Rev. Rul. 80-263

Rev. Rul. 80-263 1, 1980-2 CB 376


Section 6694.--Understatement of Taxpayer's Liability by Income Tax Return Preparer

26 CFR 1.6694-1: Understatement of taxpayer's liability by income tax return preparer.


A return peparer failed to list all income shown on a taxpayer's Forms 1099, incorrectly totaled itemized deductions, and used the wrong tax table. Even though the preparer's normal office practice was to review the taxpayer-provided information, check the return for completeness, and check the tax computation, there was a pattern of errors on the return, and the penalty unde section 6694(a) of the Code applies.


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ISSUE


Does the penalty for negligent disregard of rules and regulations under section 6694(a) of the Internal Revenue Code apply in the following situation?


FACTS


The taxpayer furnished the income tax return preparer with all of the Forms 1099-INT, Statement for Recipients of Interest Income, and Forms 1099-DIV, Statement for Recipients of Dividends and Distributions, that the taxpayer had received. The preparer failed to list the amount shown on one of the Forms 1099-INT and on one of the Forms 1099-DIV on Schedule B, Interest and Dividend Income, of Form 1040, U.S. Individual Income Tax Return. Also, the preparer made an error in totalling the amounts of itemized deductions on Schedule A, Itemized Deductions, and used the wrong tax table in determining the tax. Upon examination of the return the Internal Revenue Service determined that these errors resulted in an understatement of liability. None of these understatements was substantial in amount.


The preparer stated that these errors were merely oversights and demonstrated that the preparer's normal practice was to review the information provided by the taxpayer, review the return to check for completeness, and check the computation of the tax.


LAW AND ANALYSIS


Section 6694(a) of the Code provides that if any part of any understatement of liability with respect to any return is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return, such person shall pay a penalty of $100 with respect to such return.


Rev. Proc. 80-40, page, this Bulletin, sets forth guidelines for the application of the penalty under section 6694(a) of the Code for the negligent disregard of rules and regulations by an income tax return preparer. The revenue procedure indicates that the Service will consider the nature of the error causing the understatement, the frequency of the errors and the materiality of the errors. The revenue procedure also provides that where all the relevant facts and circumstances suggest that the return was negligently prepared, the penalty will not be asserted if (1) the preparer's normal office practice, when considered together with other facts and circumstances, indicated that the error in question would rarely occur and (2) the normal office practice was followed in preparing the return in question.


Although each error, if the sole error on the return, would not result in the imposition of the penalty, all of the errors taken together suggest that the return was negligently prepared. In addition, although the preparer alleged that the preparer's normal office practice, considered with other facts and circumstances, indicated that the errors in question would rarely occur, in this situation the normal office practice of the preparer will not relieve the preparer from the penalty because there is a pattern of errors on the return.


HOLDING


The penalty for negligent disregard of rules or regulations applies.


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1 Also released as New Release IR-80-94 dated Sept. 15, 1980.