sustain the burden that his income is excluded, then that amount must be included as income. All compensation for personal services, no matter what the form of payment, must be included in gross taxable income. This includes salary or wages paid in cash, as well as the value of property and other economic benefits received because of services performed, or to be performed in the future. Commissioner v. Kowalski [ 77-2 USTC ¶9748], 434 U.S. 77 (1977); Commissioner v. Glenshaw Glass Co. [ 55-1 USTC ¶9308], 348 U.S. 426, 431 (1955) (income not limited to gains or profits); Ledford v. Commissioner [ 2002-2 USTC ¶50,610], 297 F.3d 1378, 1381 (Fed. Cir. 2002); United States v. Connor [ 90-1 USTC ¶50,166], 898 F.2d 942, 943-44 (3d Cir.) ("Every court which has ever considered the issue has unequivocally rejected the argument that wages are not income."), cert. denied, 497 U.S. 1029 (1990); United States v. Sassak [ 89-2 USTC ¶9455], 881 F.2d 276, 281 (6th Cir. 1989); Casper v. Commissioner [ 86-2 USTC ¶9818], 805 F.2d 902 (10th Cir. 1986); Coleman v.United States [ 86-1 USTC ¶9401], 791 F.2d 68 (7th Cir. 1986) (all individuals must pay income tax on their wages); Stelly v. Commissioner [ 85-1 USTC ¶9436], 761 F.2d 1113, 1115 (5th Cir. 1985) (finding argument that taxing wages and salary is unconstitutional, because compensation for labor is an even exchange, obviously frivolous); Connor v. Commissioner [ 85-2 USTC ¶9598], 770 F.2d. 17, 20 (2d Cir. 1985); United States v. Romero [ 81-1 USTC ¶9276], 640 F.2d. 1014 (9th Cir. 1981). See also Lonsdale v. United States [ 90-2 USTC ¶50,581], 919 F.2d 1440, 1448 (10th Cir. 1990); Biermann v. Commissioner [ 85-2 USTC ¶9632], 769 F.2d 707 (11th Cir. 1985).

Finally, defendants blatantly and falsely claim that the Claim of Right program is in compliance with the Internal Revenue Code. As stated above, the Claim of Right program is annually reported on the IRS's consumer alert of tax scams that taxpayers are urged to avoid.



c. Defendant knew or had reason to know that their tax statements were false or fraudulent.

Defendants knew or had reason to know that their statements regarding the tax consequences of purchasing the tax programs were false or fraudulent. The United States is not required to establish that the defendants acted with subjective bad faith, i.e., to show that defendants actually knew, at the time they sold the program, that they were espousing false and fraudulent statements. Rather, it is sufficient (for the purpose of establishing a violation of §6700) for the Government to show that, as a result of the courts' uniform rejection of the same or similar statements, the defendant should have known that their representations regarding the tax benefits of their program were false or fraudulent. 13 White, 769 F.2d at 515 (person knew or had reason to know of false or fraudulent statements because such statements had been consistently rejected by courts); Buttorff, 761 F.2d at 1062.

The "knew or had reason to know" standard includes "what a reasonable person in the [defendant's] ... subjective position would have discovered." Estate Pres. Servs. [ 2000-1 USTC ¶50,203], 202 F.3d at 1103. As shown above, the law is well settled that the tax statements made by defendants are false or fraudulent. "[T]he average citizen knows that the payment of income taxes is legally required." Schiff v. United States [ 90-2 USTC ¶50,591], 919 F.2d 830, 834 (2d Cir. 1990). The Pughs prepare income tax returns for others, and are, thus, charged with a minimal understanding of the tax laws. A modicum of research would have revealed to them that the Claim of Right program simply rehashes discredited positions espoused by tax protesters.



d. Defendant's false or fraudulent statements were material.

In proving materiality, the Government need not demonstrate that a purchaser has relied on the promoter's misrepresentations. Rather, "[m]aterial matters are those which would have a substantial impact on the decision-making process of a reasonably prudent investor and includes matters relevant to the availability of a tax benefit." United States v. Campbell [ 90-1 USTC ¶50,215], 897 F.2d 1317, 1320 (5th Cir. 1990) (citing Buttorff, and S. Rep. No. 97-494, at 267 (1982), reprinted in 1982 U.S.C.C.A.N. 781, 1015). The false representations contained in the defendant's promotion are "material" because, as explained in White, 769 F.2d at 515, "[t]he taxpayers who have been or are now being audited by the IRS or are involved in litigation because they relied upon [the promoters' representations] should certainly have been informed about their complete lack of merit." The representations made by defendants concerning the Claim of Right program undoubtedly affect the decision making process of a purchaser of the program. Statements pertaining to the "availability of tax deductions, credits, or to other mechanisms for reducing tax liability ... clearly qualify as 'material'" under §6700. United States v. Estate Pres. Servs. [ 2000-1 USTC ¶50,202], 38 F.Supp.2d 846, 855 (E.D. Cal. 1998), aff'd [ 2000-1 USTC ¶50,203], 202 F.3d 1093 (9th Cir. 2000). In that the primary purpose of defendants' programs is tax avoidance, the tax statements made in the promotion of the programs are certainly material. 14



e. An injunction is appropriate and necessary to prevent future violations of IRC §6700.

The need for injunctive relief in order to prevent future violations of IRC §6700 in the present case is readily apparent. Through their marketing techniques, defendants are canvassing this district encouraging persons to put into practice discredited theories of federal tax laws. Their customers have been harmed by the abusive promotions because the customers have paid defendant significant sums to prepare tax returns that understate their income tax liabilities. The United States is harmed because defendants' customers are not paying the correct amount of taxes to the United States Treasury. Moreover, given the IRS's limited resources, identifying and recovering all revenues lost from the Pugh's abusive schemes may be impossible, resulting in a permanent loss to the Treasury. The public is harmed because the IRS is forced to devote some of its limited resources to identifying and attempting to recover revenue lost as a result of the defendants' programs, thereby reducing the level of service that the IRS can give to other taxpayers.

The extent of the defendants' participation in the abusive programs is broad. Defendants are attempting to wrench tax statutes out of context to encourage a willful misreading of the law. The conduct is recurrent and defendants have never renounced the promised tax aspects of the program. As income tax return preparers, defendants promote themselves as knowledgeable about the Claim of Right program. Absent an injunction there is no indication that defendants will cease engaging in violations of the tax code. Defendants' conduct in promoting their abusive tax program thus warrants an injunction under IRC §7408.



2. Defendants Engaged in Conduct Subject to Penalty under IRC §6701

IRC §6701 imposes a penalty on any person who aids in or advises with respect to the preparation of any portion of a tax return, claim for refund or other document that the person knows, if used, would result in an understatement of tax liability. As part of the Claim of Right program, defendants advise customers to take improper deductions and prepares or assists in filing false or fraudulent income tax returns. Defendants have knowledge that their advice and those documents would be used to understate their customers' correct tax liabilities. As such, defendants' conduct is subject to penalty under §6701, and therefore further grounds exist for an injunction under IRC §7408.



D. An Injunction Should Issue Based Upon IRC §7402 to Prevent Defendants from Engaging in Activities that Interfere with the Enforcement of the Internal Revenue Laws.

This Court is authorized by IRC §7402 to issue an injunction "as may be necessary or appropriate for the enforcement of the internal revenue laws." That statute manifests "a Congressional intention to provide the district courts with a full arsenal of powers to compel compliance with the internal revenue laws," 15 and "has been used to enjoin interference with tax enforcement even when such interference does not violate any particular tax statute." 16 The legislative history accompanying §7408 explicitly states that "the court will continue to have full authority under [ §7402] and will continue to possess the great latitude inherent in equity jurisdiction to fashion appropriate relief." 17 "Courts interpreting this section have concluded that the traditional equitable injunction factors should be considered in determining the propriety of a preliminary injunction." 18 Those factors are: (1) the likelihood that the plaintiff will sustain irreparable injury as a result of the defendant's conduct; (2) the likelihood of harm to the defendant if an injunction is entered; (3) the likelihood the plaintiff will ultimately prevail on the merits; and (4) the public interest.

Here, injunctive relief under §7402 is appropriate to prevent defendants from continuing to interfere with tax enforcement. Defendants' false tax advice to customers and their abusive program interferes with the enforcement of the internal revenue laws by delaying examination and collection and by discouraging their customers from complying with the internal revenue laws. The defendants' activities undermine public confidence in the fairness of the federal tax system and incite violations of the internal revenue laws. The defendants' promotion causes the Government irreparable harm and the Government's remedies at law are inadequate.

Customers who follow defendants' advice file improper, inaccurate tax returns or do not pay their proper federal income taxes. In short, defendants' activities will cause irreparable harm to the Government, the public, and their customers unless they are not enjoined. 19 The injunction causes no harm to defendants, on the other hand, because it only requires them to follow the law. Because defendants' tax-fraud scheme has been thoroughly discredited, the Government's likelihood of success is unquestionable. Injunctive relief under §7402 is therefore necessary and appropriate to prevent defendants from continuing to disrupt the federal tax system.




ORDER


Based on the foregoing finding of fact and for good cause shown the Court ORDERS

A. That pursuant to IRC §§7402, 7407 and 7408, Archie J. Pugh, Jr. And Theodore Pugh individually and doing business as Archie's Tax Service, and anyone acting in concert with them, is permanently enjoined from:


(1) Organizing, promoting, marketing, or selling any tax shelter, plan or arrangement that advises or incites customers to attempt to violate the internal revenue laws or unlawfully evade the assessment or collection of their federal tax liabilities;



(2) Making false or fraudulent statements about the securing of any tax benefit by the reason of participating in any tax plan or arrangement, including the false statements that individuals can obtain tax freedom by participating in their program and that wages or compensation for labor constitutes nontaxable income;



(3) Encouraging, instructing, advising and assisting others to violate the tax laws, including to evade the payment of taxes;



(4) Engaging in conduct subject to penalty under 26 U.S.C. §6694, including preparing a return or claim for refund that includes an unrealistic or frivolous position;



(5) Engaging in conduct subject to penalty under 26 U.S.C. §6695, including failing to sign income tax returns, or failing to furnish a customer list upon request of the Internal Revenue Service;



(6) Engaging in conduct subject to penalty under 26 U.S.C. §6700, i.e., by making or furnishing, in connection with the organization or sale of a shelter, plan, or arrangement, a statement the defendant knows or has reason to know to be false or fraudulent as to any material matter under the federal tax laws;



(7) Engaging in conduct subject to penalty under 26 U.S.C. §6701, i.e., preparing or assisting others in the preparation of any tax forms or other documents to be used in connection with any material matter arising under the internal revenue laws and which the defendant knows will (if so used) result in the understatement of tax liability;



(8) Acting as federal income tax return preparers, or providing any tax advice or services for compensation, including preparing or filing, or assisting in preparing or filing tax returns for any other person or entity, providing consultative services, or representing any persons or entities before the Internal Revenue Service in any manner, either directly or indirectly; and



(9) Engaging in any conduct that interferes with the administration and enforcement of the internal revenue laws.


B. That pursuant to IRC §7402, the Pughs are ORDERED to contact all persons and entities for whom they prepared any federal income tax returns or other tax-related documents after January 1, 2000, and inform those persons of the entry of the Court's findings concerning the falsity of representations defendants made on their customers' tax returns, and that a permanent injunction has been entered against them within 30 days of service of this Order.

C. That pursuant to IRC §7402, defendants are ORDERED to provide counsel for the United States a list of the names, addresses, e-mail addresses, phone numbers, and Social Security numbers of all individuals or entities for whom they prepared or helped to prepare any tax-related documents, including claims for refund or tax returns since January 1, 2000; and

D. That the United States is permitted to engage in post-judgment discovery to ensure compliance with the permanent injunction.

1 Merrill Lynch Mortg. Corp. v. Narayan, 908 F.2d 246, 253 (7 th Cir. 1990); Angelo lafrate Const., LLC v. Potashnick Const., Inc., 370 F.3d 715, 721-22 (8 th Cir. 2004).

2 Fed. R. Civ. P. 54(c).

3 IRC §7407(b).

4 Id.

5 Because §7408 expressly provides for an injunction, the traditional guidelines for equitable relief do not have to be established for an injunction to issue. Id.; United States v. H & L Schwartz, Inc., 60 A.F.T.R.2d 87-6031, 87-6036 (C.D. Cal. 1987) ( "Traditional equity grounds need not be proven in order for an injunction that is authorized by statute is issued.") The same is true for an injunction under §7407. United States v. Gray, 2007 U.S. Dist. LEXIS 19833 (W.D. Mich., March 19, 2007).

6 United States v. Saladino [ 2007-1 USTC ¶50,289], 2005 U.S. Dist. LEXIS 38080 (C.D. Cal. 2005), aff'd [ 2007-1 USTC ¶50,290], 2006 U.S. App. LEXIS 7881 (9 th Cir. 2006) (discussing the frivolous nature of the "claim of right" program).

7 United States v. Venie [ 88-1 USTC ¶9326], 691 F.Supp. 834, 838 (M.D. Pa. 1988) (held that the fraudulent overstatement of child care expenses based on a frivolous position subjected defendant to punishment under §7407(b)(1)(D)); See also, United States v. Franchi [ 91-1 USTC ¶50,086], 756 F.Supp. 889, 893 (W.D. Pa. 1991) (same).

8 United States v. Gray, 2007 U.S. Dist. LEXIS 19833 (W.D. Mich. March 19, 2007) (enjoining tax preparer from preparing any tax returns because he had continuously falsified numerous IRS forms and persisted in maintaining an unrealistic position.)

9 United States v. Raymond [ 2000-2 USTC ¶50,750], 228 F.3d 804, 811 (7 th Cir. 2000).

10 United States v. Estate Pres. Servs. [ 2000-1 USTC ¶50,203], 202 F.3d 1093, 1098 (9 th Cir. 2000); see also Abdo v. United States Internal Revenue Service [ 2003-1 USTC ¶50,107], 234 F.Supp.2d 553, 561 (M.D. N.C. 2002).

11 United States v. Schulz [ 2007-2 USTC ¶50,619], 2007 WL 2286410, at *3 (N.D. N.Y. 2007) (discussing selling and organizing a "tax shelter" within the meaning of IRC §6700.)

12 United States v. Saladino [ 2007-1 USTC ¶50,289], 2005 U.S. Dist. LEXIS 38080 (C.D. Cal. 2005), aff'd [ 2007-1 USTC ¶50,290], 2006 U.S. App. LEXIS 7881 (9 th Cir. 2006) (discussing the frivolous nature of the "claim of right" program); United States v. Lloyd [ 2006-2 USTC ¶50,617], 2005 U.S. Dist. LEXIS 32747 (M.D. N.C. 2005), aff'd, 2006 U.S. App. LEXIS 16254 (4 th Cir. 2006) (same).

13 If it is clear beyond any doubt that a scheme is illegal under established principles of tax law, then the participants have fair notice of its illegality even if no court has so ruled. See United States v. Ingredient Technology Corp. [ 83-1 USTC ¶9140], 698 F.2d 88 (2d Cir. 1983).

14 United States v. Schulz [ 2007-2 USTC ¶50,619], 2007 WL 2286410, at *7 (N.D. N.Y. 2007).

15 Body v. United States [ 57-1 USTC ¶9606], 243 F.2d 378, 384 (1 st Cir. 1957). See United States v. First Nat'l City Bank [ 77-1 USTC ¶9198], 568 F.2d 853 (2 nd Cir. 1977).

16 United States v. Ernst & Whinney [ 84-2 USTC ¶9618], 735 F.2d 1296, 1300 (11 th Cir. 1984). See United States v. Kaun [ 86-1 USTC ¶9454], 633 F.Supp. 406, 409 (E.D. Wis. 1986) ( "federal courts have routinely relied on [ §7402(a)] ... to preclude individuals ... from disseminating their rather perverse notions about compliance with the Internal Revenue laws or from promoting certain tax avoidance schemes"), aff'd [ 87-2 USTC ¶9487], 827 F.2d 1144 (7 th Cir. 1987).

17 S. Rep. No. 97-494, 97th Cong., 2d Sess. at 266 (1982 U.S. Code Cong. & Ad. News 781, 1014).

18 Ernst & Whinney [ 84-2 USTC ¶9618], 735 F.2d at 1301; United States v. Bell [ 2003-1 USTC ¶50,501], 238 F.Supp. 2d 696 (M.D. Pa. 2003), aff'd, 414 F.3d 474 (3 rd Cir. 2005).

19 United States v. Schulz [ 2007-2 USTC ¶50,619], 2007 WL 2286410, at *7 (N.D. N.Y. 2007).

Tax return preparer was permanently enjoined from providing any tax preparation services. The individual violated Code Sec. 6694 by preparing federal income tax returns that understated his customers' federal tax liabilities by over $6.7 million dollars. The individual also asserted frivolous positions on the returns that did not have a realistic possibility of being sustained on the merits.

United States of America, Plaintiff v. James E. Rosamond, Individually and d/b/a Taxes Done Rite, Defendant.
U.S. District Court, Mid. Dist. La.; Civ. 04-863-D-M3, April 19, 2005.




[ Code Sec. 7402]

The IRS's allegations satisfied the requirements for an injunction pursuant to Code Sec. 7402 because: (1) the understated tax liability caused by the individual's return preparation services was estimated at over $6.7 million dollars; (2) absent a permanent injunction, the tax preparer would continue to violate Code Sec. 6694 by preparing federal income tax returns that understated his customers' federal tax liabilities and asserting frivolous positions that did not have a realistic possibility of being sustained on the merits; (3) the United States would prevail on the merits of the issues; and (4) the public interest would be served through the granting of the injunction.




[ Code Sec. 7407]

An injunction pursuant to Code Sec. 7407 was proper because it was: (1) against a tax preparer; (2) the tax preparer violated Code Sec. 6694 by preparing federal income tax returns that understated his customers' federal tax liabilities and asserting frivolous positions that did not have a realistic possibility of being sustained on the merits; and (3) absent an injunction, the tax preparer would continue to violate Code Sec. 6694.







FINAL JUDGMENT OF PERMANENT INJUNCTION


BRADY, District Judge: The plaintiff United States of America filed its Complaint for Permanent Injunction under sections 7407 and 7402 of the Internal Revenue Code (26 U.S.C.) on December 6, 2004, seeking a permanent injunction barring the defendant, James E. Rosamond, individually and d/b/a Taxes Done Rite, from acting as an income tax return preparer. Rosamond was personally served with process on December 30, 2004, and his default was entered by the Clerk on February 11, 2005, when Rosamond failed to answer the complaint or otherwise appear in this action.

