GCM 38914, Date Numbered: August 5, 1982

17 TN 661GCM 37671



Internal Control Number: CC:GL-148-80

Br2:WJYork


6501.00-00

6694.00-00

6696.00-00


TO: M. EDDIE HEIRONIMUS

Assistant Commissioner (Returns and

Information Processing)

In re:

The Time at which the Three Year Statute of Limitations

on the Assessment of Return Preparer Penalties

Begins to Run


The purpose of this memorandum is to reconsider our advice to you concerning tax return preparer penalties, and the statute of limitations on their assessment.ISSUES


(1) What is the commencement date of the three-year statute of limitations on the assessment of tax return preparer negligence penalties under I.R.C. s 6694(a) and 6695 when a return is filed prior to the statutory due date?


(2) May the statute of limitations on assessment of these return preparer penalties be extended under section 6501(c)(4)?


(3) May the filing of a correct second return before the close of the statutory due date of the first return, serve to "cure" the deficiencies of the first return and preclude the assertion of preparer penalties?


(4) May the Service legally assess preparer penalties prior to the statutory due date of the subject return?


CONCLUSIONS


(1) The three year statute of limitations for the assessment of return preparer penalties begins to run on the statutory due date of the return in the case of an early-filed return, and not on the actual date the return is filed. GCM 37671 revoked.


(2) The statute of limitations on the assessment of return preparer penalties may be extended pursuant to section 6501(c)(4).


(3) The filing of a second return prior to the statutory due date of the first return will serve to cure preparer deficiencies on a prior return. O.M. 18960 reinstated. O.M. 19000 revoked. G.C.M. 37680 revoked in part. Whether something less than a complete return may be accepted to correct preparer deficiencies, is a matter of policy for the Commissioner to determine.


(4) The Service may assess preparer penalties upon receipt of a deficient return, despite the fact that such receipt may be prior to the return's statutory due date. G.C.M. 37680 modified in part. Such assessments are, of course, subject to administrative change--including abatement--upon the Service's finding that they are not warranted. Such a finding may be based on the "cure" of preparer deficiencies by means of a subsequent timely filed return or other document the Commissioner may deem acceptable.


FACTS


The above issues were the subject of GCM 37671, Assessment of Penalty Under Section 6694(a), I-148-78, Sep. 13, 1978; G.C.M. 37680, Guidance on Tax Return Preparers, GL-222-78, Sep. 15, 1978; and O.M. 19000, Amended Return Preparer's Information, I-137-77, Sep. 22, 1978, revoking O.M. 18960, Amended Return Preparer's Information, I-137-77, June 15, 1978. The cited memoranda came to the conclusion that by virtue of section 6696, the three-year period of limitations for the assessment of return preparer penalties under sections 6694(a) and 6695 begins to run on the actual filing date of the subject return, and is not subject to the provisions of section 6501. G.C.M. 37671 at 2-3. Accordingly, it was concluded that the period of limitations on the assessment of these penalties may not be extended under section 6501(c)(4), and revocation of Rev. Rul. 78-245, 1978-1 C.B. 435 (which holds to the contrary) was recommended. G.C.M. 37671 at 4. A corollary to these conclusions was that a preparer violation may not be corrected by the filing of a second timely return, and this conclusion was announced in G.C.M. 37680 at 3, and in O.M. 19000, which revoked O.M. 18960--the latter memorandum having come to the opposite conclusion. G.C.M. 37680 also concluded that the Service was authorized to assess return preparer penalties upon the receipt of a deficient return, prior to the statutory due date of the return. This conclusion was based on the idea that the period of limitations for assessment of these penalties begins on the date the return is actually filed, in the case of early returns. G.C.M. 37680 at 2.


Upon reconsideration of these matters, it is our conclusion that the prior memoranda on the subject issues should be revoked or substantially modified. This will aid the formation of new Service positions in this area. We are of the opinion that on balance, our positions adopted in the present memorandum better reconcile prior law and the legislative intent behind the tax return preparer legislation, than our earlier positions.


