Rev. Rul. 80-264

. Rul. 80-264 1, 1980-2 CB 377


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 preparer who failed to report a minimum tax liability showed that normal office practice, when taken together with other factors, indicated that the minimum tax error would rarely occur and that normal office practice was followed in preparing the return. The preparer was not liable for the negligence penalty under section 6694(a) of the Code. Rev. Rul. 80-28 distinguished.


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ISSUE


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


FACTS


An income tax return preparer failed to report a substantial minimum tax liability resulting from a net capital gain deduction shown on the individual taxpayer's 1978 return. This was the only error on the return. The preparer agreed that there was an understatement on the return and explained that the failure to report the minimum tax was due to an oversight. To show that the preparer's normal office practice was to correctly apply the minimum tax provisions, the preparer presented a checklist that showed when the minimum tax must be considered. The workpapers of the preparer for the return in question indicated that the checklist had been reviewed. Consideration of the knowledge of the preparer, the internal procedures for review, and other facts and circumstances indicated that this error would rarely occur.


LAW AND ANALYSIS


Section 56(a) of the Code provides for the imposition of an income tax on certain items of tax preference. Section 57(a)(9)(A) treats as a tax preference item an amount equal to the net capital gain deduction for the taxable year determined under section 1202. For taxable years ending prior to January 1, 1979, such item was taxed under section 56(a). For years beginning after December 31, 1978, such item is taxed under section 55 (relating to the alternative minimum tax).


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. Rul. 80-28, 1980-1 C.B. 304, holds that an income tax return preparer who failed to report a minimum tax liability on an individual taxpayer's income tax return because of an oversight was required to pay a penalty for negligent or intentional disregard of rules and regulations.


Rev. Proc. 80-40, page 22, 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 preparer. This 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 the 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, indicates that the error in question would rarely occur and (2) the normal office practice was followed in preparing the return in question.


The facts and circumstances suggested that the return was negligently prepared by the preparer. Although the failure to report the minimum tax was the only error on the return, the amount of the understatement was substantial and the error could have been discovered by reviewing the return. However, the preparer showed that the preparer's normal office practice, when taken together with other facts and circumstances, indicates that the error in question would rarely occur and that the normal office practice was followed in preparing the return in question. Furthermore, the error is not a flagrant one.


HOLDING


The preparer is not liable for a penalty for the negligent disregard of rules and regulations.


EFFECT ON OTHER REVENUE RULINGS


Rev. Rul. 80-28 is distinguished.


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