The United States has moved for the entry of a default judgment against the defendant pursuant to Federal Rule of Civil Procedure 55(b)(2). Because Rosamond has defaulted, he is deemed to have admitted all allegations of fact that are contained in the complaint. A review of the plaintiff's motion and complaint shows that the motion is due to be granted. In accordance with Federal Rule of Civil Procedure 65(d), the findings of fact and reasons for the entry of a permanent injunction against the defendant, James E. Rosamond, individually and d/b/a Taxes Done Rite, are set forth below.




I. STANDARDS FOR PERMANENT INJUNCTION


To obtain an injunction under section 7407, the United States must show: (1) that the defendant is an "income tax return preparer" within the meaning of Internal Revenue Code section 7701(a)(36); (2) that he engaged in conduct described in section 7407(b)(1)(A)-(D); and (3) that injunctive relief is appropriate to prevent the recurrence of such conduct. 26 U.S.C. §7407(b); United States v. Ernst & Whinney [ 84-2 USTC ¶9618], 735 F.2d 1296, 1303 (11th Cir. 1984), cert. denied, 470 U.S. 1050 (1985); United States v. Savoie [ 85-1 USTC ¶9182], 594 F.Supp. 678, 683 (W.D. La. 1984); United States v. Franchi [ 91-1 USTC ¶50,086], 756 F.Supp. 889, 891 (W.D. Pa. 1991). Further, the United States may obtain an injunction preventing the defendant from acting as an income tax return preparer if it shows that the defendant has "continually or repeatedly" engaged in any of the prohibited conduct described in section 7407(b)(1)(A)-(D) and that "an injunction prohibiting such conduct would not be sufficient to prevent such person's interference with the proper administration" of the internal revenue laws. 26 U.S.C. §7407(b).

The United States also has sought an injunction against Rosamond under Internal Revenue Code section 7402. An injunction under that provision is appropriate where the United States shows: (1) the likelihood of continuing irreparable injury to the United States; (2) the harm to the United States without the injunction outweighs any harm to the defendant if a permanent injunction is entered; (3) success on the merits of the case; and (4) the public interest favors the entry of a permanent injunction. United States v. Buttorff [ 85-1 USTC ¶9435], 761 F.2d 1056, 1059 n.3 (5th Cir. 1985); Forest Park II v. Hadley, 336 F.3d 724, 731 (8th Cir. 2003).




II. FINDINGS OF FACT


1. The defendant James E. Rosamond resides at 32273 Highway 1036, Holden, Louisiana 70744, within this judicial district, and operates Taxes Done Rite, an unincorporated business, from that same address.

2. Rosamond was properly served with a summons and a copy of the complaint filed in this civil action on December 30, 2004.

3. Rosamond has not answered the complaint or appeared in this action. His default was entered by the Clerk of this Court on February 11, 2005.

4. Rosamond, doing business as Taxes Done Rite, has been preparing federal income tax returns since at least 1999.

5. Rosamond achieves unlawful refunds for his customers by fraudulently offsetting his customers' taxable income with fictitious or inflated deductions reported on Schedule A. Examples of fraudulent items that Rosamond and Taxes Done Rite place on customers' federal income taxes include:


a. Fictitious or inflated medical and/or dental expenses;



b. Fictitious or inflated charitable contributions;



c. Fictitious or inflated unreimbursed employee business expenses;



d. Fictitious or inflated "miscellaneous" deductions.


6. Rosamond fabricates deduction amounts, for which his customers have no, or only partial, substantiation.

7. Rosamond misleads his customers into believing that he is a former IRS employee with special knowledge of available deductions that is not readily available to the general public. He also misleads his customers into believing that the commercially available tax preparation software that he uses, known as Tax Act, was provided to him by the IRS. Rosamond uses features of the Tax Act software to mislead his customers into believing that their returns will not be subject to audit.

8. Rosamond charges his customers a percentage, usually approximately four percent, of the amount of refund that he reports due on the customers' tax returns.

9. Rosamond has been preparing federal income tax returns under the business name Taxes Done Rite since at least 1999.

10. Rosamond is aware that income tax deductions must be substantiated. For example, some customers who have claimed excessive Schedule A medical expenses have contacted Rosamond for advice after learning that they would be subject to an IRS audit. Rosamond has advised those customers to send substantiation to the IRS if the customers have incurred the medical expenses, but, if they have not incurred the claimed expenses, to state that payment was made in cash and that they did not keep receipts.

11. Rosamond prepared at least 1,294 original tax returns that were processed by the IRS in 2002 and 2003. Of that total, 341 returns were processed in 2002, and 953 returns were processed in 2003. The IRS has examined at least 29 of those returns, and all required audit adjustments that increased the tax owed because of the frivolous positions described above. The average audit adjustment for the 29 examined federal income tax returns resulted in increased tax owed of $4,101.00 per return. Assuming that examination of all returns that Rosamond prepared would yield similar increases in tax, the understated tax liability resulting from Rosamond's acts for the 1,294 original returns that were processed in 2002 and 2003 would result in a tax loss of $5,306,694.00.

12. The IRS also has identified at least 585 amended tax returns prepared by Rosamond for prior tax years that were processed by the IRS in 2002 and 2003. Of that total, 243 amended returns were processed in 2002, and 342 amended returns were processed in 2003. The IRS has examined at least 22 of those amended returns, and all of the refunds requested on each of those returns were found not to be owed to the taxpayers because of the frivolous positions described above. Assuming that examination of all amended returns that Rosamond prepared would similarly show that the entirety of the refunds requested were not owed, the understated tax liability resulting from Rosamond's acts for the 585 identified amended returns that were processed in 2002 and 2003 would be $1,413,906.00.

13. Combining original and amended returns, the total understated tax liability caused by Rosamond's improper return preparation services is estimated at $6,720,600.00 ($5,306,694.00 + $1,413,906.00).

14. Rosamond continued to prepare federal income tax returns for the 2003 tax year.




III. REASONS FOR ENTRY OF PERMANENT INJUNCTION


1. The Court has jurisdiction over this action pursuant to 28 U.S.C. §§1340 and 1345 and 26 U.S.C. §7402(a).

2. A default judgment is properly entered against a defendant who, like Rosamond, fails to answer, plead, or otherwise defend in a civil action. See Fed. R. Civ. P. 55.

3. As the United States has sought injunctive relief in this case, its claim is not for a sum certain or for a sum which can by computation be made certain. Accordingly, the Clerk may not enter judgment in this action under Federal Rule of Civil Procedure 55(b)(1). Any judgment must be entered by the Court under Federal Rule of Civil Procedure 55(b)(2).

4. As a person who prepares income tax returns for compensation, Rosamond is an "income tax return preparer" within the meaning of Internal Revenue Code sections 7407 and 7701(a)(36).

5. Rosamond has continually and repeatedly engaged in conduct subject to penalty under Internal Revenue Code section 6694(b) by preparing federal income tax returns that understate his customers' federal income tax liabilities. Rosamond willfully understated his customers' tax liabilities by fabricating or inflating their tax deductions on at least 29 original income tax returns and on at least 22 amended returns that were examined by the IRS.

6. Rosamond also continually and repeatedly engaged in conduct subject to penalty under section 6694(a) when he prepared tax returns that asserted frivolous positions that did not have a realistic possibility of being sustained on the merits. Claiming entirely fabricated or, at the very least, overstated deductions is a frivolous position. Rosamond knew or should have known that there was no realistic possibility of fabricated or inflated tax deductions being sustained on the merits if the returns that he prepared were examined by the IRS.

7. Rosamond misrepresented his experience and/or education as an income tax return preparer when he misled his customers into believing that he is a former IRS employee with special knowledge of available deductions that is not readily available to the general public and when he also misled his customers into believing that the commercially available tax preparation software that he uses, known as Tax Act, was provided to him by the IRS.

8. Rosamond also guaranteed to customers that he would get them tax refunds.

9. Because Rosamond (1) has continually and repeatedly engaged in willful and reckless conduct that is subject to penalty under Internal Revenue Code section 6694(a) and (b); (2) has misrepresented his experience and/or education as an income tax return preparer as described in section 7407(b)(1)(B); (3) has guaranteed the payment of tax refunds as described in section 7407(b)(1)(C); and (4) has engaged in fraudulent or deceptive conduct that substantially interferes with the proper administration of the internal revenue laws, the Court finds that Rosamond should be permanently enjoined from acting as an income tax return preparer.

10. The United States and the public will suffer irreparable harm in the absence of a permanent injunction, and Rosamond will suffer little, if any, harm if the permanent injunction is granted.

11. The United States has prevailed on the merits of the issues raised in this civil action, and the public interest will be served through granting a permanent injunction.

12. The record shows that, absent a permanent injunction, Rosamond likely will continue to violate Internal Revenue Code section 6694 and otherwise engage in conduct that substantially interferes with the proper administration of the internal revenue laws. Accordingly, the Court finds that Rosamond also should be permanently enjoined from acting as an income tax return preparer under Internal Revenue Code section 7402.




IV. ORDER


Based on the foregoing factual findings and legal conclusions, and for good cause shown, the Court accordingly ORDERS, ADJUDGES, and DECREES that:

1. The defendant, individually and doing business under any other name or using any other entity, and anyone in active concert or participation with him, including any representative, agent, servant, or employee, is permanently enjoined and restrained from, directly or indirectly, by the use of any means or instrumentalities:


a. Preparing or assisting in the preparation of any federal income tax return for any other person or entity;



b. Providing any tax advice or services for compensation, including preparing returns, providing consultative services or representation of customers;



c. Engaging in conduct subject to penalty under 26 U.S.C. §6694, including preparing a return or claim for refund that includes an unrealistic or frivolous position or preparing a return or claim for refund that willfully or recklessly understates a tax liability;



d. Misrepresenting his qualifications and experience as an income tax return preparer;



e. Guaranteeing the payment of any tax refund or the allowance of any tax credit; and



f. Engaging in any conduct that interferes with the proper administration and enforcement of the internal revenue laws through the preparation of false tax returns.


2. It is further ORDERED that the defendant, at his own expense, shall send by certified mail, return receipt requested, a copy of the final injunction entered against him in this action to each person for whom he, or anyone at his or her direction or in his employ, prepared federal income tax returns or any other federal tax forms after January 1, 1999.

3. It is further ORDERED that the defendant shall keep records of his compliance with the requirement of paragraph 2, above, which may be produced to the Court, if requested, or to the United States pursuant to paragraph 7, below.

4. It is further ORDERED that the defendant, and anyone who prepared tax returns at the direction of or in the employ of the defendant, shall turn over to the United States copies of all returns or claims for refund that they prepared for customers after January 1, 1999.

5. It is further ORDERED that the defendant, and anyone who prepared tax returns at the direction of or in the employ of the defendant, shall turn over to the United States a list with the name, address, telephone number, e-mail address (if known), and social security number or other taxpayer identification number of all customers for whom they prepared returns or claims for refund after January 1, 1999.

6. It is further ORDERED that the defendant, within forty-five days of entry of this final injunction, shall file a sworn statement with the Court evidencing his compliance with the requirements of paragraphs 2, 4 and 5, above.

7. It is further ORDERED that the United States may monitor the defendant's compliance with this injunction and may engage in post-judgment discovery in accordance with the Federal Rules of Civil Procedure.

8. It is further ORDERED that this Court shall retain jurisdiction over this action for the purpose of implementing and enforcing this Final Judgment of Permanent Injunction.

DONE.

The "diligence" test in the proposed 6694 regs.

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).

The above language comes from the proposed section 6694 regulations.

The "analysis" and "authority" requirement is also subject to a "facts and circumstances" test that "includes" a due diligence test that takes into account the personal experience of the regturn preparer and the complexity of the law.

The languages suggest that an inept tax return preparer may be excused from the penalty under the "diligence" test. But the "diligence" test is only one of the facts and circumstnaces that may be considered. The key language of the MLTN standard requiring "analysis" and "authority" will not be negated by an inept tax return preparer. In other words, the "diligence" test is only a factor is not an independant test that will satisfy the "analysis" and "authority" requirements.

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.

Tax preparer fraud was sustained under 7206

Clients relied on the return preparer to determine what deductions were legal and proper, and some of the employees explicitly testified that they also relied on the return preparer to determine the propriety of deductions and to review the returns before they were submitted. All of the employees testified that they were data entry personnel and did not have the knowledge or training to determine whether deductions were proper. Further, the owner's claim that he did not prepare returns, aside from the one he admits to, was contradicted by testimony. This case illustrates the risk of having return preparer pass on the validity of the deductions taken.

United States of America, Plaintiff-Appellee v. Gregory D. Goosby, Defendant-Appellant.

U.S. Court of Appeals, 6th Circuit; 07-5229, April 24, 2008.

Affirming an unreported DC Tenn. decision.

[ Code Sec. 7206]

OPINION


SILER, Circuit Judge. Defendant Gregory Goosby appeals his jury conviction and sentence on thirty counts of willfully aiding or assisting in the preparation and presentation of false or fraudulent income tax returns under 26 U.S.C. §7206(2). He challenges (1) the sufficiency of the evidence, (2) the district court's evidentiary ruling on a motion in limine, (3) the jury charge regarding IRS publications, and (4) the reasonableness of his sentence. We AFFIRM.




BACKGROUND


Goosby operated a tax preparation business or, as he would characterize it, an electronic taxfiling center from his home. Goosby's business prepared 558 returns in 1999, 877 returns in 2000, and 1,435 returns in 2001. In 2006, Goosby was indicted on thirty-three counts of violating 26 U.S.C. §7206. The government dismissed three counts, and Goosby was found guilty on the remaining thirty counts. He was sentenced to a 46-month term of imprisonment.

The witnesses at trial included IRS employees, numerous taxpayers, and several of Goosby's former employees. The trial began with testimony to explain the background of the IRS investigation. Investigative Analyst Carl Gibeault explained that he received a list of tax return preparers for the region that included Goosby's business. Gibeault used a computer program that allows him to review all the returns by a given tax preparer and rank the returns by amount of refund. He then compared the ratio of adjusted gross income to the amount of deductions; a high ratio is an indicator of potential fraud. Gibeault found a high ratio for returns prepared by Goosby's business and referred the case for further investigation.

The taxpayer witnesses testified to similar experiences in their dealings with Goosby's tax preparation business. The greatest areas of commonality concerned how the taxpayers came to employ Goosby's business, what they experienced while meeting with Goosby or his employees, their reliance on Goosby's business to properly prepare their returns and determine their entitlement to deductions, and the type and number of deductions on their returns. Eighteen of the taxpayers testified that they relied on Goosby to properly prepare their tax returns. At least ten of these taxpayers met or talked with Goosby in person and provided him with documents and/or answered questions asked by Goosby. The remaining taxpayer witnesses met with Goosby's employees and provided them with documents and/or answered questions asked by the employees. Most of the taxpayers testified that neither Goosby nor his employees reviewed the completed tax returns with them, and most did not receive a copy of their return from Goosby or his employees as IRS regulations require.

During the trial, the taxpayers were shown copies of their returns, and all identified deductions for which they had provided no information or deductions that were based on answers given to Goosby or his employees in response to questions. They identified numerous false or inflated deductions of which they were unaware. Nearly all of the taxpayers identified false deductions for personal property taxes and/or false charitable contribution deductions. Most also identified false or inflated reporting of un-reimbursed employee expenses --generally, some combination of deductions for cell phones, computers, internet access, extra phone lines, uniforms, dry cleaning, laundry expenses, work boots, mileage, meals, entertainment, and travel. Instead of providing the information needed to properly determine whether they were eligible for specific deductions, most of the taxpayers testified that they were simply asked questions about how far they drove to work and how much they paid for items such as cell phones and computers. Their tax returns then claimed deductions for the full cost of these items. As a result of the false deductions, most of the taxpayers were audited or voluntarily filed amended tax returns, and most paid thousands of dollars in additional taxes.

One of the taxpayers, Idella Branch, filed a tax return that contained only one deduction, for gambling losses. In 2001, she won two jackpots totaling approximately $163,000 and took home around $104,000 after taxes. Branch testified that she loaned approximately $55,000 to family members and spent or gambled away the rest. Her tax return, prepared by Goosby, reported $162,886 of gambling losses, thereby entitling her to a refund of the previously withheld taxes. Branch testified that it was impossible for her to have lost that amount and that she never told Goosby she had lost that amount.

The employee witnesses all testified that they were data entry personnel. Their job was to enter data into a computer program that filled out the customers' tax returns. They had no training in tax preparation. Several employees testified that they relied on Goosby to determine whether particular items were deductible; others testified that the returns were reviewed, presumably by Goosby, before being submitted to the IRS. Some of the employees testified that they asked customers questions about mileage and how much they paid for items such as uniforms, cell phones, and computers; these amounts were either recorded and passed on to someone else or entered directly into the computer program.

Goosby testified at the trial and denied any wrongdoing. He denied that he was a tax preparer and admitted to preparing only one tax return, a 1999 amended return. He essentially accused the taxpayer witnesses of lying.




DISCUSSION





A. Sufficiency of the Evidence


When a defendant claims there is insufficient evidence to support a conviction, we must decide "whether, after viewing the evidence in a light most favorable to the government, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." United States v. Gardner, 488 F.3d 700, 710 (6th Cir. 2007). A conviction will be reversed based on insufficient evidence only if it is "not supported by substantial and competent evidence upon the record as a whole." United States v. Barnett, 398 F.3d 516, 522 (6th Cir. 2005). Furthermore, "[c]ircumstantial evidence alone, if substantial and competent, may support a verdict and need not remove every reasonable hypothesis except that of guilt." United States v. Tarwater, 308 F.3d 494, 504 (6th Cir. 2002) (quoting United States v. Humphrey, 279 F.3d 372, 378 (6th Cir. 2002)).

Goosby was convicted of thirty violations of 26 U.S.C. §7206(2). An offense under §7206(2) has three essential elements:

(1) that defendant aided, assisted, procured, counseled, advised or caused the preparation and presentation of a return;

(2) that the return was fraudulent or false as to a material matter; and

(3) that the act of the defendant was willful.

United States v. Sassak [ 89-2 USTC ¶9455], 881 F.2d 276, 278 (6th Cir. 1989) (quoting United States v. Hooks [ 88-1 USTC ¶13,771], 848 F.2d 785, 788-89 (7th Cir. 1988)). Goosby argues that the evidence is insufficient with respect to the second and third elements --materiality and willfulness.