ANALYSIS


We think that G.C.M. 37671, Assessment of Penalty under Section 6694(a), I-148-78, Sep. 13, 1978, is incorrect in concluding that because of I.R.C. s 6696(d), the period of limitations for the assessment of return preparer penalties under sections 6694(a) and 6695 expires three years from the date an early return is actually filed rather than three years from the statutory due date of the return.


Section 6501(a) provides in part that, except as otherwise provided in that section, the amount of any tax imposed by Title 26 shall be assessed within three years after the return was filed (whether or not such return was filed on or after the date prescribed) and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period.


Section 6501(b)(1) provides in part that, for purposes of that section, a return of tax imposed by Title 26 filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be considered filed on such last day.


Treas. Reg. s 301.6501(b)-1(a) states:


any return, other than a return of tax referred to in paragraph (b) of this section [dealing with returns of social security tax and of income tax withholding], filed before the last day prescribed by law or regulations for the filing thereof (determined without regard to any extension of time for filing) shall be considered as filed on such last day.


Section 6671(a) provides in part that, except as otherwise provided, any reference in Title 26 to "tax" imposed by that title shall be deemed also to refer to the penalties and liabilities provided in subchapter B of chapter 68.


Section 6696(d)(1) provides, in part, that the amount of any penalty under section 6694(a) or under section 6695 shall be assessed within three years after the return or claim for refund with respect to which the penalty is assessed was filed, and no proceeding to collect without assessment shall be begun after the expiration of such period.


The problem centers around the meaning of the word "filed" as used in section 6696(d)(1). If "filed" is construed to mean actually filed, then the conclusion that the three year period of limitations runs from the actual filing date, is correct. If "filed" is construed to have the same meaning as that in section 6501, then the period of limitations for penalties under sections 6694(a) and 6695 runs from the statutory due date of the return, regardless of whether it is an early-filed return.


The word "filed" as used by section 6696(d)(1), we now conclude, should be construed in light of section 6501. Section 6501(a) provides that the amount of any "tax" imposed by Title 26 shall be assessed within three years after the return is filed. Section 6501(a) applies to the tax return preparer penalties imposed by sections 6694(a) and 6695 because section 6671(a) states that any reference in Title 26 to "tax" shall be deemed also to refer to the penalties provided in the subchapter that includes sections 6694(a) and 6695.


In applying section 6501(a), section 6501(b) provides that a return filed before the prescribed filing date shall be considered as filed on such filing date. Thus, section 6501 provides that the penalties under sections 6694(a) and 6695 must be assessed within three years from the prescribed filing date when a return is filed before that date.


Treas. Reg. s 301.6501(b)-1 also provides that, for purposes of section 6696(d)(1), returns filed before the due date are deemed filed on the due date. This regulation applies to any return filed before the last day prescribed by law and is not limited to returns filed under any particular section of the Code.


Because Treas. Reg. s 301.6501(b)-1 applies to all Code sections for purposes of determining the period of limitations and is a regulation of long standing, we assume that Congress, by not placing the word "actually" before "filed" in section 6696(d)(1), intended to have the rule contained in Treas. Reg. s 301.6501(b)-1 apply to section 6696(d)(1). This interpretation is in accord with accepted principles of statutory construction. 2A C. Sands, Statutes and Statutory Construction, s 51.02 (1973).


Reading section 6501(b)(1) into section 6696(d)(1) is necessitated by the legislative history of these two provisions. The underlying committee reports for section 6696(d)(1) merely state:


While the three-year statute of limitations is to apply to the assessment of the penalty for negligent or intentional disregard of rules or regulations, no statute of limitations is to apply to the willful understatement penalty. [Emphasis added].


