Letter Ruling 7813019, December 27, 1977

Uniform Issue List Information:

UIL No. 6694.00-00

Understatement of taxpayer's liability by income tax return preparer


This is in reply to your letter of May 24, 1977, requesting a ruling concerning whether Corp. A, an income tax return preparer, would be liable for the penalty under section 6694 of the Internal Revenue Code of 1954 for negligent and/or willful disregard of tax rules and regulations under the following circumstances.



On several occasions the question of the proper treatment of 'family trusts' has been at issue. Clients have informed Corp. A that they (or their outside professional advisers, attorney or certified public accountant) believe such trusts to be legal. Corp. A believes that such trust are not legal based on Rev. Rul. 75--257, 1975--2 C.B. 251 and Rev. Rul. 75--258, 1975--2 C.B. 503.



Section 6694(a) of the Code imposes a penalty on an income tax return preparer who understates a taxpayer's liability by negligent or intentional disregard of rules and regulations. Subsection (by imposes a penalty on an income tax return preparer who willfully attempts to understate a tax liability.



Section 1.6694--1(a) of the Income Tax Regulations provides that the penalty under section 6694(a) of the Code applies where an income tax return preparer has intentionally or negligently disregarded the rules and regulations resulting in an understatement of a taxpayer's tax liability.



Section 1.6694--1(a)(4) of the regulations provides that the conduct of an income tax return preparer is not considered a negligent or intentional disregard of rules and regulations if the preparer in good faith disagrees with the legal validity of a regulation or published ruling. However, for purposes of this paragraph (a), the view of the taxpayer concerning a rule or regulation is not material.



Section 1.6694--1(a)(5) of the regulations provides that the income tax return preparer bears the burden of proof that the preparer did not intentionally or negligently disregarded rules and regulations.



Section 1.6694--1(b) of the regulations provides that the penalty for willful understatement of tax liability by an income tax return preparer under section 6694(b) of the Code applies in the case where a preparer disregards facts supplied by the taxpayer or others in an attempt to wrongfully reduce the taxpayer's tax liability. An example in the regulation is where a taxpayer states to a preparer that the taxpayer has only two dependents, and the preparer reports six dependents on the return. The preparer would be subject to the penalty.



Under section 7427 of the Code, the Internal Revenue Service bears the burden of proof on the issue whether the preparer has willfully attempted to understate the liability for tax within the meaning of section 6694(b).



In the situation presented, it is the taxpayer or the taxpayer's outside professional adviser who disagrees with the Service's published position. The income tax return preparer, however, agrees with the Service's position.



Section 6694 of the Code applies to an income tax return preparer who negligently or intentionally disregards a rule or regulation. If a preparer believes a ruling or regulation to be correct, the view of the taxpayer or the taxpayer's outside adviser concerning such rule or regulation is immaterial.



Accordingly, the penalties under section 6694, for the negligent and/or willful disregard of the tax rules or regulations may be imposed if an income tax return preparer does not follow a rule or regulation that the preparer believes is valid because the taxpayer or the taxpayer's outside professional adviser believe the rule or regulation is not valid.



(Signed) Richard L. Crain
Chief, Wage, Excise and Administrative Provisions Branch