1. Willfulness


The element of willfulness requires the government to prove an "intentional violation of a known legal duty." Sassak [ 89-2 USTC ¶9455], 881 F.2d at 280 (citing United States v. Pomponio [ 76-2 USTC ¶9695], 429 U.S. 10, 12-23 (1976) ( per curiam)). Goosby claims that the government failed to prove he intentionally violated the law. However, viewing the evidence in the light most favorable to the government, it is sufficient to permit a finding that Goosby intentionally assisted in the filing of false or fraudulent tax returns. The taxpayer witnesses came to Goosby, or to his business, to have their taxes prepared. They were assisted by either Goosby or one of his employees. The taxpayers relied on Goosby to determine what deductions were legal and proper, and some of the employees explicitly testified that they also relied on Goosby to determine the propriety of deductions and to review the returns before they were submitted. All of the employees testified that they were data entry personnel and did not have the knowledge or training to determine whether deductions were proper. Further, Goosby's claim that he did not prepare returns, aside from the one he admits to, is contradicted repeatedly by the taxpayers' testimony.

A defendant may be convicted under §7206 even if his involvement in the preparation of certain returns was minimal. See United States v. Searan, 259 F.3d 434 (6th Cir. 2001). In Searan, a mother and son operated a tax preparation business. Id. at 438. The son was convicted under §7206 and argued there was insufficient evidence to support the conviction. Id. at 443. Although the evidence showed that his mother had prepared and signed most of the returns and sometimes even spoke with taxpayers outside his presence, we upheld the son's conviction because "he actively participated...by assuring victims of his and his mother's competency to file tax returns, particularly returns containing allegedly legitimate `deductions' known to few other people." Id. at 445.

In this case, the similarity in the type of false deductions claimed on most of the tax returns is strong circumstantial evidence that the defendant willfully submitted tax returns containing false statements. Viewing the evidence in the light most favorable to the government, the jury could find beyond a reasonable doubt that Goosby was responsible for submitting the tax returns with numerous false deductions and that his actions were willful.




2. Materiality


Goosby's second contention involves the requirement that the return be "fraudulent or false as to a material matter." Sassak [ 89-2 USTC ¶9455], 881 F.2d at 278. He argues that the government failed to prove the returns were materially false and that it was error for the district court to submit the issue of materiality to the jury. "When materiality is an element of the offense, it must be submitted to the jury." United States v. Kone, 307 F.3d 430, 436 (6th Cir. 2002). Therefore, the district court did not err in submitting the question of materiality to the jury.

Goosby acknowledges that the government presented evidence of materiality at the sentencing hearing, but he argues there was no such proof at trial. However, the evidence at trial established that most of the taxpayers had been audited or filed amended returns, and they paid or owed additional money to the IRS as a result of the false statements. Further, some of the false deductions were so large or inflated, e.g., the approximately $162,000 of gambling losses, that they were obviously material. Therefore, sufficient evidence was presented at trial to prove that the tax returns contained materially false statements.




B. Evidentiary Ruling on Gibeault's Testimony


Goosby filed a pre-trial motion in limine that sought to prohibit the testimony of Investigative Analyst Gibeault. The district court allowed Gibeault's testimony. Goosby argues that the testimony was inadmissible hearsay and that it was in violation of the Sixth Amendment Confrontation Clause, FRE 404(b), and FRE 403. We review the evidentiary rulings of the district court for abuse of discretion. United States v. Lloyd, 462 F.3d 510, 516 (6th Cir. 2006).

We have allowed similar background testimony in other contexts. In United States v. Aguwa, DEA agents were permitted to testify about information they received from an informant, which precipitated a controlled purchase of heroin from the defendant. 123 F.3d 418, 421 (6th Cir. 1997) ("The statements were not offered `for the truth of the matter asserted,' see Fed. R. Evid. 801(c), but only to provide background information and to explain how and why the agents even came to be involved with this particular defendant."). As in Aguwa, the testimony here was limited to "constructing the sequence of events" in the investigation and did not directly implicate the defendant in criminal activity. Id. (brackets omitted). Likewise, the purpose of Gibeault's testimony was to provide background information about the investigation, not to discuss the character or prior bad acts of the defendant; thus, FRE 404(b) is not implicated. There is also no Confrontation Clause violation because Gibeault did not make statements that would be characterized as testimonial hearsay. See Davis v. Washington, 126 S. Ct. 2266, 2273-74 (2006).

Goosby's final evidentiary argument is that Gibeault's testimony violates FRE 403 because its prejudicial effect outweighs its probative value. The only statement by Gibeault that approaches having an unduly prejudicial effect is that he was able to find fifteen returns with a suspicious ratio "very quickly." However, that statement was not before the district court when it ruled on the motion in limine and cannot be considered in determining whether the district court abused its discretion in denying the motion. 1




C. Jury Instruction on IRS Publications


At trial, IRS Agent Janet Cunningham testified about how a taxpayer can properly claim the deductions seen repeatedly on the returns involved in the indictment. The government also introduced various IRS publications into evidence. During Cunningham's testimony, the court gave a limiting instruction to make it clear that a violation of IRS rules or regulations "is insufficient to establish criminal conduct." At the conclusion of the trial, Goosby requested the following jury instruction regarding the evidence on IRS rules, regulations, and publications:


The violations by the defendant, Gregory D. Goosby, of the rules, regulations, or directives set out in the publications of the Internal Revenue Service are not evidence or proof that the defendant committed the criminal acts alleged in the indictment. The defendant is not on trial for any acts or crimes not alleged in the indictment.


However, the district court agreed with the government that the IRS publications could be considered as "some evidence" that the defendant violated §7206. The court ultimately gave an instruction similar to the one requested by Goosby, except it included the following sentence: "You may consider them in deciding whether or not the crimes were committed, but violation of the IRS rules and regulations alone is insufficient." (emphasis added).

Goosby asserts that the instruction given by the district court was an incorrect statement of the law. Because Goosby did not object to the instruction, we review the refusal to give his requested instruction for plain error. United States v. Blood, 435 F.3d 612, 625 (6th Cir. 2006). Even if an error occurred here, there is no basis to find that its "adverse impact seriously affected the fairness, integrity or public reputation of the judicial proceedings," United States v. Koeberlein, 161 F.3d 946, 949 (6th Cir. 1998), particularly where the district court's instruction emphasized that a violation of the IRS rules and regulations would not establish a criminal violation. Therefore, the district court did not commit plain error.




D. Sentencing


We review the district court's sentencing decision for reasonableness. United States v. Liou, 491 F.3d 334, 337 (6th Cir. 2007). Goosby appeals his sentence on both procedural and substantive grounds. Procedurally, he challenges the district court's determination of sentence enhancements. Findings under the Sentencing Guidelines that increase a defendant's sentence must be based on reliable information and supported by a preponderance of the evidence. See United States v. Yagar, 404 F.3d 967, 972 (6th Cir. 2005). The district court's factual findings regarding the amount of tax loss and obstruction of justice enhancement are reviewed for clear error. See United States v. Burke, 345 F.3d 416, 428 (6th Cir. 2003).

Goosby contends that it was improper to calculate the tax loss based on Agent McElroy's interviews with taxpayers who were not cross-examined and whose reliability was not investigated. However, we have previously upheld a calculation of tax loss based on IRS interviews with taxpayers. See United States v. Redmond, 188 F. App'x 377, 382 (6th Cir. 2006) (unpublished opinion). Goosby also appeals the district court's decision to apply an enhancement for obstruction of justice under USSG §3C1.1. Conduct that gives rise to the obstruction of justice enhancement includes committing perjury. USSG §3C1.1 cmt. n.4. In light of Goosby's testimony, which was contradicted in material respects by the taxpayer witnesses and Agent McElroy, the district court did not clearly err in determining that the obstruction of justice enhancement should apply. See Redmond, 188 F. App'x at 381 (quoting Regalado v. United States, 334 F.3d 520, 524 (6th Cir. 2003)) ("Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.").

Finally, Goosby argues that the sentence imposed is substantively unreasonable under 18 U.S.C. §3553(a). Because of his stable home life, prior military service, and lack of a criminal record, Goosby contends that he should have been sentenced to a term of probation. However, the district court's imposition of a 46-month term of imprisonment is within the properly calculated Guidelines range of 41 to 51 months. This court has applied a "`rebuttable presumption of reasonableness' to sentences falling within the applicable Guidelines range." Liou, 491 F.3d at 337. In this case, the district court clearly considered Goosby's history and explained its decision to impose a sentence within the Guidelines range. That sentence was reasonable.

AFFIRMED.

1 Goosby did not raise or renew his FRE 403 objection when Gibeault testified at trial regarding how quickly he found the sample of fifteen suspicious returns.


NON: UST02 2008-1USTCP50331 http://tax.cchgroup.com/network&JA=LK&fNoSplash=Y&&LKQ=GUID%3A9b99a1f1-037e-3ddf-9b7b-9a7de2dbb7b0&KT=L&fNoLFN=TRUE& UST02 #678 [CASES ]

Informal comment by Treasury on the new regulations

Treasury attorney Anita Soucy discussed the new 6694 return preparer regulations at a June 23, 2008 meeting. Soucy noted that some of the most important areas the Treasury grappled with were the one-preparer-per-position rule, the determination of income derived from return preparation and the applicable standard of care that applied to tax preparers.

Soucy noted that the proposed regulations maintain the exception for advice given on events that have not yet occurred. The rules would not reach out to pre-transaction planning, and no penalty would apply. The Treasury added a 5-percent carve-out rule, allowing 5-percent of the preparer's advice to apply to past events without triggering potential liability. She noted that the effective date applies to the time that the return is signed, not when the advice is given. The filing of the return is important. For pre-effective date actions, the interim rules apply, she commented.


The Treasury made a change to the current rules by imposing the one-preparer-per-firm-per-position rule. This reflects modern tax practice, Soucy commented. The result is to expand the liability of the firm, because the return may reflect multiple positions and more than one person could be liable overall.


The signing preparer is generally responsible, Soucy said. This is a rule of convenience for the IRS, providing a point of initial contact regarding the return. The IRS was very concerned about a default rule, she indicated. The signer may, in fact, be liable for the penalty if there is no reliance on others. However, a non-signing preparer may be responsible for the position on the return and, therefore, be liable for the penalties. If the signer is not primarily responsible, the IRS may look to the supervisor who has overall responsibility for the position taken on the return.

The regulations continue to allow reasonable reliance on third parties. A preparer may reasonably rely on other professionals, other advisors at the same firm, and previously filed returns.

The rules for income derived by the firm applied some operating rules. It was difficult to identify all compensation received by the firm for preparing the return. If the firm is paid in a lump sum, this can be allocated to pre- and post-transaction advice. It may be necessary to look at the firm's engagement letter to determine the services for which it is being compensated.

The income may be allocated between the firm and an individual preparer. The firm will not always be liable for a penalty; if it is, the regulations should not count the same income twice, Soucy said. She stated that the Treasury is interested in comments on whether penalties are being equitably imposed under the regulations (aside from the liability issue).

Soucy said that the factors in the regulations for imposing liability recognize that it is difficult for a preparer to meet the "more likely than not" standard. If they cannot, they must instruct the taxpayer about the potential penalties --"have a conversation with the taxpayer," she indicated. She added that this is a useful practice that many law firms are adopting.


In addition, Soucy noted that the examples in the regulations are targeted to specific situations. For example, a preparer can rely on the statute itself if there is no other guidance. This is a rule of necessity to prevent the IRS from being swamped with disclosures. But the preparer's assumptions must be reasonable. Soucy said that reliance on a generally accepted industry practice can be reasonable.

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Comment by Alvin S. Brown, Esq. ab@irstaxattorney.com

Ms. Soucy did not distinguish beteen the differenct standards for disclosed and non-disclosed positions, and she did not take into account the difficulty of dealing with an IRS examiner. For the disclosed positions, the return preparer must have a "reasonable basis" for the position. The IRS examiner can be expected to challange the "reasonableness" of the analysis and authority used. Then the burden of proof is on the return preparer to demonstrate that the analysis and authority is reasonable. This cannot be done without a leglam memorandum on the applicable law.

Ms. Soucy's comment that one can rely on a statute if there is nothing else does not take into account that most tax issues involve statutes, regulations, legislative history, tax policy, IRS publications, the Internal Revenue Manual, and a large body of case law. Her comment is a trap for the unwary.

The return prepararation industry must wake up to the fact that the tax issues arising in 20o8 for tax returns to be filed in 2009 must be resolved now before the tax returns are prepared in order to best prepare to avoid the 6694 penaltyies.

Comment on the new 6694 regulations 129243-07

REG-129243-07

The new rgulations deal with the enhancement of the penalty under section 6694 under Business and Work Opportunity Tax Act of 2007 (2007 Small Business Tax Act). The proposed regs describe, among other controversial items, the new more likely than not standard in Code Sec. 6694(a), penalties for noncompliance, the responsibilities of non-signing preparers, and adequate disclosure. The IRS has scheduled a hearing on the proposed regs this summer and predicted that the regs will be finalized in time for the 2009 filing season.

While practitioners have been anxiously awaiting release of the proposed regs, pending legislation could make much of them irrelevant. The House has already approved legislation ( H.R. 6049) equalizing the preparer penalty and taxpayer penalty standards at substantial authority for nonabusive undisclosed positions. The reducesd standard is part of the so-called "extenders bill". A similar provision is part of the House-approved Taxpayer Assistance Act of 2008 ( H.R. 5719).

A hearing on the proposed regs is scheduled for August 18 at the IRS National Office in Washington, D.C.


Reasonable belief

At the heart of the proposed regs is the explanation of what is a reasonable belief of more likely than not under Code Sec. 6694(a) A preparer may reasonably believe that a position would more likely than not be sustained on its merits if he or she 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.

The requirement that a position satisfies the more likely than not standard must be satisfied on the date the return is deemed prepared.


All of the facts and circumstances will be taken into account in determining if a preparer satisfies this standard, including the preparer's due diligence.


Under the proposed regs, a preparer may rely in good faith and without verification on information furnished by a tax attorney or another tax return preparer. A 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.

A preparer may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer. If the information appears to be incorrect or incomplete, the preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.

The proposed regs describe the penalty under Code Sec. 6694(a) for understatement due to an unreasonable position and the penalty under Code Sec. 6694(b) for an understatement due to willful, reckless, or intentional conduct.

The Code Sec. 6694(a) penalty will not be imposed if, considering all the facts and circumstances, it is determined that the understatement was due to reasonable cause and that the tax return preparer acted in good faith. The proposed regs describe various factors the IRS will take into account.

The IRS is revisiting the one preparer one firm rule. In its place, the IRS has proposed a preparer-per-position within a firm approach. Under the proposed regs, only one person within a firm would be considered primarily responsible for each position giving rise to an understatement and, accordingly, be subject to the penalty.

The individual signing the return will continue to be held responsible for all of the positions on a return, but if another individual is determined (either via information received from the signing individual or from other sources) to have primary responsibility for a position giving rise to the understatement, that other individual will be responsible under Code Sec. 6694. If there are one or more nonsigning tax return preparers at the same firm and no signing preparer at the firm, the individual within the firm with supervisory responsibility for the position will be responsible for the Code Sec. 6694 penalty.

The IRS intends to modify its internal guidance so that a referral by revenue agents to 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.

The IRS also indicated that it will "generally" not stack penalties under Code Sec. 6694(a) and Circular 230.

The proposed regs do not carve-out an exception for non-signing preparers. A nonsigning preparer is any preparer who is not a signing 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.

However, the IRS created a safe harbor. In determining whether an individual is a nonsigning preparer, the proposed regs provide that any time spent on advice that is given with respect to events that have occurred, which is less than five 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 preparer.

The proposed regs describe disclosure of a position for signing preparers and non-signing preparers. For signing preparers, disclosure includes, among other methods, 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 (Rev. Proc. 2008-14). The proposed regs also describe ways that non-signing preparers may disclose a position. Disclosure must be tailored to the taxpayer's facts and circumstances. Boilerplate language is not sufficient, the IRS warned.

Prevention of use of Forms 1099 held to be fraudulent

In order to prove a conspiracy to defraud the United States in violation of 18 U.S.C. § 371 the Government must prove beyond a reasonable doubt: (1) the existence of an agreement to defraud the United States; (2) the defendant's participation in that agreement with the intent to defraud the United States; and (3) an overt act by one of the conspirators in furtherance of that objective. United States v. McKee, 506 F.3d 225, 238-44 (3d Cir. 2007); see also Gambone, 314 F.3d at 176. Where a defendant is charged with a "Klein" conspiracy, as Defendant is here, the "agreed-upon objective must be to impede the IRS" from its lawful collection of federal income taxes. See United States v. Gricco, 277 F.3d 339, 348 (3d Cir. 2002); see also United States v. Klein, 247 F.2d 908 (2d Cir. 1957).


United States v. Thomas L. Root, U.S. District Court, East. Dist. Pa.; 07-149, June 10, 2008.

[ Code Sec. 7201]

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The director of a television station was properly convicted of tax evasion and conspiracy to defraud the government. The government showed that the individual had conspired with the station's president to impede the IRS from imposing taxes on their commissions received from the station by assigning them to various LLCs and instructing the corporation's bookkeeper to avoid issuing Form 1099s to those LLCs. The individual used similar techniques to evade taxes on the income earned from his legal services. Further, a single count charging the individual with tax evasion covering several years was not duplicitous when the director exhibited the same pattern of evasive conduct for all those years. Finally, the director was not entitled to a new trial because he could not establish a Brady violation or show that the trial court erred in summarizing the indictment's allegations in the jury charge.

Furnishing a Copy of the Tax return

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.

Section 6694 Proposed Regulations

SECTION 6694 PROPOSED REGULATIONS

The IRS has released proposed return preparer penalty regulations. The proposed regulations provide guidance on the new Code Sec. 6694(a) more-likely-than-not preparer standard, and contain a comprehensive overhaul of all preparer penalties. The IRS predicted that final regulations will be in place for the 2009 filing season. A hearing on the proposed regulations is scheduled for August 18, 2008, at the IRS National Office in Washington, D.C.

The IRS stated that it will not stack penalties under Code Sec. 6694 and Circular 230. The IRS stated that penalties under Code Sec. 6694 are not automatic. Additionally, the IRS included many examples of various provisions in the proposed regulations.

Passage of the Small Business and Work Opportunity Tax Act of 2007 (2007 Small Business Tax Act) (P.L. 110-28), sparked the drafting of the proposed regulations. The new law replaced the "realistic possibility of success standard" in Code Sec. 6694(a) with the heightened "more likely than not standard" for non-abusive undisclosed positions. The preparer must have a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits.