S. Rep. No. 94-938, 94th Cong., 2nd Sess, 356 (1976); H.R. Rep. No. 94-658, 94th Cong., 1st Sess. 279 (1976). It appears that the existing method of regulating income tax return preparers that was eventually passed as H.R. 10612, 94th Congress, was originally introduced as H.R. 7064, 92nd Congress, on April 16, 1973. This bill did not have any provision that paralleled present section 6696(d)(1). On April 30, 1973 the Department of the Treasury published "Proposals for Tax Change." Referring to the preparer penalties, this report stated:


In general, the period of limitation for assessment will expire three years after the time the return or claim for refund, with respect to which the penalty is imposed, was filed. However, the unlimited period under section 6501(c)(2) of the Internal Revenue Code for assessment in the case of a willful attempt to evade or defeat a tax will apply to the $500 penalty assessed for willful attempts to evade tax. (By reason of section 6671(a) of the Internal Revenue Code, the reference to "tax" in section 6501(c)(2) will refer to such penalty.)


Proposals For Tax Change, Apr. 30, 1973, p. 157. It is our belief that section 6696(d)(1) resulted from this recommendation. There was no forerunner of section 6696(d)(1) until this time, yet the wording of this recommendation and the provision as finally enacted are too similar to be mere coincidence. It is clear that the main thrust of the recommendation is that there should be no statute of limitations for "willful understatement of liability" under section 6694(b). The direct reference to sections 6501(c)(2) and 6671(a) manifests the intention that the normal three year assessment period would apply to section 6694(a) and 6695 penalties. It is our belief that this is equally true under section 6696(d)(1).


The legislative history of section 6501(b)(1) indicates that there is no incongruity in reading that section into "was filed" in section 6696(d)(1). Section 6501(b)(1) was originally passed as section 275(c) of the Revenue Act of 1934. This section was enacted to relieve the administrative burden on the Service, to keep track of the date each was filed for statute of limitations purposes. In the report of the Committee on Ways and Means that dealt with the Revenue Act of 1934, it was stated:


The present law imposes upon the government the burden of keeping a record of the date of the expiration of the period of assessment in each separate return. Inasmuch as many returns are filed before the date prescribed by law it is necessary for the government to maintain an accurate record of expiration in order to prevent the loss of revenue. The change in subsection (c) eliminates a substantial portion of this burden by providing that the beginning of the period for assessment in all cases shall be the last day prescribed by law for filing of the return, regardless of the fact that the return may be filed before such date.


H.R. Rep. No. 704, 73d. Cong., 2d, Sess; 1939-1 C.B. (Part 2) 580.


This underlying rationale of section 6501(b)(1) certainly applies to those returns with respect to which section 6694(a) or 6695 penalties are assessed. The Service should not be required to keep track of when the return was actually filed for purposes of the preparer penalties, when the return is deemed filed on the due date for other purposes. Furthermore, it is entirely possible to have a situation where there is a prepared return, yet the preparer did not satisfy the disclosure requirements of section 6695. From the face of the return, the Service could not tell it was "prepared." The only time this would be discovered by the Service is in an audit examination. The audit examination, however, might occur after three years from the date the return was actually filed, but before three years from the last day prescribed for filing the return. In such an instance, under our prior opinion, assessment of the penalties would be barred.


Furthermore, a return may have been the subject of an extension of the statutory period on assessment by agreement under section 6501(c)(4), prior to the final determination and assessment of return preparer penalties. We are informed that such may be the rule rather than the exception in cases involving prepared returns in tax shelter investigations. Thus, there is an administrative imperative for having the authority to consensually extend the statute of limitations for the assessment of preparer penalties under section 6694 and 6695. Therefore, G.C.M. 37671, Assessment of Penalty Under Section 6694(a), I- 148-78, Sep. 13, 1978, is hereby revoked.


Note that the consensual extension of the statute of limitations for the assessment of preparer penalties, must be entered into by the preparer and the Service. It is our opinion that a consent entered into by the taxpayer would not have the effect of extending the period of limitations with respect to preparers who are not parties to such a consent.


Contemporaneously with the issuance of G.C.M. 37671, this office issued G.C.M. 37680, Guidance on Tax Return Preparers, GL-222-78, Sep. 15, 1978. In the latter G.C.M., we took the position that the Service may legally assess preparer penalties prior to the statutory due date of the subject return. We reaffirm that conclusion, but for different reasons than were stated in G.C.M. 37680.


