Letter Ruling 8034159, June 2, 1980

Uniform Issue List Information:

UIL No. 7701.00-00

Definitions


In letters dated July 6, 1979, and December 27, 1979, your authorized representative requested rulings concerning the applicability to you of provisions of the Internal Revenue Code of 1954 relating to income tax return preparers.



You have presented the following facts to us:



You are an employee of a federally chartered cooperative association of local farmers operating under the Farm Credit Act of 1971. Members of the co-op are those farmers who have previously borrowed from you and those who contemplate borrowing in the future. In connection with your employer's lending activity, it promotes and markets a computerized data processing system. Using the information submitted by its customers, this system performs a series of processing, computational, and organizational operations that result in a variety of schedules and summaries dealing with the financial results and position of the customer's operation. The final product available to the customer through the system includes:


1. A cash summary listing.


2. A detailed list of entries.


3. A general summary, providing detailed physical and dollar information as to inventories


4. An enterprise summary, providing detailed information on an entity-by-entity basis.


5. A payroll summary.


6. A tentative depreciable and other asset schedule, providing information relating to asset balances, depreciation, and investment tax credit.


7. A tax planning worksheet, summarizing year-end information pertinent to the estimation of taxable income and tax liability.


8. A tax audit listing, providing month-by-month summaries of receipts and expenses.


9. A completed Schedule F, for use in the preparation of Form 1040.


10. Form W--2, for reporting the wages and related information of employees.


11. Form 941, for reporting withheld income tax and FICA tax.


Some of this information is available monthly, some on a 10-month basis, some annually, and some on more than one of the foregoing bases.



The customers need not receive all of the above information, but are entitled to request such schedules and analyses as they feel would be useful. A standard fee is charged, and whether a customer chooses to receive a completed Schedule F, or other available information, has no effect on the fee.



Generally, you spend one-half of your time or more with respect to the system. Your responsibilities include explaining the system to potential customers, assisting existing customers in assembling and coding data for submission to the computer and miscellaneous credit and administrative functions. While you are knowledgeable in both the financial and operational aspects of farming and have acquired a relatively sophisticated knowledge of farm finance and individual income taxation, you are not an attorney or certified public accountant and do not represent yourself or anyone connected with the system to be a trained tax expert. You frequently, however, render informal advice to the customers as to tax planning. Return preparation for customers (and, in come cases, planning) is generally left to outside tax professionals. In some cases, the customers prepare their own returns. You are not assigned to the accounts of specific customers and, while a customer may deal with you on a recurring basis, he may also see other employees. You may review the schedules and summaries for business purposes and answer questions about them. You do not, however, usually review the tax-related items for tax purposes.



You have asked us to rule that you are not an income tax return preparer within the definition of section 7701(a)(36) of the Code or for the purposes of sections 6060, 6107, 6694, 6695, or 7216 of the Code.



Section 7701(a)(36) of the Code defines 'income tax return preparer' as any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by Subtitle A or any claim for refund of tax imposed by Subtitle A. The preparation of a substantial portion of a return or claim for refund is treated as if it were the preparation of such return or claim for refund. Specifically excepted from the definition of preparer are persons who merely furnish typing, reproducing, or other mechanical assistance; prepare a return or claim for refund of an employer; prepare as a fiduciary; prepare a claim for refund for a taxpayer in response to a notice of deficiency or waiver of restriction.



Under the definition provided by the Code, a person is not an income tax return preparer in the abstract; he can only be a preparer with respect to a specific return or claim for refund. Thus, the determination whether a person is a preparer can only be made in relation to the returns. In order to be a preparer under section 7701(a)(36) of the Code, and be subject to the provisions of other sections, a person (or a person in his employ) must satisfy all elements of the definition of a preparer. He must: a) prepare b) returns c) for compensation.



In order to be 'preparing,' a person cannot fall within the exception provided by section 7701(a)(36)(B)(i) of the Code relating to typing, reproducing, or mechanical assistance. In many cases, the work that you perform may well fall into this exception. However, in other cases, you may make determinations with or advise the customer which items submitted for input are includible in gross income, which are deductible, which items should be capitalized, which items qualify for investment credit, etc. While the bulk of your duties may not be considered preparation, some of your activities could be considered preparation rather than mechanical assistance. In order to determine when those activities constitute preparation of returns, the second element of the definition of preparer must be examined.



The documents being prepared must be 'returns.' A return, as defined by section 301.7701--15 of the Regulations on Procedure and Administration, is a 'return of tax filed by or on behalf of a taxpayer reporting the liability of the taxpayer under subtitle A.' However, a person who prepares a substantial portion of a return can also be a preparer even if that portion is not a complete return. Section 301.7701--15(b) of the regulations provides that whether a schedule of a return is a substantial portion is determined by comparing the length and complexity of, and tax liability or refund involved in, the return or claim for refund as a whole. A 'safe haven' rule is established under which entries which involve amounts of gross income, amounts of deduction, or amounts on the basis of which credits are determined which are less than $2,000 or less than $100,000 and also less than 20% of the gross income shown on the return are not considered to be a substantial portion of the return.