The 2007 Small Business Tax Act also extended Code Sec. 6694 to preparers of all returns and not just preparers of income tax returns. Additionally, the new law significantly increased the penalties for noncompliance. The old, first-tier $250 penalty in Code Sec. 6694(a) jumped to the greater of $1,000 or 50 percent of the income derived, or to be derived, by the preparer. The penalty for willful or reckless conduct in Code Sec. 6694(b) increased from $1,000 to the greater of $5,000 or 50 percent of the income derived or to be derived by the preparer.

The proposed regulations eliminate the current "one preparer per firm" rule used in determining who in a particular firm is responsible for penalties in favor of a framework that focuses on returns on a position-by-position basis. If a preparer is primarily responsible for a position on a return giving rise to an understatement, that person will be subject to Code Sec. 6694. Only one person within a firm will be considered primarily responsible for each position; however, multiple individuals may be responsible for a position if employed by multiple firms.

The individual signing the return will continue to be held responsible for all of the positions on a return, but if another individual is determined (either via information received from the signing individual or from other sources) to have primary responsibility for a position giving rise to the understatement, that other individual will be responsible under Code Sec. 6694. If there are one or more nonsigning tax return preparers at the same firm and no signing preparer at the firm, the individual within the firm with supervisory responsibility for the position will be responsible for the Code Sec. 6694 penalty.
These new rules allow the IRS more flexibility in assessing responsibility for positions giving rise to understatements than the IRS has under the current "one preparer per firm" system.

The proposed regulations also provide new guidance for determining the amount of income derived by a firm or an individual in preparing a return containing a position giving rise to an understatement, upon which the maximum penalty under Code Sec. 6694 is calculated. Income derived includes all compensation the preparer receives or expects to receive in preparing the return or providing tax advice. If the preparer is paid by a firm for work done for a client of the firm, income derived is all compensation that can be reasonably allocated to work done in preparing the return or advising the client on a position giving rise to an understatement.

If the firm is subject to penalty under Code Sec. 6694, then all compensation received by the firm will be included as income derived from the transaction. If both the firm and the preparer are subject to liability, the income derived from the transaction will only count once, meaning that income received by the firm from the client and paid to the preparer will not both be used in determining the maximum penalty.

The proposed regulations provide additional guidance on satisfaction of the "more likely than not" standard. The standard would be satisfied if the preparer analyzes the facts and authorities and reasonably concludes in good faith that the position has a greater than 50-percent likelihood of being sustained. The IRS will take into account the preparer's experience in tax law, familiarity with the taxpayer's affairs and the complexity of the facts. The standard may also be satisfied through a well-reasoned construction of statutory authority where no other authority exists or if the preparer relies upon the advice of another preparer or the taxpayer. However, the preparer may not rely upon information provided by taxpayers with respect to legal conclusions on tax issues.

Preparers must provide disclosure of a return position where the position has a reasonable basis, but the "more likely than not" standard cannot be satisfied. The proposed regulations provide that the reasonable basis standard for these purposes is the same as is used for the accuracy-related penalty under Code Sec. 6662 (significantly higher than not frivolous or patently improper and not satisfied by a position that is merely arguable or a merely colorable claim). However, in meeting the "reasonable basis" standard, preparers can rely in good faith upon the advice furnished by a taxpayer, advisor or another preparer without verification.

The proposed regulations also provide guidance on what constitutes adequate disclosure, building upon guidance provided in Notice 2008-13. For a signing return preparer, disclosure can be accomplished in one of five ways:
- through the use of Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, or on the return in accordance with the annual procedure (see Rev. Proc. 2008-14, I.R.B. 2008-7, 435);

- if the position does not satisfy the substantial authority standard of Reg. §1.6662-4(d), provision of a disclosure to the taxpayer with the prepared tax return;

- if the position does satisfy the substantial authority standard of Reg. §1.6662-4(d), by advising the taxpayer of all the penalty standards applicable under Code Sec. 6662;

- if the position can be described as a tax shelter or reportable transaction, the preparer must advise the taxpayer of the requirements of minimum substantial authority and possession, on the part of the taxpayer, of a reasonable belief that the "more likely than not standard" is met and that the disclosure does not preclude the assessment of an accuracy-related penalty; or

- for returns or refund claims subject to penalties other than the accuracy-related penalty for substantial understatements, the preparer must advise the taxpayer of the applicable penalty standards under Code Sec. 6662.

For a non-signing return preparer, adequate disclosure may be met in one of three ways:

- through the use of Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, or on the return in accordance with the annual procedure (see Rev. Proc. 2008-14, I.R.B. 2008-7, 435);

- the preparer may advise the taxpayer of opportunities to avoid potentially applicable Code Sec. 6662 accuracy-related penalties and of applicable standards of disclosure; and

- the non-signing preparer advises another preparer that disclosure may be required and notes this advice in the other preparer's files.

Each of these methods of disclosure with regard to advice given to a taxpayer must be tailored to the taxpayer's facts and circumstances. Boilerplate language is not sufficient.

Under current Reg. §1.6694-2(d), an exception to the imposition of the penalty is provided where the understatement is due to reasonable cause where the preparer acted in good faith. The regulation includes factors to be considered in determining if the exception applies. The proposed regulations provide that whether the position is supported by generally accepted administrative or industry practices is to be added as an additional factor to be taken into consideration.

The proposed regulations provide definitions of both a signing tax return preparer and a non-signing tax return preparer. A signing tax return preparer is any tax return preparer who signs or is required to sign a return or claim for refund. A non-signing tax return preparer is any tax return preparer who is not a signing tax return preparer but prepares all or a substantial portion of a return.

Electronically Filed and Signed Returns

The proposed regulations provide two changes that will better facilitate the use of electronically signed returns. First, Reg. § 1.6107-1(a), which requires signing return preparers to provide a copy of the filed return to the taxpayer is proposed to be amended to allow preparers electronically filing Form 1040EZ or Form 1040-A to provide the copy to the taxpayer by reproducing the information on Form 1040. Also, a preparer need not sign an electronically signed return prior to providing the taxpayer with a copy of the return but must provide all of the information to that taxpayer at the same time the preparer provides the taxpayer with Form 8879, IRS e-file Signature Authorization.

The proposed regulations also provide the following changes:

- the rules under Reg. §§1.6694-2 and -3 are proposed to be changed to allow for a firm to be subject to penalty where the firm's review procedures are not followed through willfulness, recklessness or gross indifference;

- a reasonableness standard is provided for signing return preparer's due diligence requirements in determining eligibility for the earned income credit; and

- for purposes of the penalties under Code Sec. 6694, the date that a return is determined to be prepared is the date the return is signed by the preparer or, if the preparer fails to sign the return, the date the return is filed.

The IRS stated in the preamble to the proposed regulations that the Service 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 Code Sec. 6694(a) against a tax return preparer who is also a practitioner within the meaning of Circular 230.

A public hearing has been scheduled for August 18, 2008, beginning at 10:00 a.m. Written or electronic comments must be received by the IRS by August 16, 2008. Outlines of topics to be discussed at the public hearing must be received by August 4, 2008.


Proposed Section 6694 Regulations, REG-129243-07, June 17, 2008


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

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.

Par. 6. Section 1.6694-1 is revised to read as follows:



§1.6694-1 Section 6694 penalties applicable to tax return preparers .

(a) Overview --(1) In general . Sections 6694(a) and (b) impose penalties on tax return preparers for conduct giving rise to certain understatements of liability on a return (including an amended or adjusted return) or claim for refund. The section 6694(a) penalty is imposed in an amount equal to the greater of $1,000, or 50 percent of the income derived (or to be derived) by the tax return preparer for an understatement of liability with respect to tax that is due to an undisclosed position for which the tax return preparer did not have a reasonable belief that the position would more likely than not be sustained on its merits (or due to a disclosed position for which there is no reasonable basis). The section 6694(b) penalty is imposed in an amount equal to the greater of $5,000, or 50 percent of the income derived (or to be derived) by the tax return preparer for an understatement of liability with respect to tax that is due to a willful attempt to understate tax liability or that is due to reckless or intentional disregard of rules or regulations. See §1.6694-2 for rules relating to the penalty under section 6694(a). See §1.6694-3 for rules relating to the penalty under section 6694(b).

(2) Date return is deemed prepared . For purposes of the penalties under section 6694, a return or claim for refund is deemed prepared on the date it is signed by the tax return preparer. If a signing tax return preparer within the meaning of §301.7701-15(b)(1) of this chapter fails to sign the return, the return is deemed prepared on the date the return is filed. See §1.6695-1 of this section. In the case of a nonsigning tax return preparer within the meaning of §301.7701-15(b)(2) of this chapter, the relevant date is the date the nonsigning tax return preparer provides the tax advice with respect to the position giving rise to the understatement. This date will be determined based on all the facts and circumstances.

(b) Tax return preparer --(1) In general . For purposes of this section, "tax return preparer" means any person who is a tax return preparer within the meaning of section 7701(a)(36) and §301.7701-15 of this chapter. An individual is a tax return preparer subject to section 6694 if the individual is primarily responsible for the position(s) on the return or claim for refund giving rise to an understatement. There is only one individual within a firm who is primarily responsible for each position on the return or claim for refund giving rise to an understatement. In the course of identifying the individual who is primarily responsible for the position, the Internal Revenue Service 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.

(2) Responsibility of signing tax return preparer . The signing tax return preparer within the meaning of §301.7701-15(b)(1) of this chapter will generally be considered the person who is primarily responsible for all of the positions on the return or claim for refund giving rise to an understatement. It may be concluded, however, 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) on the return or claim for refund giving rise to an understatement.

(3) Responsibility of nonsigning tax return preparer . If there are one or more individuals within a firm who are nonsigning tax return preparers within the meaning of §301.7701-15(b)(2) of this chapter and there is no signing tax return preparer within the meaning of §301.7701- 15(b)(1) of this chapter for the return or claim for refund within that 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 paragraph (b)(2) of this section, it is concluded that the signing tax return preparer 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 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.

(4) Tax return preparer and firm responsibility . To the extent provided in §§1.6694-2(a)(2) and 1.6694-3(a)(2), an individual and the firm that employs the individual, or the firm of which the individual is a partner, member, shareholder, or other equity holder, may both be subject to penalty under section 6694 with respect to the position(s) on the return or claim for refund giving rise to an understatement. If an individual (other than the sole proprietor) who is employed by a sole proprietorship is subject to penalty under section 6694, the sole proprietorship is considered a "firm" for purposes of this paragraph (b).

(5) Examples . The provisions of paragraph (b) of this section are illustrated by the following examples:

Example 1 . Attorney A provides advice to Client C concerning the proper treatment of an item with respect to which all events have occurred on C's income tax return. In preparation for providing that advice, A seeks advice regarding the proper treatment of the item from Attorney B, who is within the same firm as A, but A is the attorney who signs C's return as a tax return preparer. B provides advice on the treatment of the item upon which A relies. B's advice is reflected on C's income tax return but no disclosure was made in accordance with §1.6694-2(c)(3). The advice constitutes preparation of a substantial portion of the return within the meaning of §301.7701-15(b)(3) and the IRS later challenges the position taken on the tax return, giving rise to an understatement of liability. For purposes of the regulations under section 6694, A is initially considered the tax return preparer with respect to C's return and the IRS advises A that A may be subject to the penalty under section 6694 with respect to C's return. Based upon information received from A or another source, it may be concluded that B had primary responsibility for the position taken on the return that gave rise to the understatement because B had overall supervisory responsibility for the position giving rise to an understatement.

Example 2 . Same as Example 1 , except that neither Attorney A nor any other attorney within A's firm signs Client C's return as a tax return preparer. Attorney B is the nonsigning tax return preparer within the firm with overall supervisory responsibility for the position giving rise to an understatement. Accordingly, B is the tax return preparer who is primarily responsible for the position on C's return giving rise to an understatement and is subject to penalty under section 6694.

Example 3 . Same as Example 1 , except Attorney D, who works for a different firm than A, also provides advice on the same position upon which A relies. It may be concluded that D is also primarily responsible for the position on the return.

(c) Understatement of liability . For purposes of this section, an "understatement of liability" exists if, viewing the return or claim for refund as a whole, there is an understatement of the net amount payable with respect to any tax imposed by the Internal Revenue Code (Code), or an overstatement of the net amount creditable or refundable with respect to any tax imposed by the Code. The net amount payable in a taxable year with respect to the return for which the tax return preparer engaged in conduct proscribed by section 6694 is not reduced by any carryback. Tax imposed by the Code does not include additions to the tax, additional amounts, and assessable penalties imposed by subchapter 68 of the Code. Except as provided in paragraph (d) of this section, the determination of whether an understatement of liability exists may be made in a proceeding involving the tax return preparer that is separate and apart from any proceeding involving the taxpayer.

(d) Abatement of penalty where taxpayer's liability not understated . If a penalty under section 6694(a) or (b) concerning a return or claim for refund has been assessed against one or more tax return preparers, and if it is established at any time in a final administrative determination or a final judicial decision that there was no understatement of liability relating to the position(s) on the return or claim for refund, then --

(1) The assessment shall be abated; and

(2) If any amount of the penalty was paid, that amount shall be refunded to the person or persons who so paid, as if the payment were an overpayment of tax, without consideration of any period of limitations.

(e) Verification of information furnished by taxpayer or other party --(1) In general . For purposes of sections 6694(a) and (b) (including meeting the reasonable belief that the position would more likely than not be sustained on its merits and reasonable basis standards in §§1.6694- 2(b) and (c)(2), and demonstrating reasonable cause and good faith under §1.6694-2(d)), the tax return preparer generally may rely in good faith without verification upon information furnished by the taxpayer. A tax return preparer, however, may not rely on information provided by a taxpayer with respect to legal conclusions on Federal tax issues. A tax return preparer may also rely in good faith and without verification upon information furnished by another advisor, another tax return preparer or other party (including another advisor or tax return preparer at the tax return preparer's firm). The tax return preparer is not required to audit, examine or review books and records, business operations, or documents or other evidence to verify independently information provided by the taxpayer, advisor, other tax return preparer, or other party. 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. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some provisions of the Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintain specific documents) before a deduction or credit may be claimed. The tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit.

(2) Verification of information on previously filed returns . For purposes of section 6694(a) and (b) (including meeting the reasonable belief that the position would more likely than not would be sustained on its merits and reasonable basis standards in §§1.6694-2(b) and (c)(2), and demonstrating reasonable cause and good faith under §1.6694-2(d)), 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. For example, a tax return preparer who prepares an amended return (including a claim for refund) need not verify the positions on the original return. 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. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. The tax return preparer must confirm that the position being relied upon has not been adjusted by examination or otherwise.

(3) Examples . The provisions of this paragraph (e) are illustrated by the following examples:

Example 1 . During an interview conducted by Preparer E, a taxpayer stated that he had made a charitable contribution of real estate in the amount of $50,000 during the tax year, when in fact he had not made this charitable contribution. E did not inquire about the existence of a qualified appraisal or complete a Form 8283, Noncash Charitable Contributions, in accordance with the reporting and substantiation requirements under section 170(f)(11). E reported a deduction on the tax return for the charitable contribution, which resulted in an understatement of liability for tax, and signed the tax return as the tax return preparer. E is subject to a penalty under section 6694.

Example 2 . While preparing the 2008 tax return for an individual taxpayer, Preparer F realizes that the taxpayer did not provide a Form 1099 for a bank account that produced significant taxable income in 2008. When F inquired about any other income, the taxpayer furnished the Form 1099 to F for use in preparation of the 2008 tax return. F did not know that the taxpayer owned an additional bank account that generated taxable income for 2008 and the taxpayer did not reveal this information to the tax return preparer notwithstanding F's general inquiry about any other income. F signed the taxpayer's return as the tax return preparer. F is not subject to a penalty under section 6694.

Example 3 . In preparing a tax return, Accountant G relies on the advice of an actuary concerning the limit on deductibility under section 404(a)(1)(A) of a contribution by an employer to a qualified pension trust. On the basis of this advice, G completed and signed the tax return. It is later determined that there is an understatement of liability for tax that resulted from the incorrect advice provided by the actuary. G had no reason to believe that the advice was incorrect or incomplete, and the advice appeared reasonable on its face. G was also not aware at the time the return was prepared of any reason why the actuary did not know all of the relevant facts or that the advice was no longer reliable due to developments in the law since the time the advice was given. G is not subject to a penalty under section 6694. The actuary, however, may be subject to penalty under section 6694 if the advice given by the actuary constitutes a substantial portion of the tax return within the meaning of §301.7701-15(b)(3) of this chapter.

(f) Income derived (or to be derived) with respect to the return or claim for refund --(1) In general . For purposes of sections 6694(a) and (b), income derived (or to be derived) means 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 of which the individual tax return preparer is a partner, member, shareholder, or other equity holder) is subject to a penalty under section 6694(a) or (b) pursuant to the provisions in §§1.6694-2(a)(2) or 1.6694-3(a)(2), 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.

(2) Compensation --(i) Multiple engagements . For purposes of applying paragraph (f)(1) of this section, 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 calculating the income derived (or to be derived) with respect to the return or claim for refund.

(ii) Reasonable allocation . For purposes of applying paragraph (f)(1) of this section, only compensation for 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(a) and (b) penalties. If a lump sum fee is received that includes amounts not taken into account under the preceding sentence, the amount of income derived will be based on a reasonable allocation of the lump sum fee between the tax advice giving rise to the penalty and the advice that does not give rise to the penalty.

(iii) Fee refunds . For purposes of applying paragraph (f)(1) of this section, a refund to the taxpayer of all or part of the amount paid to the tax return preparer or the tax return preparer's firm will not reduce the amount of the section 6694 penalty assessed. A refund in this context does not include a discounted fee or alternative billing arrangement for the services provided.

(iv) Reduction of compensation . For purposes of applying paragraph (f)(1) of this section, it may be concluded based upon information provided by the tax return preparer or the tax return preparer's firm 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, 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.

(3) Individual and firm allocation . If both an individual within a firm and a firm that employs the individual (or the firm of which the individual is a partner, member, shareholder, or other equity holder) are subject to a penalty under section 6694(a) or (b) pursuant to the provisions in §§1.6694-2(a)(2) or 1.6694-3(a)(2), 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 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. The portion of the total amount of the penalty assessed against the individual tax return preparer shall not exceed 50 percent of the individual's compensation as determined under paragraphs (f)(1) and (2) of this section.