Upon reconsideration of our prior opinion, we now conclude that the Service may assess return preparer penalties upon the receipt of a deficient return and without having to wait until the return's statutory due date. Previously we had taken the contrary position:


Section 6501(a) provides, in part, that the amount of any tax (and return preparer penalties are assessed and collected as taxes pursuant to section 6671(a)) imposed by Title 26 'shall be assessed within three years after the return is filed....' This statutory language implies that the assessment of tax must be made after the return is filed. Because section 6501(b)(1) provides that for purposes of section 6501 a tax return filed before the due date shall be considered as filed on the due date, it follows that penalties attributable to early-filed returns cannot be properly assessed until the deemed filing date, i.e., the due date.


Since section 6501 applies to "any tax imposed by this title," this statement leads logically to the conclusion that no assessment of any tax, even if the tax is shown to be due on a return, may be made before the statutory due date and that any assessment so made would be premature and void. Clearly such a conclusion would endanger the longstanding Service practice of assessing taxes shown due on returns upon receipt.


In our opinion, the Commissioner is authorized under section 6201(a)(1) to assess "all taxes determined by the taxpayer or by the Secretary as to which returns...are made...," and to make such assessment upon receipt of the return. Section 6501 merely establishes a period of limitations beyond which the Commissioner is barred from assessing a tax. Section 6501 does not purport to establish a starting date for assessments, but merely an ending date.


The date on which a return is deemed filed under section 6501(b)(1) is explicitly stated to be "[f]or purposes of this section"; hence it is not for purposes of section 6201. The language in section 6501(b)(1) cannot restrict or limit the Service's assessment authority. It is relevant only to the starting point for the running of limitations on assessment.


We think that our interpretation is consistent with the legislative intent behind the forerunner statute of present section 6501(b)(1). Cases on "premature assessment" are inapposite in the present context, as they are concerned with assessments of deficiencies mistakenly made during the period prohibiting such assessments. The contrary interpretation would lead to the result that the Government could not pay refunds until its books could be credited with the tax paid in i.e. after the statutory due date. Such a limitation is administratively intolerable, and would not be in accord with present Service practice.


The code provisions for the assessment of deficiencies do not apply to preparer penalties under section 6694(a) and 6695, as penalties are imposed under Chapter 68 of the Code, which is not made subject to the definition of a deficiency in section 6211. Thus, these penalties may be assessed upon the receipt of a return. G.C.M. 37680, Guidance on Tax Return Preparers, GL-222-78, Sep. 15, 1978, is hereby modified in part.


G.C.M. 37680 also concluded that as to preparer disclosure requirements, deficiencies and omissions relating to an early return may not be corrected by the timely filing of a second return (such a subsequent timely return is termed a "superseding return" in IR Manual s 4121.2(3)). This conclusion is a corollary to the position that the statute of limitations on assessment of the preparer penalties begins to run on the actual filing date of a return. The idea was to fix the preparer's liability as of such date. By having a period of limitations that was absolute and incapable of extension by consent, the Service would be spared the administrative problems that would arise were it required to take the information on timely superseding returns, into account. The publication of this position in G.C.M. 37680 necessitated the revocation of O.M. 18960, Amended Return Preparer's Information, I-137-77, June 15, 1978, which revocation was accomplished by means of O. M. 19000, Amended Return Preparer's Information, I- 137-77, Sep. 22, 1978. We are now of the opinion that the position taken in O.M. 18960 is the better view. Therefore, we revoke G.C.M. 37680 in part, revoke O.M. 19000, and reinstate O.M. 18960.


We believe that a preparer can correct deficiencies through the use of a subsequent timely return. We are led to this conclusion by the Supreme Court's holding in Haggar Co. v. Helvering, 389 U.S. 308 (1940). In Haggar, the Court held that a second return filed prior to the return filing due date should be deemed the "first return" for purposes of electing the declared value of the capital stock of the corporation. The Commissioner argued that a "first return" consisted solely of the return first filed, and could not include the timely filed amendment. The Court rejected this position. While the Court's decision turned on the purpose of section 215(f) of the National Industrial Recovery Act, we think that the rationale of Haggar is applicable to instances involving timely filed amended returns. Thus, we conclude, Haggar would cause a timely amended return to be treated as the original return or as a part of the original return. See G.C.M. 36932, * * *, I-258- 76, Nov. 29, 1976, P. 8, N. 1. Our opinion is supported by Treas. Reg. s 31.6011(a)-7(a), which states in part that a "supplemental" return "...shall constitute a part of the return which it supplements."