In your case, items 1 through 8 enumerated above are clearly not returns or portions of returns, although the information might be useful for return purposes. Items 10 (Form W--2) and 11 (Form 941) are specifically excluded from the definition of income tax returns by section 301.7701--15(c)(1)(ii) of the regulations. Item 9 (Schedule F), however, may be a substantial portion of a return for an individual taxpayer engaged in farming as his primary business, depending on the facts in each particular case. A determination of whether you are a preparer with respect to each Schedule F must, therefore, be made on a case-by-case basis by making the comparison outlined in section 301.7701--15(b). Thus, if you make determinations with respect to certain information presented to you, or give advice after the fact as to the tax treatment of certain items, and the particular determinations or advice constitute a substantial portion of that particular return, you will be considered a preparer with respect to that return. Conversely, if you make no determinations or give no advice with respect to a specific return, or if the determinations you do make or the advice that you give does not constitute a substantial portion of a return, you are not a preparer with respect to that return.



The preparation of the return must be 'for compensation.' In your case, nothing is paid directly for Schedule F. However, compensation is paid to your employer for the package which includes Schedule F, and you are paid for duties which include preparation of Schedule F. The fact that a relatively small amount of your time is spent in conjunction with Schedule F has no bearing on whether you might be an income tax return preparer with respect to a specific tax return which includes a Schedule F prepared by you through use of the computer service. Moreover, the fact that you do not hold yourself out as a preparer does not prevent you from being one. While in many cases the customers retain outside tax advisors who may prepare the return as a whole, you may still be a preparer with respect to that portion of the return prepared by you. More than one person can be a preparer with respect to a return.



Accordingly, you may be an income tax return preparer within the meaning of section 7701(a)(36) of the Code with respect to certain returns. If you are a preparer with respect to those returns, you may be subject to various provisions of the Code.



Section 6060 of the Code requires information returns from any person who employs an income tax return preparer. Because you are an employee, not an employer, you have no responsibility under section 6060.



Section 6107(a) of the Code requires any person who is an income tax preparer with respect to any return or claim for refund is to furnish a completed copy of such return or claim for refund to the taxpayer not later than the time such return or claim for refund is presented for such taxpayer's signature.



Section 6107(b) of the Code requires any person who is an income tax return preparer with respect to a return or claim for refund to retain a completed copy of such return or claim for refund, or retain, on a list, the name and taxpayer identification number of the taxpayer.



Section 1.6107--1(c) of the Income Tax Regulations provides that the person who employs one or more other preparers shall be considered to be the sole income tax return preparer for purposes of section 6107 of the Code. Because you are an employee, you have no responsibility under section 6107.



Section 6694 of the Code imposes civil penalties against income tax preparers who, on a return or claim for refund, willfully understate a tax liability or negligently or intentionally disregard rules and regulations.



Section 6695 of the Code imposes civil penalties upon any person who is an income tax return preparer with respect to a claim for refund who:


a) fails to comply with section 6107(a)


b) fails to sign such return or claim for refund


c) fails to furnish his identifying number


d) fails to comply with section 6107(b)


e) fails to make the information return provided for by section 6060


f) endorses or otherwise negotiates a refund check



Because you may be an income tax return preparer with respect to certain returns, you may be subject to the penalties imposed by sections 6694(a) and 6694(b) of the Code with respect to specific advice given or determinations made in those cases where the advice or determinations constitute a substantial portion of the return. Because sections 6060 and 6107 do not apply to you, you are not liable to the penalties imposed by sections 6695(a), 6695(d), and 6695(e). You are also not subject to the penalties imposed by sections 6695(b) and 6695(c). Under section 1.6695--1(b) of the Income Tax Regulations, an individual who is an income tax return preparer with respect to a return shall manually sign the return in the appropriate space provided on the return after it is completed and before it is presented to the taxpayer for signature. There is no space on Schedule F for signature, and the completed Schedule is not presented for signature, but for attachment to Form 1040. Therefore, you do not have to sign Schedule F or the related Form 1040 in those cases in which you are deemed to have prepared a substantial portion of the return. Because you do not have to sign the return, you need not furnish your identifying number under section 6109(a)(4) of the Code and you are not subject to the penalty imposed by section 6695(c). However, you are subject to the penalty imposed by section 6695(f) relating to endorsement of refund checks.



Section 7216 of the Code imposes criminal penalties on any person who is engaged in the business of preparing or providing services in connection with the preparation of returns, claims for refund, or declarations of estimated tax, or any person who for compensation prepares any such return or declaration for any other person, and who discloses any information furnished to him for, or in connection with the preparation of any such return or declaration, or uses any such information for any purpose other than to prepare or assist in preparing any such return or declaration.



Because your activities, even in those cases in which you are not considered to be a preparer, constitute providing services in connection with the preparation of returns, you are subject to the criminal penalties imposed by section 7216 of the Code.



Pursuant to the power of attorney on file in our office, a copy of this letter is being sent to your authorized representatives.



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