(4) Examples . The provisions of this paragraph (f) are illustrated by the following examples:

Example 1 . Signing Tax Return Preparer H is engaged by a taxpayer and paid a total of $21,000. Of this amount, $20,000 relates to research and consultation regarding a transaction that is later reported on a return, and $1,000 for the activities relating to the preparation of the return. Based on H's hourly rates, a reasonable allocation of the amount of compensation related to the advice rendered prior to the occurrence of events that are the subject of the advice is $5,000. The remaining compensation of $16,000 is considered to be compensation related to the advice rendered after the occurrence of events that are the subject of the advice and return preparation. The income derived by H with respect to the return for purposes of computing the penalty under section 6694(a) is $16,000, and the amount of the penalty imposed under section 6694(a) is $8,000.

Example 2 . Accountants I, J, and K are employed by Firm L. I is a principal manager of Firm L and provides corporate tax advice for the taxpayer after all events have occurred subject to an engagement for corporate tax advice. J provides international tax advice for the taxpayer after all events have occurred subject to a different engagement for international tax advice. K prepares and signs the taxpayer's return under a general tax services engagement. I's advice is the source of an understatement on the return and the advice constitutes preparation of a substantial portion of the return within the meaning of §301.7701-15(b) of this chapter. I is the nonsigning tax return preparer within the firm with overall supervisory responsibility for the position on the taxpayer's return giving rise to an understatement. Thus, I is the tax return preparer who is primarily responsible for the position on the taxpayer's return giving rise to the understatement. Because K's signature as the signing tax return preparer is on the return, the IRS advises K that K may be subject to the section 6694(a) penalty against K to the understatement. K provides information that I is the tax return preparer with primary responsibility for the position that gave rise to the understatement and K formed a reasonable belief that the position would more likely than not be sustained on the merits by relying on the advice provided by I. Furthermore, K has reasonable cause because K relied on I for the advice on the corporate tax matter. The IRS, therefore, assesses the section 6694 penalty against I. The portion of the total amount of the penalty allocable to I does not exceed that part of I's compensation that is attributable to the corporate tax advice engagement. In the event that Firm L is also liable under the provisions in §1.6694-2(a)(2), the IRS assesses the section 6694 penalty in an amount not exceeding 50 percent of Firm L's firm compensation based on the engagement relating to the corporate tax advice services provided by I where there is no applicable reduction in compensation pursuant to §1.6694-1(f)(2)(iii).

Example 3 . Same facts as Example 2 , except that I provides the advice on the corporate matter when the events have not yet occurred. I's advice is the cause of an understatement position on the return but I is not a tax return preparer pursuant to §301.7701-15(b)(2) or (3) of this chapter. K has reasonable cause because K relied on I for the advice on the corporate tax matter and K is not limited to reliance on persons who provide post-transactional advice if such reliance is reasonable and in good faith. I, K and Firm L are not liable for the section 6694 penalty.

(g) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 7. Section 1.6694-2 is revised to read as follows:



§1.6694-2 Penalty for understatement due to an unreasonable position .

(a) In general --(1) Proscribed conduct . Except as otherwise provided in this section, a tax return preparer is liable for a penalty under section 6694(a) equal to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer for any return or claim for refund that it prepares that results in an understatement of liability due to a position if the tax return preparer knew (or reasonably should have known) of the position and either --

(i) The position was not disclosed as provided in this section and there was not a reasonable belief that the position would more likely than not be sustained on its merits; or

(ii) The position was disclosed as provided in this section but there was no reasonable basis for the position.

(2) Special rule for corporations, partnerships, and other firms . A firm that employs a tax return preparer subject to a penalty under section 6694(a) (or a firm of which the individual tax return preparer is a partner, member, shareholder or other equity holder) is also subject to penalty if, and only if --

(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(a);

(ii) The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) Such review procedures were disregarded by the corporation, partnership, or other firm entity 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.

(b) Reasonable belief that the position would more likely than not be sustained on its merits --(1) In general . A tax return preparer may "reasonably believe that a position would more likely than not be sustained on its merits" 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. In reaching this conclusion, the possibility that the position will not be challenged by the Internal Revenue Service (IRS) (for example, because the taxpayer's return may not be audited or because the issue may not be raised on audit) is not to be taken into account. The analysis prescribed by §1.6662-4(d)(3)(ii) (or any successor provision) for purposes of determining whether substantial authority is present applies for purposes of determining whether the more likely than not standard is satisfied. Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer's diligence. In determining the level of diligence in a particular situation, the tax return preparer's experience with the area of Federal tax law and familiarity with the taxpayer's affairs, as well as the complexity of the issues and facts, will be taken into account. A tax return preparer may reasonably believe that a position more likely than not would be sustained on its merits despite the absence of other types of authority if the position is supported by a well-reasoned construction of the applicable statutory provision. For purposes of determining whether the tax return preparer has a reasonable belief that the position would more likely than not be sustained on the merits, a tax return preparer may rely in good faith without verification upon information furnished by the taxpayer, advisor, other tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer's firm), as provided in §1.6694-1(e).

(2) No unreasonable assumptions . A position must not be based on unreasonable factual or legal assumptions (including assumptions as to future events) and must not unreasonably rely on the representations, statements, findings, or agreements of the taxpayer or any other person. For example, a position must not be based on a representation or assumption that the tax return preparer knows, or has reason to know, is inaccurate.

(3) Authorities . The authorities considered in determining whether a position satisfies the more likely than not standard are those authorities provided in §1.6662-4(d)(3)(iii) (or any successor provision).

(4) Examples . The provisions of paragraphs (b)(1) through (b)(3) of this section are illustrated by the following examples:

Example 1 . A new statute is silent as to whether the taxpayer may take advantage of certain tax benefits. The Treasury Department and the IRS have not issued any interpretative guidance for the newly enacted provision. A well-reasoned construction of the statutory text supports the position that a taxpayer may claim the tax benefits. Preparer M may avoid the section 6694(a) penalty by taking the position that M reasonably believed that the taxpayer's position would more likely than not be sustained on its merits.

Example 2 . After the passage of legislation containing a new statutory provision, a taxpayer engaged in a transaction that is adversely affected by the new provision. Prior law supported a position favorable to the taxpayer. Preparer N believes that the new statute is inequitable as applied to the taxpayer's situation. The statutory language, however, is unambiguous as applied to the transaction to deny the result claimed by the taxpayer previously. In considering the new statutory provision as applied to the taxpayer's position, N may not avoid the section 6694(a) penalty by taking the position that the tax return preparer reasonably believed that the position would more likely than not be sustained on its merits.

Example 3 . While preparing the taxpayer's return, Preparer O determines that a statute is silent as to whether the taxpayer may take a certain position on the taxpayer's 2007 Federal income tax return. Three private letter rulings issued to other taxpayers in 2002 and 2003 support the taxpayer's position. Temporary regulations issued in 2004, however, are clearly contrary to the taxpayer's position. After the issuance of the temporary regulations, the earlier private letter rulings cease to be authorities and are not taken into account in determining whether the taxpayer's position satisfies the reasonable belief that the position would more likely than not be sustained on its merits standard. Preparer O may not avoid the section 6694(a) penalty by taking the position that the tax return preparer reasonably believed that the taxpayer's position would more likely than not be sustained on its merits.

Example 4 . In the course of researching whether an interpretation of a phrase in the Internal Revenue Code (Code) is a position that more likely than not will be sustained on its merits, Preparer P discovers that the only relevant authorities include decisions of five U.S. courts of appeal. Three U.S. courts of appeal have construed the language as being taxpayer favorable. Two other U.S. courts of appeal, however, have construed the identical language as being favorable to the government's position. The U.S. court of appeals in the jurisdiction where the taxpayer is located has not addressed this issue. P reasonably believes that the taxpayer's facts more closely parallel the facts involved in the three U.S. courts of appeals' decisions that were taxpayer favorable. Under the analysis prescribed by §1.6662-4(d)(3)(ii), P may avoid the section 6694(a) penalty by taking the position that the tax return preparer reasonably believed that a well-reasoned position consistent with the taxpayer favorable interpretation would more likely than not be sustained on its merits.

(5) Written determinations . The tax return preparer may avoid the section 6694(a) penalty by taking the position that the tax return preparer reasonably believed that the taxpayer's position satisfies the "more likely than not" standard if the taxpayer is the subject of a "written determination" as provided in §1.6662-4(d)(3)(iv)(A).

(6) When "more likely than not" standard must be satisfied . For purposes of this section, the requirement that a position satisfies the "more likely than not" standard must be satisfied on the date the return is deemed prepared, as prescribed by §1.6694-1(a)(2).

(c) Exception for adequate disclosure of positions with a reasonable basis --(1) In general . The section 6694(a) penalty will not be imposed on a tax return preparer if the position taken has a reasonable basis and is adequately disclosed within the meaning of paragraph (c)(3) of this section. For an exception to the section 6694(a) penalty for reasonable cause and good faith, see paragraph (d) of this section.

(2) Reasonable basis . For purposes of this section, "reasonable basis" has the same meaning as in §1.6662-3(b)(3) or any successor provision of the accuracy-related penalty regulations. For purposes of determining whether the tax return preparer has a reasonable basis for a position, a tax return preparer may rely in good faith without verification upon information furnished by the taxpayer, advisor, other tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer's firm), as provided in §1.6694-1(e).

(3) Adequate disclosure --(i) Signing tax return preparers . In the case of a signing tax return preparer within the meaning of §301.7701-15(b)(1) of this chapter, 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 the merits is adequate if the tax return preparer meets any of the following standards:

(A) The position is disclosed in accordance with §1.6662-4(f) (which permits disclosure 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 described in §1.6662-4(f)(2)).

(B) For income tax returns, if the position would not meet the standard for the taxpayer to avoid a penalty under section 6662(d)(2)(B) without disclosure (no substantial authority), the tax return preparer provides the taxpayer with the prepared tax return that includes the disclosure in accordance with §1.6662-4(f).

(C) For income tax returns, if the position would otherwise meet the standard for nondisclosure under section 6662(d)(2)(B)(i) (substantial authority), the tax return preparer advises the taxpayer of all the penalty standards applicable to the taxpayer under section 6662. The tax return preparer must also contemporaneously document the advice in the tax return preparer's files.

(D) For income tax returns, if section 6662(d)(2)(B) does not apply because the position may be described in section 6662(d)(2)(C) or section 6662A (a tax shelter, reportable transaction with a significant purpose of tax avoidance or evasion, or a listed transaction), 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 in order to avoid a penalty under section 6662(d) or section 6662A as applicable, and that disclosure will not protect the taxpayer from assessment of an accuracy-related penalty if either section 6662(d)(2)(C) or 6662A applies to the position. The tax return preparer must also contemporaneously document the advice in the tax return preparer's files.

(E) For returns or claims for refund that are subject to penalties pursuant to section 6662 other than the substantial understatement penalty under section 6662(b)(2) and (d), the tax return preparer advises the taxpayer of the penalty standards applicable to the taxpayer under sections 6662. The tax return preparer must also contemporaneously document the advice in the tax return preparer's files.

(ii) Nonsigning tax return preparers . In the case of a nonsigning tax return preparer within the meaning of §301.7701-15(b)(2) of this chapter, disclosure of a position that satisfies the reasonable basis standard but does not satisfy the reasonable belief that a position would more likely than not be sustained on its merits standard is adequate if the position is disclosed in accordance with §1.6662-4(f) (which permits disclosure on a properly completed and filed Form 8275 or Form 8275-R, as appropriate, or on the return in accordance with an annual revenue procedure described in §1.6662-4(f)(2)). In addition, disclosure of a position is adequate in the case of a nonsigning tax return preparer if, with respect to that position, the tax return preparer complies with the provisions of paragraph (c)(3)(ii)(A) or (B) of this section, whichever is applicable.

(A) Advice to taxpayers . If a nonsigning tax return preparer provides advice to the taxpayer with respect to a position for which there is a reasonable basis but for which the nonsigning tax return preparer does not have a reasonable belief that the position would more likely than not be sustained on the merits, disclosure of that position is adequate if the tax return preparer advises the taxpayer of any opportunity to avoid penalties under section 6662 that could apply to the position, if relevant, and of the standards for disclosure to the extent applicable. The tax return preparer must also contemporaneously document the advice in the tax return preparer's files.

(B) Advice to another tax return preparer . If a nonsigning tax return preparer provides advice to another tax return preparer with respect to a position for which there is a reasonable basis but for which the nonsigning tax return preparer does not have a reasonable belief that the position would more likely than not be sustained on the merits, disclosure of that position is adequate if the tax return preparer advises the other tax return preparer that disclosure under section 6694(a) may be required. The tax return preparer must also contemporaneously document the advice in the tax return preparer's files.

(iii) Requirements for advice . For purposes of satisfying the disclosure standards of paragraphs (c)(3)(i) and (ii) of this section, 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. The advice to the taxpayer with respect to each position, therefore, must be particular to the taxpayer and tailored to the taxpayer's facts and circumstances. The tax return preparer is required to contemporaneously document the fact that the advice was provided. There is no general pro forma language or special format required for a tax return preparer to comply with these rules. No form of a general boilerplate disclaimer, however, is sufficient to satisfy these standards. A tax return preparer may choose to comply with the documentation standard in one document covering each position, or in multiple documents covering all of the positions.

(iv) Pass-through entities . Disclosure in the case of items attributable to a pass-through entity is adequate if made at the entity level in accordance with the rules in §1.6662-4(f)(5) or at the entity level in accordance with the rules in paragraphs (c)(3)(i) or (ii) of this section.

(v) Examples . The provisions of paragraph (c)(3) of this section are illustrated by the following examples:

Example 1 . An individual taxpayer hires Accountant Q to prepare its income tax return. Q does not reasonably believe that a particular position taken on the tax return would more likely than not be sustained on its merits although there is substantial authority for the position. Q prepares and signs the tax return without disclosing the position taken on the tax return, but advises the individual taxpayer of the penalty standards applicable to the taxpayer under section 6662, and contemporaneously documents in Q's files that this advice was provided. The individual taxpayer signs and files the tax return without disclosing the position because the position meets the standards for nondisclosure under section 6662(d)(2)(B)(i). The IRS later challenges the position taken on the tax return, resulting in an understatement of liability. Q is not subject to a penalty under section 6694.

Example 2 . Attorney R advises a large corporate taxpayer concerning the proper treatment of complex entries on the corporate taxpayer's tax return. R has reason to know that the tax attributable to the entries is a substantial portion of the tax required to be shown on the tax return within the meaning of §301.7701-15(b)(3). When providing the advice, R concludes that one position with respect to these entries does not meet the reasonable belief that the position would more likely than not be sustained on the merits standard and also does not have substantial authority, although the position meets the reasonable basis standard. R, in good faith, advises the corporate taxpayer that the position lacks substantial authority and the taxpayer will be subject to an accuracy-related penalty under section 6662 unless the position is disclosed in a disclosure statement included in the return. R also documents the fact that this advice was contemporaneously provided to the corporate taxpayer at the time the advice was provided. Neither R nor any other attorney within R's firm signs the corporate taxpayer's return as a tax return preparer, but the advice by R constitutes preparation of a substantial portion of the tax return and R is the individual with overall supervisory responsibility for the position giving rise to the understatement. Thus, R is a tax return preparer for purposes of section 6694. R, however, will not be subject to a penalty under section 6694.

(d) Exception for reasonable cause and good faith . The penalty under section 6694(a) will not be imposed if, considering all the facts and circumstances, it is determined that the understatement was due to reasonable cause and that the tax return preparer acted in good faith. Factors to consider include:

(1) Nature of the error causing the understatement . The error resulted from a provision that was complex, uncommon, or highly technical and a competent tax return preparer of tax returns or claims for refund of the type at issue reasonably could have made the error. The reasonable cause and good faith exception, however, does not apply to an error that would have been apparent from a general review of the return or claim for refund by the tax return preparer.

(2) Frequency of errors . The understatement was the result of an isolated error (such as an inadvertent mathematical or clerical error) rather than a number of errors. Although the reasonable cause and good faith exception generally applies to an isolated error, it does not apply if the isolated error is so obvious, flagrant, or material that it should have been discovered during a review of the return or claim for refund. Furthermore, the reasonable cause and good faith exception does not apply if there is a pattern of errors on a return or claim for refund even though any one error, in isolation, would have qualified for the reasonable cause and good faith exception.

(3) Materiality of errors . The understatement was not material in relation to the correct tax liability. The reasonable cause and good faith exception generally applies if the understatement is of a relatively immaterial amount. Nevertheless, even an immaterial understatement may not qualify for the reasonable cause and good faith exception if the error or errors creating the understatement are sufficiently obvious or numerous.

(4) Tax return preparer's normal office practice . The tax return preparer's normal office practice, when considered together with other facts and circumstances, such as the knowledge of the tax return preparer, indicates that the error in question would rarely occur and the normal office practice was followed in preparing the return or claim for refund in question. Such a normal office practice must be a system for promoting accuracy and consistency in the preparation of returns or claims for refund and generally would include, in the case of a signing tax return preparer, checklists, methods for obtaining necessary information from the taxpayer, a review of the prior year's return, and review procedures. Notwithstanding these rules, the reasonable cause and good faith exception does not apply if there is a flagrant error on a return or claim for refund, a pattern of errors on a return or claim for refund, or a repetition of the same or similar errors on numerous returns or claims for refund.

(5) Reliance on advice of others . For purposes of demonstrating reasonable cause and good faith, a tax return preparer may rely without verification upon advice and information furnished by the taxpayer or other party, as provided in §1.6694-1(e). The tax return preparer may reasonably rely in good faith on the advice of, or schedules or other documents prepared by, the taxpayer, another advisor, another tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer's firm), and who the tax return preparer had reason to believe was competent to render the advice or other information. The advice or information may be written or oral, but in either case the burden of establishing that the advice or information was received is on the tax return preparer. A tax return preparer is not considered to have relied in good faith if --

(i) The advice or information is unreasonable on its face;

(ii) The tax return preparer knew or should have known that the other party providing the advice or information was not aware of all relevant facts; or

(iii) The tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the return or claim for refund was prepared, that the advice or information was no longer reliable due to developments in the law since the time the advice was given.

(6) Reliance on generally accepted administrative or industry practice . The tax return preparer reasonably relied in good faith on generally accepted administrative or industry practice in taking the position that resulted in the understatement. A tax return preparer is not considered to have relied in good faith if the tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the return or claim for refund was prepared, that the administrative or industry practice was no longer reliable due to developments in the law or IRS administrative practice since the time the practice was developed.

