Letter Ruling 7902033, October 11, 1978

Uniform Issue List Information:

UIL No. 6694.00-00

Understatement of taxpayer's liability by income tax return preparer

UIL No. 6695.00-00

Other assessable penalties with respect to the preparation of income tax returns for other persons

UIL No. 7701.00-00

Definitions


This is in reply to your letter dated June 26, 1978, requesting a ruling concerning the applicability of the signature requirement of section 6695(b) of the Internal Revenue Code of 1954 to Certified Public Accountants (CPA's) employed by the taxpayer, based on several examples.



In all examples the following facts apply:



A client's tax department will prepare a complete income tax return. All the positions taken on the return are separately researched by client's tax department personnel and the final decision as to the treatment on the return is that of the client's tax director. All detailed support for the information reflected on the return is maintained by the tax department and in normal books and records.



Example I


Senior management of the client wants the return reviewed by a Certified Public Accountant (CPA) employed by the taxpayer to obtain some assurance that all tax planning opportunities have been explored. Management does not deem the CAP's signature on the return as preparer does not deem the CPA's signature that the CPA not sign the tax return. The review by the CPA consists of the following:


1) Reference major items of income and deductions to the client's books and records.


2) Check to see that all required elections have been made, are timely and in the required form.


3) Determine that special information required to be included in the return is adequate, complete and sets forth properly in all material respects (for example, the information required as a result of a nontaxable reorganization).


4) Compare the tax return to the previous year's tax return and account for timing differences.


5) Reconcile tax return income to book income and account for variations between book and tax accounting.


6) Review Board of Directors minutes for matters of tax significance.


7) Determine that carryforward items from prior revenue agents reports and prior tax returns have been reflected in the tax return where applicable.


8) Determine that the return is complete on its face, internally consistent and that the tax due has been correctly computed based on the information in the return.



Is the CPA deemed a preparer required to sign the return if:


a) The review of the return by the CPA results in no changes to the tax return?


b) The review of the return by the CPA results in an alternative method for treating a particular significant item? The tax effect of this alternative treatment will exceed $100,000. The CPA presents this alternative treatment to the client's tax department. After confirming the reasonableness of, and the technical support for, the treatment through its own research, the client's tax director adopts the CPA's position and so files the return.



Example II


The CPA is not requested to review the entire income tax return but is requested to review certain portions of the information reflected on the return. For example, the client wants the CPA to review the election to adopt the LIFO method of inventory, the documentation and information included in the return to support a nontaxable reorganization that took place during the year and the treatment in the return of certain compensation arrangements with executives of the client. The dollar tax effect of each of these items is substantial.



Is the CPA required to sign the return if:


a) The review of the items resulted in no changes being made to the tax return?


b) The review resulted in at least one recommendation which would reduce income tax payable by more than $100,000? After the client's tax personnel researched the recommendation, it agreed and reflected the change on its tax return.



Example III


The CPA is not requested to perform a review of the income tax return. However, during the year the client had sold one of its major subsidiaries and has asked the CPA to prepare a tax basis study and determine the gain to be reported on the return. This gain will be the single most significant item in the return. However, the return contained other significant transactions which the CPA had not been requested to review. The basis study prepared by the CPA was reviewed by the client's corporate tax department before the information was reflected in the client's return.



Is the CPA required to sign the tax return?



Example IV


The CPA is not requested to review the client's income tax return. During the year in question, however, the CPA was asked to review the client's computation of its deduction using the LIFO method of valuing inventory which the client would adopt in filing its return. As the result of the review suggestions were made which could increase the value of the inventory by more than $300,000.



During the year, Law firm, A was requested to review the client's manner of determining its foreign tax credit. As a result of suggestions made by A, the amount of the foreign tax credit to be claimed on the return will be increased by more than $200,000.



During the year, Law firm B was requested to review the client's deferred compensation arrangements with its executives. As a result of suggestions made by B as to the interpretation of the arrangements the client will deduct on its return additional compensation of $200,000 more than it originally had intended.



Also during the year the client engaged Law firm C to review its manner of determining the lives of certain equipment used in its plants. As the result of recommendations made by C the depreciation to be claimed on its tax return on this equipment will be increased by more than $150,000.