We believe that the language "Any person who is an income tax return preparer with respect to any return..." in the relevant preparer provisions was enacted to ensure that each preparer would be held responsible for those returns that he/she prepared. The General Explanation of the Tax Reform Act of 1976 states at page 346:


Under prior law, it was difficult for the I.R.S. to detect any individual case of improper preparation because the tax return preparer was not required to sign the return. Thus, the I.R.S. had no way of knowing whether the return was prepared by the taxpayer or by a preparer who could be engaging in abusive practices involving a number of returns.


The clear implication is that the purpose of sections 6695(a), (b), and (c) is to aid the Service in connecting the returns with the preparer. Because the rationale of Haggar is, in our opinion, applicable to the instant situation, and because the purpose of the preparer disclosure provisions would be furthered by allowing timely amendment of the subject returns, it is our position that the Service should accept subsequent but timely filed returns that correct preparer deficiencies. The preceding discussion and O.M. 18960 dealt with the return preparer disclosure penalties imposed under sections 6695(b) and (c) (failure to sign return or furnish identifying number). We also think that the timely filing of a correct second return would necessarily cure any "understatement of taxpayer's liability" and thereby affect the preparer's potential penalty liability under section 6694 as well. Such a result flows from the statutory mandate that the section 6694 penalties are to be abated where there is no understatement of the taxpayer's liability. Section 6694(d). It is clear that an understatement of liability may be cured by a timely filed amended return. It would follow, therefore, that no section 6694 penalty would lie.


As in Haggar, the subsequent return must be a timely one: it must be filed prior to the expiration of the time for filing the original return. The Supreme Court in J. E. Riley Co. v. Commissioner, 314 U.S. 55 (1940), held that an "amended return" filed after the due date of the return was not a "first return" for purposes of section 114(b)(4) of the Revenue Act of 1934. It distinguished Haggar on the grounds that an "amended return" filed subsequent to the due date was outside the period of legislative grace. Similarly, the Court in Scaife Co. v. Commissioner, 314 U.S. 459 (1941), held that a "first return" cannot be corrected by an "amended return" filed after the due date but within the time an extension might have been granted. The rationale of Riley and Scaife is applicable to "amended returns" filed for the purpose of correcting preparer deficiencies. Thus, the Service need not accept those "amended returns" filed after the due date. However, please note that it is within the Commissioner's discretion to accept such amended returns, and to treat them as "first" returns. See O.M. 18960, at 3-4.


The question may now arise whether the preparer penalty liabilities on a deficient return may be avoided by means of a list or other document filed by the preparer prior to the return filing due date. 1 It is our opinion that the Service may in its discretion accept something less than a superseding, fully executed return, although it may not be legally required to do so. The obligation imposed on the Service to accept the return in Haggar related to a true, timely filed return. A true return must be signed by the taxpayer pursuant to Treas. Reg. s 1.6061-1(a), and manually signed by the preparer pursuant to Treas. Reg. s 1.6695-1(b)(1). It follows that while the Commissioner may accept a letter or list, the Commissioner is required to accept only a true and timely return.


We have been informed that under current procedures, the assessment of return preparer penalties does not occur until after the return's due date in any case. Therefore, the "problem" of "premature" assessments of these liabilities should not arise in actual practice. Further, by the time of assessment, the filing of a timely "curing" return should be known to the Service and taken into account. Of course, assessments of these preparer penalties would always be capable of subsequent adjustment by the Service, for legal or administrative reasons.


We reiterate that O.M. 19000 is revoked, G.C.M. 37671 is revoked, G.C.M. 37680 is revoked in part and modified in part, and O.M. 18960 is reinstated.


KENNETH W. GIDEON

Chief Counsel

By: BENJAMIN C. SANCHEZ

Director

General Litigation Division