(e) Burden of proof . In any proceeding with respect to the penalty imposed by section 6694(a), the issues on which the tax return preparer bears the burden of proof include whether --

(1) The tax return preparer knew or reasonably should have known that the questioned position was taken on the return;

(2) There is reasonable cause and good faith with respect to such position; and

(3) The position was disclosed adequately in accordance with paragraph (c) of this section.

(f) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 8. Section 1.6694-3 is amended by revising paragraphs (a),(c)(2) and (3),(d),(e),(f),(g) and (h) to read as follows:



§1.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general --(1) Proscribed conduct . A tax return preparer is liable for a penalty under section 6694(b) equal to the greater of $5,000 or 50 percent of the income derived (or to be derived) by the tax return preparer if any part of an understatement of liability for a return or claim for refund that is prepared is due to --

(i) A willful attempt in any manner to understate the liability for tax by a tax return preparer on the return or claim for refund; or

(ii) Any reckless or intentional disregard of rules or regulations by any such person.

(2) Special rule for corporations, partnerships, and other firms . A firm that employs a tax return preparer subject to a penalty under section 6694(b) (or a firm of which the individual tax return preparer is a partner, member, shareholder or other equity holder) is also subject to penalty if, and only if --

(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(b);

(ii) The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) Such review procedures were disregarded by the corporation, partnership, or other firm entity 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.

* * * * *

(c) Reckless or intentional disregard --(1)* * *

(2) A tax return preparer is not considered to have recklessly or intentionally disregarded a rule or regulation if the position contrary to the rule or regulation has a reasonable basis as defined in §1.6694- 2(c)(2) and is adequately disclosed in accordance with §1.6694-2(c)(3). In the case of a position contrary to a regulation, the position must represent a good faith challenge to the validity of the regulation and, when disclosed in accordance with §1.6694-2(c)(3), the tax return preparer must identify the regulation being challenged. For purposes of this section, disclosure on the return in accordance with an annual revenue procedure under §1.6662-4(f)(2) is not applicable.

(3) In the case of a position contrary to a revenue ruling or notice (other than a notice of proposed rulemaking) published by the Internal Revenue Service in the Internal Revenue Bulletin, a tax return preparer also is not considered to have recklessly or intentionally disregarded the ruling or notice if the tax return preparer reasonably believes that the position would more likely than not be sustained on its merits in accordance with §1.6694-2(b).

(d) Examples . The provisions of paragraphs (b) and (c) of this section are illustrated by the following examples:

Example 1 . A taxpayer provided Preparer S with detailed check registers reflecting personal and business expenses. One of the expenses was for domestic help, and this expense was identified as personal on the check register. S knowingly deducted the expenses of the taxpayer's domestic help as wages paid in the taxpayer's business. S is subject to the penalty under section 6694(b).

Example 2 . A taxpayer provided Preparer T with detailed check registers to compute the taxpayer's expenses. T, however, knowingly overstated the expenses on the return. After adjustments by the examiner, the tax liability increased significantly. Because T disregarded information provided in the check registers, T is subject to the penalty under section 6694(b).

Example 3 . Preparer U prepares a taxpayer's return and encounters certain expenses incurred in the purchase of a business. Final regulations provide that such expenses incurred in the purchase of a business must be capitalized. One U.S. Tax Court case has expressly invalidated that portion of the regulations. Under these facts, U will have a reasonable basis for the position as defined in §1.6694- 2(c)(2) and will not be subject to the section 6694(b) penalty if the position is adequately disclosed in accordance with paragraph (c)(2) of this section because the position represents a good faith challenge to the validity of the regulations.

(e) Rules or regulations . The term rules or regulations includes the provisions of the Internal Revenue Code, temporary or final Treasury regulations issued under the Code, and revenue rulings or notices (other than notices of proposed rulemaking) issued by the Internal Revenue Service and published in the Internal Revenue Bulletin.

(f) Section 6694(b) penalty reduced by section 6694(a) penalty . The amount of any penalty to which a tax return preparer may be subject under section 6694(b) for a return or claim for refund is reduced by any amount assessed and collected against the tax return preparer under section 6694(a) for the same return or claim for refund.

(g) Burden of proof . In any proceeding with respect to the penalty imposed by section 6694(b), the government bears the burden of proof on the issue of whether the tax return preparer willfully attempted to understate the liability for tax. See section 7427. The tax return preparer bears the burden of proof on such other issues as whether --

(1) The tax return preparer recklessly or intentionally disregarded a rule or regulation;

(2) A position contrary to a regulation represents a good faith challenge to the validity of the regulation; and

(3) Disclosure was adequately made in accordance with §1.6694-3(c)(2).

(h) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 9. Section 1.6694-4 is amended by revising paragraph (a) to read as follows:



§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 . (1) The Internal Revenue Service will investigate the preparation by a tax return preparer of a return of tax under the Internal Revenue Code (Code) or claim for refund of tax under the Code as described in §301.7701-15(b)(4) of this chapter, and will send a report of the examination to the tax return preparer before the assessment of either --

(i) A penalty for understating tax liability due to a position for which there was not a reasonable belief that the position would more likely than not be sustained on its merits under section 6694(a) (or not a reasonable basis for disclosed positions); or

(ii) A penalty for willful understatement of liability or reckless or intentional disregard of rules or regulations under section 6694(b).

* * * * *

(d) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 10. Section 1.6695-1 is revised to read as follows:



§1.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) Failure to furnish copy to taxpayer . (1) A person who is a signing tax return preparer as described in §301.7701-15(b)(1) of this chapter of any return of tax or claim for refund of tax under the Internal Revenue Code (Code), and who fails to satisfy the requirements imposed by section 6107(a) and §1.6107-1(a) to furnish a copy of the return or claim for refund to the taxpayer (or nontaxable entity), shall be subject to a penalty of $50 for such failure, with a maximum penalty of $25,000 per person imposed with respect to each calendar year, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

(2) No penalty may be imposed under section 6695(a) and paragraph (a)(1) of this section upon a tax return preparer who furnishes a copy of the return or claim for refund to taxpayers who --

(i) Hold an elected or politically appointed position with the government of the United States or a state or political subdivision thereof; and

(ii) In order faithfully to carry out their official duties, have so arranged their affairs that they have less than full knowledge of the property that they hold or of the debts for which they are responsible, if information is deleted from the copy in order to preserve or maintain this arrangement.

(b) Failure to sign return . (1) An individual who is a tax return preparer as described in §301.7701-15 of this chapter with respect to a return of tax or claim for refund of tax under the Code that is not signed electronically shall sign the return or claim for refund after it is completed and before it is presented to the taxpayer (or nontaxable entity) for signature. For rules covering electronically signed returns, see paragraph (b)(2) of this section. For purposes of this paragraph (b), a return of tax shall not include information returns under subpart B and subpart C of Part III of Subtitle F. If the tax return preparer is unavailable for signature, another tax return preparer shall review the entire preparation of the return or claim for refund, and then shall sign the return or claim for refund. The tax return preparer shall sign the return in the manner prescribed by the Commissioner in forms, instructions, or other appropriate guidance.

(2) In the case of electronically signed tax returns, the 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 that will be transmitted as the electronically signed tax return to the taxpayer contemporaneously with furnishing the Form 8879, "IRS e-file Signature Authorization," or other similar Internal Revenue Service (IRS) e-file signature form. The information may be furnished on a replica of an official form. The tax return preparer shall electronically sign the return in the manner prescribed by the Commissioner in forms, instructions, or other appropriate guidance.

(3) If more than one tax return preparer is involved in the preparation of the return or claim for refund, the individual tax return preparer who has the primary responsibility as between or among the tax return preparers for the overall substantive accuracy of the preparation of such return or claim for refund shall be considered to be the signing tax return preparer for purposes of this paragraph (b) and §301.7701-15(b)(1) of this chapter. Any other tax return preparer as described in §301.7701-15(b)(2) of this chapter is not required to sign the return or claim for refund.

(4) Examples . The application of this paragraph (b) is illustrated by the following examples:

Example 1 . Law Firm A employs B, a lawyer, to prepare for compensation estate tax returns and claims for refund of taxes. Firm A is engaged by C to prepare a Federal estate tax return. Firm A assigns B to prepare the return. B obtains the information necessary for completing the return from C and makes determinations with respect to the proper application of the tax laws to such information in order to determine the estate's tax liability. B then forwards such information to D, a computer tax service that performs the mathematical computations and prints the return by means of computer processing. D then sends the completed estate tax return to B who reviews the accuracy of the return. B is the individual tax return preparer who is primarily responsible for the overall accuracy of the estate tax return. B must sign the return as tax return preparer.

Example 2 . Partnership E is a national accounting firm that prepares returns and claims for refund of taxes for compensation. F and G, employees of Partnership E, are involved in preparing the Form 990-T, Exempt Organization Business Income Tax Return, for H, a tax exempt organization. After they complete the return, including the gathering of the necessary information, analyzing the proper application of the tax laws to such information, and the performance of the necessary mathematical computations, I, a supervisory employee of Partnership E, reviews the return. As part of this review, I reviews the information provided and the application of the tax laws to this information. The mathematical computations and carriedforward amounts are reviewed by J, an employee of Partnership E. The policies and practices of Partnership E require that K, a partner, finally review the return. The scope of K's review includes reviewing the information provided and applying to this information his knowledge of H's affairs, observing that Partnership E's policies and practices have been followed, and making the final determination with respect to the proper application of the tax laws to determine H's tax liability. K may or may not exercise these responsibilities, or may exercise them to a greater or lesser extent, depending on the degree of complexity of the return, his confidence in I (or F and G), and other factors. K is the individual tax return preparer who is primarily responsible for the overall accuracy of H's return. K must sign the return as tax return preparer.

Example 3 . L corporation maintains an office in Seattle, Washington, for the purpose of preparing partnership returns for compensation. L makes compensatory arrangements with individuals (but provides no working facilities) in several states to collect information from partners of a partnership and to make decisions with respect to the proper application of the tax laws to the information in order to prepare the partnership return and calculate the partnership's distributive items. M, an individual, who has such an arrangement in Los Angeles with L, collects information from N, the general partner of a partnership, and completes a worksheet kit supplied by L that is stamped with M's name and an identification number assigned to M by L. In this process, M classifies this information in appropriate categories for the preparation of the partnership return. The completed worksheet kit signed by M is then mailed to L. O, an employee in L's office, reviews the worksheet kit to make sure it was properly completed. O does not review the information obtained from N for its validity or accuracy. O may, but did not, make the final decision with respect to the proper application of tax laws to the information provided. The data from the worksheet is entered into a computer and the return form is completed. The return is prepared for submission to N with filing instructions. M is the individual tax return preparer primarily responsible for the overall accuracy of the partnership return. M must sign the return as tax return preparer.

Example 4 . P employs R, S, and T to prepare gift tax returns for taxpayers. After R and S have collected the information from a taxpayer and applied the tax laws to the information, the return form is completed by a computer service. On the day the returns prepared by R and S are ready for their signatures, R is away from the city for 1 week on another assignment and S is on detail to another office in the same city for the day. T may sign the gift tax returns prepared by R, provided that T reviews the information obtained by R relative to the taxpayer, and T reviews the preparation of each return prepared by R. T may not sign the returns prepared by S because S is available.

(5) An individual required by this paragraph (b) to sign a return or claim for refund shall be subject to a penalty of $50 for each failure to sign, with a maximum of $25,000 per person imposed with respect to each calendar year, unless it is shown that the failure is due to reasonable cause and not due to willful neglect. If the tax return preparer asserts reasonable cause for failure to sign, the IRS will require a written statement to substantiate the tax return preparer's claim of reasonable cause. For purposes of this paragraph (b), reasonable cause is a cause that arises despite ordinary care and prudence exercised by the individual tax return preparer.

(6) Effective/applicability date . This paragraph (b) is applicable to returns and claims for refund filed after the date that final regulations are published in the Federal Register.

(c) Failure to furnish identifying number . (1) A person who is a signing tax return preparer as described in §301.7701-15(b)(1) of this chapter of any return of tax under the Code or claim for refund of tax under the Code, and who fails to satisfy the requirement of section 6109(a)(4) and §1.6109-2(a) to furnish one or more identifying numbers of signing tax return preparers or persons employing the signing tax return preparer (or with which the signing tax return preparer is associated) on a return or claim for refund after it is completed and before it is presented to the taxpayer (or nontaxable entity) for signature shall be subject to a penalty of $50 for each failure, with a maximum of $25,000 per person imposed with respect to each calendar year, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

(2) No more than one penalty of $50 may be imposed under section 6695(c) and paragraph (c)(1) of this section with respect to a single return or claim for refund.

(d) Failure to retain copy or record . (1) A person who is a signing tax return preparer as described in §301.7701-15(b)(1) of this chapter of any return of tax under the Code or claim for refund of tax under the Code, and who fails to satisfy the requirements imposed upon him or her by section 6107(b) and §1.6107-1(b) and (c) (other than the record requirement described in both §1.6107-1(b)(2) and (3)) to retain and make available for inspection a copy of the return or claim for refund, or to include the return or claim for refund in a record of returns and claims for refund and make the record available for inspection, shall be subject to a penalty of $50 for the failure, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

(2) A person may not, for returns or claims for refund presented to the taxpayers (or nontaxable entities) during any single return period, be subject to more than $25,000 in penalties under section 6695(d) and paragraph (d)(1) of this section.

(e) Failure to file correct information returns . A person who is subject to the reporting requirements of section 6060 and §1.6060-1 and who fails to satisfy these requirements shall pay a penalty of $50 for each such failure, with a maximum of $25,000 per person imposed for each calendar year, unless such failure was due to reasonable cause and not due to willful neglect.

(f) Negotiation of check . (1) No person who is a tax return preparer as described in §301.7701-15 of this chapter may endorse or otherwise negotiate, directly or through an agent, a check for the refund of tax under the Code that is issued to a taxpayer other than the tax return preparer if the person was a tax return preparer of the return or claim for refund which gave rise to the refund check.

(2) Section 6695(f) and paragraphs (f)(1) and (3) of this section do not apply to a tax return preparer-bank that --

(i) Cashes a refund check and remits all of the cash to the taxpayer or accepts a refund check for deposit in full to a taxpayer's account, so long as the bank does not initially endorse or negotiate the check (unless the bank has made a loan to the taxpayer on the basis of the anticipated refund); or

(ii) Endorses a refund check for deposit in full to a 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).

(3) A tax return preparer-bank may also subsequently endorse or negotiate a refund check as a part of the checkclearing process through the financial system after initial endorsement or negotiation.

(4) The tax return preparer shall be subject to a penalty of $500 for each endorsement or negotiation of a check prohibited under section 6695(f) and paragraph (f)(1) of this section.

(g) 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. 11. Section 1.6695-2 is amended by revising the heading and paragraphs (a), (b)(3), (c) and (d) to read as follows:



§1.6695-2 Tax return preparer due diligence requirements for determining earned income credit eligibility .

(a) Penalty for failure to meet due diligence requirements . A person who is a signing tax return preparer of a tax return or claim for refund under the Internal Revenue Code with respect to determining the eligibility for, or the amount of, the earned income credit (EIC) under section 32 and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty of $100 for each such failure.

(b) * * *

(3) Knowledge --(i) In general . The tax return preparer must not know, or have reason to know, that any information used by the tax return preparer in determining the taxpayer's eligibility for, or the amount of, the EIC is incorrect. The tax return preparer may not ignore the implications of information furnished to, or known by, the tax return preparer, and must make reasonable inquiries if the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. A tax return preparer must make reasonable inquiries if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. The tax return preparer must also contemporaneously document in the files the reasonable inquiries made and the responses to these inquiries.

(ii) Examples . The provisions of paragraph (b)(3)(i) of this section are illustrated by the following examples:

Example 1 . A 22 year-old taxpayer wants to claim two sons, ages 10 and 11, as qualifying children for purposes of the EIC. Preparer A must make additional reasonable inquiries regarding the relationship between the taxpayer and the children as the age of the taxpayer appears inconsistent with the ages of the children claimed as sons.

Example 2 . An 18 year-old female taxpayer with an infant has $3,000 in earned income and states that she lives with her parents. Taxpayer wants to claim the infant as a qualifying child for the EIC. This information appears incomplete and inconsistent because the taxpayer lives with her parents and earns very little income. Preparer B must make additional reasonable inquires to determine if the taxpayer is the qualifying child of her parents and, therefore, ineligible to claim the EIC.

Example 3 . In March 2008, Mr. D has Preparer C prepare his tax year 2007 return using Married Filing Separate filing status, and an address of 25 Main Street, Mytown, Mystate. Two weeks later Mrs. D has C prepare her tax year 2007 return, and she asks C to use the Head of Household filing status, claiming two qualifying children, and the EIC. She tells C that her address is 25 Main Street, Mytown, Mystate. Mrs. D's filing status appears incorrect based on the filing status used by Mr. D. Therefore, C must make additional reasonable inquiries to determine Mrs. D's proper filing status.

Example 4 . Taxpayer asks Preparer E to prepare her tax return and tells D that she has a Schedule C business, that she has two qualifying children and that she wants to claim the EIC. Taxpayer indicates that she earned $10,000 from her Schedule C business, but that she has no expenses. This information appears incomplete because it is very unlikely that someone who is self-employed has no business expenses. E must make additional reasonable inquiries regarding taxpayer's business to determine whether the information regarding both income and expenses is correct.

(c) Exception to penalty . The section 6695(g) penalty will not be applied with respect to a particular tax return or claim for refund if the tax return preparer can demonstrate to the satisfaction of the Internal Revenue Service that, considering all the facts and circumstances, the tax return preparer's normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of paragraph (b) of this section, and the failure to meet the due diligence requirements of paragraph (b) of this section with respect to the particular return or claim for refund was isolated and inadvertent.

(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. 12. Section 1.6696-1 is revised to read as follows:



§1.6696-1 Claims for credit or refund by tax return preparers or appraisers .

(a) Notice and demand . (1) The Internal Revenue Service (IRS) shall issue to each tax return preparer or appraiser one or more statements of notice and demand for payment for all penalties assessed against the tax return preparer or appraiser under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A (and any subsequently issued regulations).

(2) For the definition of the term "tax return preparer," see section 7701(a)(36) and §301.7701-15 of this chapter. A person who prepares a claim for credit or refund under this section for another person, however, is not, with respect to that preparation, a tax return preparer as defined in section 7701(a)(36) and §301.7701-15 of this chapter.