Before adopting any of the above recommendations the client performed its own research and the final decision was the responsibility of the client's tax director. The client does not want any of its professional advisers to sign the return.


a) Must the CPA, A, B and C, or any of them sign the tax return?



Under section 1.6695--1(b) of the Income Tax Regulations, a person who is an income tax return preparer with respect to any return of tax or claim for refund under subtitle A of the Internal Revenue Code of 1954 shall manually sign the return or claim for refund. Section 1.6695--1(b)(5) provides that a person who is an income tax return preparer solely by reason of section 301.7701--15(a)(2) and (b) on account of having given advice on specific issues of law, is not required to manually sign the return.



Section 301.7701--15(a) of the Regulations on Procedure and Administration provides that an income tax return preparer is any person who prepares for compensation, or who employs or engages one or more persons to prepare for compensation, other than for the person, all or a substantial portion of any return of tax or claim for refund of tax under subtitle A of the Code.



Under section 301.7701--15(a)(1) of the regulations, a person who furnishes to a taxpayer or other preparer sufficient information and advice so that completion of the return or claim for refund is largely a mechanical or clerical matter is considered an income 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) of this section. Further, section 301.7701--15(a)(2) provides that a person who only gives advice on specific issues of law shall not be considered an income tax return preparer, unless--


(i) The advice is given with respect to events which have occurred at the time the advice is rendered and is not given with respect to the consequences of contemplated action; and


(ii) The advice is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund. For example, if a lawyer gives an opinion on a transaction which a corporation has consummated, solely to satisfy an accountant (not at the time a preparer of the corporation's return) who is attempting to determine whether the reserve for taxes set forth in the corporation's financial statement is reasonable, the lawyer shall not be considered a tax return preparer solely by reason of rendering such opinion.



'Substantial preparation', is defined in section 301.7701--15(b) of the regulations as follows. Only a person (or persons acting in concert) who prepares all or a substantial portion of a return or claim for refund shall be considered to be a preparer (or preparers) of the return or claim for refund. A person who renders advice which 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 by comparing the length and complexity of, and the tax liability or refund involved in, that portion to the length and complexity of, and tax liability or refund involved in, the return or claim for refund as a whole.



For purposes of applying the rule of paragraph (b)(1) of this section, 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 which are--


(i) Less than $2,000; or


(ii) Less than $100,000, and also less than 20% of the gross income (or adjusted gross income if the taxpayer is an individual) as shown on the return or claim for refund,


then the schedule or other portion is not considered to be a substantial portion. If more than one schedule, entry or other portion is involved, they shall be aggregated in applying the rule of this subparagraph (2). Thus, if a person, for an individual taxpayer's return, prepares a schedule for dividend income which totals $1,500 and gives advice making him a preparer of a schedule of medical expenses which results in a deduction for medical expenses of $1,500, the person is not a preparer if the taxpayer's adjusted gross income shown on the return is more than $15,000. This subparagraph shall not apply to a person who prepares all of a return or claim for refund.



A preparer of a return is not considered to be a preparer of another return merely because an entry or entries reported on the return may affect an entry reported on the other return, unless the entry or entries reported on the prepared 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 a small business corporation income tax return is considered a 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.



The question raised is whether the CPA in any of the examples is deemed to be an income tax return preparer required to sign the income tax return for the year involved for which the service was rendered. The facts with respect to each example indicate the extent of review of the income tax return by the CPA affecting an entry on the return, or any recommendation furnished by the CPA affecting an entry on the return or to be entered on the return. However, the client's tax director retained the right to make the final decision as to the treatment of the item on the return. Accordingly, the CPA is not deemed to be the income tax preparer required to manually sign the client's return.



The facts in all the examples indicate that the review by the CPA would represent a substantial protion of the return, as defined in section 301.7701--15(b) of the regulations. The CPA, while not required to manually sign the return under the facts and circumstances stated above, is an income tax return preparer, within the purview of section 301.7701--15(a)(2) of the regulations because advice given by the CPA was with respect to events which had occurred at the time such advice was rendered, which was directly relevant to the determination of the existence, characterization, or amount of an entry on the return. Therefore, the CPA may be subject to the penalties under section 6694 for the negligent or intentional disregard of rules and regulations or willful understatement of tax liability.



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