(b) Claim filed by tax return preparer or appraiser . A claim for credit or refund of a penalty (or penalties) assessed against a tax return preparer or appraiser under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A (and any subsequently issued regulations) may be filed under this section only by the tax return preparer or the appraiser (or the tax return preparer's or appraiser's estate) against whom the penalty (or penalties) is assessed and not by, for example, the tax return preparer's or appraiser's employer. This paragraph (b) is not intended, however, to impose any restrictions on the preparation of this claim for credit or refund. The claim may be prepared by the tax return preparer's or appraiser's employer or by other persons. In all cases, however, the claim for credit or refund shall contain the information specified in paragraph (d) of this section and, as required by paragraph (d) of this section, shall be verified by a written declaration by the tax return preparer or appraiser that the information is provided under penalty of perjury.

(c) Separation and consolidation of claims . (1) Unless paragraph (c)(2) of this section applies, a tax return preparer shall file a separate claim for each penalty assessed in each statement of notice and demand issued to the tax return preparer.

(2) A tax return preparer may file one or more consolidated claims for any or all penalties imposed on the tax return preparer by a single IRS Office under section 6695(a) and §1.6695-1(a) (relating to failure to furnish copy of return to taxpayer), section 6695(b) and §1.6695-1(b) (relating to failure to sign), section 6695(c) and §1.6695-1(c) (relating to failure to furnish identifying number), or under section 6695(d) and §1.6695-1(d) (relating to failure to retain copy of return or record), whether the penalties are asserted on a single or on separate statements of notice and demand. In addition, a tax return preparer may file one consolidated claim for any or all penalties imposed on the tax return preparer by a single IRS Office under section 6695(e) and §1.6695-1(e) (relating to failure to file correct information return), which are asserted on a single statement of notice and demand.

(d) Content of claim . Each claim for credit or refund for any penalty (or penalties) paid by a tax return preparer under section 6694 and §1.6694-1, or under section 6695 and §1.6695-1, or paid by an appraiser under section 6695A (and any subsequently issued regulations) shall include the following information, verified by a written declaration by the tax return preparer or appraiser that the information is provided under penalty of perjury:

(1) The tax return preparer's or appraiser's name.

(2) The tax return preparer's or appraiser's identification number. If the tax return preparer or appraiser is --

(i) An individual (not described in paragraph (d)(2)(iii) of this section) who is a citizen or resident of the United States, the tax return preparer's or appraiser's social security account number (or such alternative number as may be prescribed by the IRS in forms, instructions, or other appropriate guidance) shall be provided;

(ii) An individual who is not a citizen or resident of the United States and also was not employed by another tax return preparer or appraiser to prepare the document (or documents) with respect to which the penalty (or penalties) was assessed, the tax return preparer's or appraiser's employer identification number shall be provided; or

(iii) A person (whether an individual, corporation, or partnership) that employed one or more persons to prepare the document (or documents) with respect to which the penalty (or penalties) was assessed, the tax return preparer's or appraiser's employer identification number shall be provided.

(3) The tax return preparer's or appraiser's address where the IRS mailed the statement (or statements) of notice and demand and, if different, the tax return preparer's or appraiser's address shown on the document (or documents) with respect to which the penalty (or penalties) was assessed.

(4)(i) The address of the IRS campus or office that issued the statement (or statements) of notice and demand for payment of the penalty (or penalties).

(ii) The date (or dates) and identifying number (or numbers) of the statement (or statements) of notice and demand.

(5)(i) The identification, by amount, type, and document to which related, of each penalty included in the claim. Each document referred to in the preceding sentence shall be identified by the form title or number, by the taxpayer's (or nontaxable entity's) name and taxpayer identification number, and by the taxable year to which the document relates.

(ii) The date (or dates) of payment of the amount (or amounts) of the penalty (or penalties) included in the claim.

(iii) The total amount claimed.

(6) A statement setting forth in detail --

(i) Each ground upon which each penalty overpayment claim is based; and

(ii) Facts sufficient to apprise the IRS of the exact basis of each such claim.

(e) Form for filing claim . Notwithstanding §301.6402(c) of this chapter, Form 6118, "Claim for Refund of Tax Return Preparer Penalties," is the form prescribed for making a claim as provided in this section.

(f) Place for filing claim . A claim filed under this section shall be filed with the IRS campus or office that issued to the tax return preparer or appraiser the statement (or statements) of notice and demand for payment of the penalty (or penalties) included in the claim.

(g) Time for filing claim . (1)(i) Except as provided in section 6694(c)(1) and §1.6694-2(a)(3)(ii) and (4), and in section 6694(d) and §1.6694-1(c):

(A) A claim for a penalty paid by a tax return preparer under section 6694 and §1.6694-1, or under section 6695 and §1.6695-1, or by a appraiser under section 6695A (and any subsequently issued regulations) shall be filed within three years from the date the payment was made.

(B) A consolidated claim, permitted under paragraph (c)(2) of this section, shall be filed within three years from the first date of payment of any penalty included in the claim.

(ii) For purposes of this paragraph (g)(1), payment is considered made on the date payment is received by the IRS or, if applicable, on the date an amount is credited in satisfaction of the penalty.

(2) For purposes of determining whether a claim is timely filed, the rules under sections 7502 and 7503 and the provisions of §§1.7502-1, 1.7502-2, and 1.7503-1 apply.

(h) Application of refund to outstanding liability of tax return preparer or appraiser . The IRS may, within the applicable period of limitations, credit any amount of an overpayment by a tax return preparer or appraiser of a penalty (or penalties) paid under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A (and any subsequently issued regulations) against any outstanding liability for any tax (or for any interest, additional amount, addition to the tax, or assessable penalty) owed by the tax return preparer or appraiser making the overpayment. If a portion of an overpayment is so credited, only the balance will be refunded to the tax return preparer or appraiser.

(i) Interest . (1) Section 6611 and §301.6611-1 of this chapter apply to the payment by the IRS of interest on an overpayment by a tax return preparer or appraiser of a penalty (or penalties) paid under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A (and any subsequently issued regulations).

(2) Section 6601 and §301.6601-1 of this chapter apply to the payment of interest by a tax return preparer or appraiser to the IRS on any penalty (or penalties) assessed against the tax return preparer under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A (and any subsequently issued regulations).

(j) Suits for refund of penalty . (1) A tax return preparer or appraiser may not maintain a civil action for the recovery of any penalty paid under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A(and any subsequently issued regulations), unless the tax return preparer or appraiser has previously filed a claim for credit or refund of the penalty as provided in this section (and the court has jurisdiction of the proceeding). See sections 6694(c) and 7422.

(2)(i) Except as provided in section 6694(c)(2) and §1.6694-2(b), the periods of limitation contained in section 6532 and §301.6532-1 of this chapter apply to a tax return preparer's or appraiser's suit for the recovery of any penalty paid under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A (and any subsequently issued regulations).

(ii) The rules under section 7503 and §301.7503-1 of this chapter apply to the timely commencement by a tax return preparer or appraiser of a suit for the recovery of any penalty paid under section 6694 and §1.6694-1, under section 6695 and §1.6695-1, or under section 6695A (and any subsequently issued regulations).

(k) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 20 --ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER

AUGUST 16, 1954

Par. 13. The authority citation for part 20 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 20.6060-1 also issued under 26 U.S.C. 6060(a).

* * *

Section 20.6109-2 also issued under 26 U.S.C. 6109(a).

* * *

Section 20.6695-1 also issued under 26 U.S.C. 6695(b).

* * *

Section 20.6695-2 also issued under 26 U.S.C. 6695(g).

* * *

Par. 14. Section 20.6060-1 is added to read as follows:



§20.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of estate tax under chapter 11 of subtitle B of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the recordkeeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 15. Section 20.6107-1 is added to read as follows:



§20.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of estate tax under chapter 11 of subtitle B of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the estate, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 16. Section 20.6109-1 is added to read as follows:



§20.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund.

(a) In general . Each estate tax return or claim for refund prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 17. Section 20.6694-1 is added to read as follows:



§20.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of estate tax returns or claims see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 18. Section 20.6694-2 is added to read as follows:



§20.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of estate tax under chapter 11 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 19. Section 20.6694-3 is added to read as follows:



§20.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of estate tax under chapter 11 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 20. Section 20.6694-4 is added to read as follows:



§20.6694-4 Extension of period of collection when preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters .

(a) In general . For rules relating to the extension of the period of collection when a tax return preparer who prepared a return or claim for refund for estate tax under chapter 11 of subtitle B of the Internal Revenue Code pays 15 percent of a penalty for understatement of the taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under sections 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 21. Section 20.6695-1 is added to read as follows:



§20.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of estate tax under chapter 11 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 22. Section 20.6696-1 is added to read as follows:



§20.6696-1 Claims for credit or refund by tax return preparers or appraisers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for estate tax under chapter 11 of subtitle B of the Internal Revenue Code, or by an appraiser that prepared an appraisal in connection with such a return or claim for refund under section 6695A, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 23. Section 20.7701-1 is added to read as follows:



§20.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 25 --GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

Par. 24. The authority citation for part 25 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 25.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 25.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 25.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 25.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 25. Section 25.6060-1 is added to read as follows:



§25.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of gift tax under chapter 12 of subtitle B of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 26. Section 25.6107-1 is added to read as follows:



§25.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of gift tax under chapter 12 of subtitle B of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 27. Section 25.6109-1 is added to read as follows:



§25.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each gift tax return or claim for refund prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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 .

Par. 28. Section 25.6694-1 is added to read as follows:



§25.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of gift tax returns or claims see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 29. Section 25.6694-2 is added to read as follows:



§25.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of gift tax under chapter 12 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 30. Section 25.6694-3 is added to read as follows:



§25.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of gift tax under chapter 12 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 31. Section 25.6694-4 is added to read as follows:



§25.6694-4 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 . For rules for the extension of period of collection when a tax return preparer who prepared a return or claim for refund for gift tax under chapter 12 of subtitle B of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation of , assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 32. Section 25.6695-1 is added to read as follows:



§25.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of gift tax under chapter 12 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 33. Section 25.6696-1 is added to read as follows:



§25.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for gift tax under chapter 12 of subtitle B of the Internal Revenue Code, or by an appraiser that prepared an appraisal in connection with such a return or claim for refund under section 6695A, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 34. Section 25.7701-1 is added to read as follows:



§25.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 26 --GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1986

Par. 35. The authority citation for part 26 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 26.6060-1 also issued under 26 U.S.C. 6060(a).

* * *

Section 26.6109-2 also issued under 26 U.S.C. 6109(a).

* * *

Section 26.6695-1 also issued under 26 U.S.C. 6695(b).

* * *

Section 26.6695-2 also issued under 26 U.S.C. 6695(g).

* * *

Par. 36. Section 26.6060-1 is added to read as follows:



§26.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of generation-skipping transfer tax under chapter 13 of subtitle B of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 37. Section 26.6107-1 is added to read as follows:



§26.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of generationskipping transfer tax under chapter 13 of subtitle B of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the estate, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 38. Section 26.6109-1 is added to read as follows:



§26.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each generation-skipping transfer tax return or claim for refund prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 39. Section 26.6694-1 is added to read as follows:



§26.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of generation-skipping transfer tax returns or claims see §1.66994-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 40. Section 26.6694-2 is added to read as follows:



§26.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of generationskipping transfer tax under chapter 13 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 41. Section 26.6694-3 is added to read as follows:



§26.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of generation-skipping transfer tax under chapter 13 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 42. Section 26.6694-4 is added to read as follows:



§26.6694-4 Extension of period of collection when preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters .

(a) In general . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for generationskipping transfer tax under chapter 13 of subtitle B of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 43. Section 26.6695-1 is added to read as follows:



§26.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of generation-skipping transfer tax under chapter 13 of subtitle B of the Internal Revenue Code (Code) shall be subject to penalties for failure to a furnish copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 44. Section 26.6696-1 is added to read as follows:



§26.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for generation-skipping transfer tax under chapter 13 of subtitle B of the Internal Revenue Code, or by an appraiser that prepared an appraisal in connection with such a return or claim for refund under section 6695A, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 45. Section 26.7701-1 is added to read as follows:



§26.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 31 --EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE SOURCE

Par. 46. The authority citation for part 31 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 31.6060-1 also issued under 26 U.S.C. 6060(a).

* * *

Section 31.6109-2 also issued under 26 U.S.C. 6109(a).

* * *

Section 31.6695-1 also issued under 26 U.S.C. 6695(b).

* * *

Section 31.6695-2 also issued under 26 U.S.C. 6695(g).

* * *

Par. 47. Section 31.6060-1 is added to read as follows:



§31.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 48. Section 31.6107-1 is added to read as follows:



§31.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 49. Section 31.6109-2 is added to read as follows:



§31.6109-2 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each employment tax return or claim for refund of employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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 Registe r.

Par. 50. Section 31.6694-1 is added to read as follows:


(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of employment tax returns or claims of employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code, see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 51. Section 31.6694-2 is added to read as follows:



§31.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 52. Section 31.6694-3 is added to read as follows:



§31.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in 1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 53. Section 31.6694-4 is added to read as follows:



§31.6694-4 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 . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 54. Section 31.6695-1 is added to read as follows:



§31.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 55. Section 31.6696-1 is added to read as follows:



§31.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 56. Section 31.7701-1 is added to read as follows:



§31.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 40 --EXCISE TAX PROCEDURAL REGULATIONS

Par. 57. The authority citation for part 40 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 40.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 40.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 40.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 40.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 58. Section 40.6060-1 is added to read as follows:



§40.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the recordkeeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 59. Section 40.6107-1 is added to read as follows:



§40.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of excise tax under chapters 31, 32(other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) Effective/applicability date . This section is applicable for returns and claims for refund filed after the date that final regulations are published in the Federal Register.

Par. 60. Section 40.6109-1 is added to read as follows:



§40.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each return or claim for refund of excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36(other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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. 61. Section 40.6694-1 is added to read as follows:



§40.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of returns or claims for refund of excise tax under chapters 31, 32(other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code, see §1.6694-1 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 62. Section 40.6694-2 is added to read as follows:



§40.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 63. Section 40.6694-3 is added to read as follows:



§40.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 64. Section 40.6694-4 is added to read as follows:



§40.6694-4 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 . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 65. Section 40.6695-1 is added to read as follows:



§40.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) Effective/applicability date . This section is applicable for returns and claims for refund filed after the date that final regulations are published in the Federal Register.

Par. 66. Section 40.6696-1 is added to read as follows:



§40.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 67. Section 40.7701-1 is added to read as follows:



§40.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 41 --EXCISE TAX ON USE OF CERTAIN HIGHWAY MOTOR VEHICLES

Par. 68. The authority citation for part 41 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 41.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 41.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 41.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 41.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 69. Section 41.6060-1 is added to read as follows:



§41.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of excise tax under section 4481 of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) Effective/applicability date . This section is applicable for returns and claims for refund filed after the date that final regulations are published in the Federal Register.

Par. 70. Section 41.6107-1 is added to read as follows:



§41.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of excise tax section 4481 of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) Effective/applicability date . This section is applicable for returns and claims for refund filed after the date that final regulations are published in the Federal Register.

Par. 71. Section 41.6109-2 is added to read as follows:



§41.6109-2 Tax return preparers furnishing identifying numbers for returns or claims for refund filed after December 31, 2008 .

(a) In general . Each excise tax return or claim for refund under section 4481 prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) Effective/applicability date . This section is applicable for returns and claims for refund filed after the date that final regulations are published in the Federal Register.

Par. 72. Section 41.6694-1 is added to read as follows:



§41.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund, see §1.6694-1 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 73. Section 41.6694-2 is added to read as follows:



§41.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under section 4481 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 74. Section 41.6694-3 is added to read as follows:



§41.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under section 4481 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 75. Section 41.6694-4 is added to read as follows:



§41.6694-4 Extension of period of collection when preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters .

(a) In general . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for excise tax under section 4481 of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 76. Section 41.6695-1 is added to read as follows:



§41.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under section 4481 of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign a return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 77. Section 41.6696-1 is added to read as follows:



§41.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for excise tax under section 4481 of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 78. Section 41.7701-1 is added to read as follows:



§41.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 44 --TAXES ON WAGERING; EFFECTIVE JANUARY 1, 1955

Par. 79. The authority citation for part 44 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 44.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 44.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 44.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 44.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 80. Section 44.6060-1 is added to read as follows:



§44.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of tax on wagers under sections 4401 or 4411 of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 81. Section 44.6107-1 is added to read as follows:



§44.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of tax on wagers under sections 4401 or 4411 of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) Effective/applicability date . This section is applicable for returns and claims for refund filed after the date that final regulations are published in the Federal Register.

Par. 82. Section 44.6109-1 is added to read as follows:



§44.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each tax return or claim for refund of tax under sections 4401 or 4411 prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) Effective/applicability date . This section is applicable for returns and claims for refund filed after the date that final regulations are published in the Federal Register.

Par. 83. Section 44.6694-1 is added to read as follows:



§44.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of wagering tax returns or claims for refund under sections 4401 or 4411, see §1.6694-1 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 84. Section 44.6694-2 is added to read as follows:



§44.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax on wagers under sections 4401 or 4411 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 85. Section 44.6694-3 is added to read as follows:



§44.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax on wagers under sections 4401 or 4411 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 86. Section 44.6694-4 is added to read as follows:



§44.6694-4 Extension of period of collection when preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters .

(a) In general . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax on wagers under sections 4401 or 4411 of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 87. Section 44.6695-1 is added to read as follows:



§44.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax on wagers under sections 4401 or 4411 of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 88. Section 44.6696-1 is added to read as follows:



§44.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax on wagers under sections 4401 or 4411 of the Internal Revenue Code, the rules under §1.6696- 1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 89. Section 44.7701-1 is added to read as follows:



§44.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 53 --FOUNDATION AND SIMILAR EXCISE TAXES

Par. 90. The authority citation for part 53 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 53.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 53.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 53.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 53.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 91. Section 53.6060-1 is added to read as follows:



§53.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of tax under Chapter 42 of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 92. Section 53.6107-1 is added to read as follows:



§53.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of tax under Chapter 42 of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 93. Section 53.6109-1 is added to read as follows:



§53.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund filed .

(a) In general . Each tax return or claim for refund under Chapter 42 of the Internal Revenue Code prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 94. Section 53.6694-1 is added to read as follows:



§53.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund under Chapter 42 of the Internal Revenue Code, see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 95. Section 53.6694-2 is added to read as follows:



§53.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under Chapter 42 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 96. Section 53.6694-3 is added to read as follows:



§53.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under Chapter 42 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 97. Section 53.6694-4 is added to read as follows:



§53.6694-4 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 . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund of tax under Chapter 42 of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 98. Section 53.6695-1 is added to read as follows:



§53.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under Chapter 42 of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 99. Section 53.6696-1 is added to read as follows:



§53.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under Chapter 42 of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 100. Section 53.7701-1 is added to read as follows:



§53.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 54 --PENSION EXCISE TAXES

Par. 101. The authority citation for part 54 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 54.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 54.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 54.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 54.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 102. Section 54.6060-1 is added to read as follows:



§54.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund under Chapter 43 of subtitle D of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 103. Section 54.6107-1 is added to read as follows:



§54.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of tax under Chapter 43 of subtitle D of the Internal Revenue Code, shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 104. Section 54.6109-1 is added to read as follows:



§54.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund filed .

(a) In general . Each tax return or claim for refund of tax under Chapter 43 of subtitle D prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 105. Section 54.6694-1 is added to read as follows:



§54.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund of tax under Chapter 43 of subtitle D, see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 106. Section 54.6694-2 is added to read as follows:



§54.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under chapter 43 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 107. Section 56.6694-3 is added to read as follows:



§54.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under chapter 43 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 108. Section 54.6694-4 is added to read as follows:



§54.6694-4 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 . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under chapter 43 of subtitle D of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 109. Section 54.6695-1 is added to read as follows:



§54.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under chapter 43 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 110. Section 54.6696-1 is added to read as follows:



§54.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for excise tax under chapter 43 of subtitle D of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 111. Section 54.7701-1 is added to read as follows:



§54.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 55 --EXCISE TAX ON REAL ESTATE INVESTMENT TRUSTS AND REGULATED INVESTMENT COMPANIES

Par. 112. The authority citation for part 55 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 55.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 55.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 55.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 55.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 113. Section 55.6060-1 is added to read as follows:



§55.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund under chapter 44 of subtitle D of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 114. Section 55.6107-1 is added to read as follows:



§55.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of tax under Chapter 44 of subtitle D of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 115. Section 55.6109-1 is added to read as follows:



§55.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each tax return or claim for refund of tax under chapter 44 of Subtitle D prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 116. Section 55.6694-1 is added to read as follows:



§55.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund of tax under chapter 44 of Subtitle D see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 117. Section 55.6694-2 is added to read as follows:



§55.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under chapter 44 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 118. Section 55.6694-3 is added to read as follows:



§55.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under chapter 44 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 119. Section 55.6694-4 is added to read as follows:



§55.6694-4 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 . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for excise tax under chapter 44 of subtitle D of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 120. Section 55.6695-1 is added to read as follows:



§55.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under chapter 44 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 121. Section 55.6696-1 is added to read as follows:



§55.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under chapter 44 of subtitle D of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 122. Section 55.7701-1 is added to read as follows:



§55.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 56 --PUBLIC CHARITY EXCISE TAXES

Par. 123. The authority citation for part 56 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 56.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 56.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 56.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 56.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 124. Section 56.6060-1 is added to read as follows:



§56.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund of tax under chapter 41 of subtitle D of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 125. Section 56.6107-1 is added to read as follows:



§56.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of tax under Chapter 41 of subtitle D of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the estate, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 126. Section 56.6109-1 is added to read as follows:



§56.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each tax return or claim for refund for tax under chapter 41 of subtitle D prepared by one or more tax signing return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 127. Section 56.6694-1 is added to read as follows:



§56.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund of tax under chapter 41 of subtitle D see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 128. Section 56.6694-2 is added to read as follows:



§56.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of excise tax under chapter 41 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 129. Section 56.6694-3 is added to read as follows:



§56.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under chapter 41 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 130. Section 56.6694-4 is added to read as follows:



§56.6694-4 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 . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under chapter 41 of subtitle D of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 131. Section 56.6695-1 is added to read as follows:



§56.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under chapter 41 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 132. Section 56.6696-1 is added to read as follows:



§56.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules relating to claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under chapter 41 of subtitle D of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 133. Section 56.7701-1 is added to read as follows:



§56.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 156 --EXCISE TAX ON GREENMAIL

Par. 134. The authority citation for part 156 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 156.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 156.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 156.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 156.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 135. Section 156.6060-1 is added to read as follows:



§156.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund under section 5881 of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 136. Section 156.6107-1 is added to read as follows:



§156.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of tax under Section 5881 of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 137. Section 156.6109-1 is added to read as follows:



§156.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each tax return or claim for refund for tax under section 5881 of the Internal Revenue Code prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 138. Section 156.6694-1 is added to read as follows:



§156.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund for tax under section 5881 of the Internal Revenue Code, see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 139. Section 156.6694-2 is added to read as follows:



§156.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under section 5881 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 140. Section 156.6694-3 is added to read as follows:



§156.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under section 5881 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 141. Section 156.6694-4 is added to read as follows:



§55.6694-4 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 . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under section 5881 of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 142. Section 156.6695-1 is added to read as follows:



§156.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under section 5881 of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 143. Section 156.6696-1 is added to read as follows:



§156.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under section 5881 of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 144. Section 156.7701-1 is added to read as follows:



§156.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 157 --EXCISE TAX ON STRUCTURED SETTLEMENT FACTORING TRANSACTIONS

Par. 145. The authority citation for part 157 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 157.6060-1 also issued under 26 U.S.C. 6060(a). * * *

Section 157.6109-2 also issued under 26 U.S.C. 6109(a). * * *

Section 157.6695-1 also issued under 26 U.S.C. 6695(b). * * *

Section 157.6695-2 also issued under 26 U.S.C. 6695(g). * * *

Par. 146. Section 157.6060-1 is added to read as follows:



§157.6060-1 Reporting requirements for tax return preparers .

(a) In general . A person that employs (or engages) one or more tax return preparers to prepare a return or claim for refund for tax under section 5891 of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in §1.6060-1 of this chapter.

(b) 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. 147. Section 157.6107-1 is added to read as follows:



§157.6107-1 Tax return preparer must furnish copy of return to taxpayer and must retain a copy or record .

(a) In general . A person who is a signing tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in §1.6107-1 of this chapter.

(b) 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. 148. Section 157.6109-1 is added to read as follows:



§157.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund .

(a) In general . Each tax return or claim for refund for tax under section 5891 of the Internal Revenue Code prepared by one or more signing tax return preparers must include the identifying number of the preparer required by §1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in §1.6109-2 of this chapter.

(b) 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.

Par. 149. Section 157.6694-1 is added to read as follows:



§157.6694-1 Section 6694 penalties applicable to tax return preparer .

(a) In general . For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund for tax under section 5891 of the Internal Revenue Code see §1.6694-1 of this chapter.

(b) Effective/applicability date . Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register .

Par. 150. Section 157.6694-2 is added to read as follows:



§157.6694-2 Penalties for understatement due to an unreasonable position .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in §1.6694-2 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 151. Section 157.6694-3 is added to read as follows:



§157.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in §1.6694-3 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 152. Section 157.6694-4 is added to read as follows:



§157.6694-4 Extension of period of collection when preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters .

(a) In general . For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under section 5891 of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under §1.6694-4 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 153. Section 157.6695-1 is added to read as follows:



§157.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons .

(a) In general . A person who is a tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in §1.6695-1 of this chapter.

(b) 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. 154. Section 157.6696-1 is added to read as follows:



§157.6696-1 Claims for credit or refund by tax return preparers .

(a) In general . For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under section 5891 of the Internal Revenue Code, the rules under §1.6696-1 of this chapter will apply.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Par. 155. Section 157.7701-1 is added to read as follows:



§157.7701-1 Tax return preparer .

(a) In general . For the definition of a tax return preparer, see §301.7701-15 of this chapter.

(b) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.



PART 301 --PROCEDURE AND ADMINISTRATION

Par. 156. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 157. Section 301.7701-15 is amended to read as follows:



§301.7701-15 Tax return preparer .

(a) In general . A tax return preparer is any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code (Code).

(b) Definitions --(1) Signing tax return preparer . 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) of this chapter.

(2) Nonsigning tax return preparer --(i) In general . 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 paragraph(b)(3) of this section 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, time spent on advice that is given after events have occurred that represents less than 5 percent of the aggregate time incurred by such individual with respect to the position(s) giving rise to the understatement shall not be taken into account. Examples of nonsigning tax return preparers are tax return preparers who provide advice (written or oral) to a taxpayer (or to another tax return preparer) when that advice constitutes a substantial portion of the return within the meaning of paragraph(b)(3) of this section.

(ii) Examples . The provisions of this paragraph (b)(2) are illustrated by the following examples:

Example 1 . Attorney A, an attorney in a law firm, provides legal advice to a large corporate taxpayer regarding a completed corporate transaction. The advice provided by A is directly relevant to the determination of an entry on the taxpayer's return and this advice constitutes a substantial portion of the return. A, however, does not prepare any other portion of the taxpayer's return and is not the signing tax return preparer of this return. A is considered a tax return preparer.

Example 2 . Attorney B, an attorney in a law firm, provides legal advice to a large corporate taxpayer regarding the tax consequences of a proposed corporate transaction. Based upon this advice, the corporate taxpayer enters into the transaction. Once the transaction is completed, the corporate taxpayer does not receive any additional advice from B with respect to the transaction. B did not provide advice with respect to events that have occurred and is not considered a tax return preparer.

Example 3 . The facts are the same as Example 2 , except that Attorney B provides supplemental advice to the corporate taxpayer on a phone call after the transaction is completed. The time incurred on this supplemental advice by B represented less than 5 percent of the aggregate amount of time spent by B providing tax advice on the position. B is not considered a tax return preparer.

(3) Substantial portion . (i) Only a person who prepares all or a substantial portion of a return or claim for refund shall be considered to be a tax return preparer of the return or claim for refund. A person who renders tax advice on a position that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund will be regarded as having prepared that entry. Whether a schedule, entry, or other portion of a return or claim for refund is a substantial portion is determined based upon whether the person knows or reasonably should know that the tax attributable to the schedule, entry, or other portion of a return or claim for refund is a substantial portion of the tax required to be shown on the return or claim for refund. A single tax entry may constitute a substantial portion of the tax required to be shown on a return. Factors to consider in determining whether a schedule, entry, or other portion of a return or claim for refund is a substantial portion include but are not limited to --

(A) the size and complexity of the item relative to the taxpayer's gross income; and

(B) the size of the understatement attributable to the item compared to the taxpayer's reported tax liability.

(ii)(A) For purposes of applying the rules of paragraph (b)(3)(i) of this section to a nonsigning tax return preparer within the meaning of paragraph (b)(2) of this section only, if the schedule, entry, or other portion of the return or claim for refund involves amounts of gross income, amounts of deductions, or amounts on the basis of which credits are determined that are --

(1 ) Less than $10,000; or

(2 ) Less than $400,000 and also less than 20 percent of the gross income as shown on the return or claim for refund (or, for an individual, the individual's adjusted gross income), then the schedule or other portion is not considered to be a substantial portion.

(B) If more than one schedule, entry or other portion is involved, all schedules, entries or other portions shall be aggregated in applying this rule. This paragraph shall not apply to a signing tax return preparer within the meaning of paragraph (b)(1) of this section.

(iii) A tax return preparer with respect to one return is not considered to be a tax return preparer of another return merely because an entry or entries reported on the first return may affect an entry reported on the other return, unless the entry or entries reported on the first return are directly reflected on the other return and constitute a substantial portion of the other return. For example, the sole preparer of a partnership return of income or small business corporation income tax return is considered a tax return preparer of a partner's or a shareholder's return if the entry or entries on the partnership or small business corporation return reportable on the partner's or shareholder's return constitute a substantial portion of the partner's or shareholder's return.

(iv) Examples . The provisions of this paragraph (b)(3) are illustrated by the following examples:
Example 1 . Accountant C prepares a Form 8886, "Reportable Transaction Disclosure Statement", that is used to disclose reportable transactions. C does not prepare the tax return or advise the taxpayer regarding the tax return reporting position of the transaction to which the Form 8886 relates. The preparation of the Form 8886 is not directly relevant to the determination of the existence, characterization, or amount of an entry on a tax return or claim for refund. Rather, the Form 8886 is prepared by C to disclose a reportable transaction. C has not prepared a substantial portion of the tax return and is not considered a tax return preparer under section 6694.

Example 2 . Accountant D prepares a schedule for an individual taxpayer's Form 1040, "U.S. Individual Income Tax Return", reporting $4,000 in dividend income and gives oral or written advice about Schedule A, which results in a claim of a medical expense deduction totaling $5,000, but does not sign the tax return. D is not a tax return preparer because the total aggregate amount of the deductions is less than $10,000.

(4) Return and claim for refund --(i) Return . For purposes of this section, a return of tax is a return (including an amended or adjusted return) filed by or on behalf of a taxpayer reporting the liability of the taxpayer for tax under the Code, if the type of return is identified in published guidance in the Internal Revenue Bulletin. A return of tax also includes any information return or other document identified in published guidance in the Internal Revenue Bulletin, and that reports information that is or may be reported on another taxpayer's return under the Code if the information reported on the information return or other document constitutes a substantial portion of the taxpayer's return within the meaning of paragraph (b)(3) of this section.

(ii) Claim for refund . For purposes of this section, a claim for refund of tax includes a claim for credit against any tax that is included in published guidance in the Internal Revenue Bulletin. A claim for refund also includes a claim for payment under section 6420, 6421, or 6427.

(c) Mechanical or clerical assistance . A person who furnishes to a taxpayer or other tax return preparer sufficient information and advice so that completion of the return or claim for refund is largely a mechanical or clerical matter is considered a tax return preparer, even though that person does not actually place or review placement of information on the return or claim for refund. See also paragraph (b)(3) of this section.

(d) Qualifications . A person may be a tax return preparer without regard to educational qualifications and professional status requirements.

(e) Outside the United States . A person who prepares a return or claim for refund outside the United States is a tax return preparer, regardless of the person's nationality, residence, or the location of the person's place of business, if the person otherwise satisfies the definition of tax return preparer . Notwithstanding the provisions of §301.6109-1(g), the person shall secure an employer identification number if the person is an employer of another tax return preparer, is a partnership in which one or more of the general partners is a tax return preparer, is a firm entity in which one or more of the equity holders is a tax return preparer, or is an individual not employed by another tax return preparer.

(f) Persons who are not tax return preparers . (1) The following persons are not tax return preparers:

(i) An official or employee of the Internal Revenue Service (IRS) performing their official duties.

(ii) Any individual who provides tax assistance under a Volunteer Income Tax Assistance (VITA) program established by the IRS, but only with respect to those returns prepared as part of the VITA program.

(iii) Any organization sponsoring or administering a VITA program established by the IRS, but only with respect to that sponsorship or administration.

(iv) Any individual who provides tax counseling for the elderly under a program established pursuant to section 163 of the Revenue Act of 1978, but only with respect to those returns prepared as part of that program.

(v) Any organization sponsoring or administering a program to provide tax counseling for the elderly established pursuant to section 163 of the Revenue Act of 1978, but only with respect to that sponsorship or administration.

(vi) Any individual who provides tax assistance as part of a qualified Low-Income Taxpayer Clinic (LITC), as defined by section 7526, subject to the requirements of paragraphs (f)(2) and (3) of this section, but only with respect to those returns prepared as part of the LITC program.

(vii) Any organization that is a qualified LITC, as defined by section 7526, subject to the requirements of paragraphs (h)(2) and (3) of this section.

(viii) An individual providing only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund.

(ix) An individual preparing a return or claim for refund of a person, or an officer, a general partner, member, shareholder, or employee of a person, by whom the individual is regularly and continuously employed or compensated or in which the individual is a general partner.

(x) An individual preparing a return or claim for refund for a trust, estate, or other entity of which the person either is a fiduciary or is an officer, general partner, or employee of the fiduciary.

(xi) An individual preparing a claim for refund for a taxpayer in response to --

(A) A notice of deficiency issued to the taxpayer; or

(B) A waiver of restriction on assessment after initiation of an audit of the taxpayer or another taxpayer if a determination in the audit of the other taxpayer affects, directly or indirectly, the liability of the taxpayer for tax under subtitle A.

(xii) A person who prepares a return or claim for refund for a taxpayer with no explicit or implicit agreement for compensation, even if the person receives an insubstantial gift, return service, or favor.

(2) Paragraphs (f)(1)(vi) and (vii) of this section apply only if any assistance with a return of tax or claim for refund is directly related to a controversy with the IRS for which the qualified LITC is providing assistance, or is an ancillary part of an LITC program to inform individuals for whom English is a second language about their rights and responsibilities under the Code.

(3) Notwithstanding paragraph (f)(2) of this section, paragraphs (f)(1)(vi) and (f)(1)(vii) of this section do not apply if an LITC charges a separate fee or varies a fee based on whether the LITC provides assistance with a return of tax or claim for refund under the Code, or if the LITC charges more than a nominal fee for its services.

(4) For purposes of paragraph (f)(1)(ix) of this section, the employee of a corporation owning more than 50 percent of the voting power of another corporation, or the employee of a corporation more than 50 percent of the voting power of which is owned by another corporation, is considered the employee of the other corporation as well.

(5) For purposes of paragraph (f)(1)(x) of this section, an estate, guardianship, conservatorship, committee, or any similar arrangement for a taxpayer under a legal disability (such as a minor, an incompetent, or an infirm individual) is considered a trust or estate.

(6) Examples . The mechanical assistance exception described in paragraph (f)(1)(viii) of this section is illustrated by the following examples:

Example 1 . A reporting agent received employment tax information from a client from the client's business records. The reporting agent did not render any tax advice to the client or exercise any discretion or independent judgment on the client's underlying tax positions. The reporting agent processed the client's information, signed the return as authorized by the client pursuant to Form 8655, Reporting Agent Authorization, and filed the client's return using the information supplied by the client. The reporting agent is not a tax return preparer.

Example 2 . A reporting agent rendered tax advice to a client on determining whether its workers are employees or independent contractors for Federal tax purposes. For compensation, the reporting agent received employment tax information from the client, processed the client's information and filed the client's return using the information supplied by the client. The reporting agent is a tax return preparer.

(g) Effective/applicability date . This section is applicable to returns and claims for refund filed, and advice provided, after the date that final regulations are published in the Federal Register.

Linda E. Stiff

Deputy Commissioner for Services and Enforcement.