Rev. Rul.80-262

Rev. Rul. 80-262 1, 1980-2 CB 375


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.


An inadvertent error made by a return preparer in either listing or totaling on Schedule B, Form 1040, the separate amounts shown on Forms 1099-INT furnished by a taxpayer that does not result in substantial understatement of tax and isthe only error on the return does not subject the preparer to the negligence penalty under section 6694(a) of the Code.


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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 to a preparer in the following situations?


FACTS

Situation 1


The taxpayer furnished the income tax return preparer with all of the Forms 1099-INT, Statement for Recipients of Interest Income, that the taxpayer had received. The preparer failed to list the amount shown on one of the Forms 1099-INTon schedule B of Form 1040, U.S. Individual Income Tax Return. Upon examination of the return by the Service, it was determined that the omission resulted in an understatement of tax liability. However, the amount of the understatement was notsubstantial and the omission was the only error on the return.


The preparer stated that the reason for the failure to report the omitted amount was that the Form 1099-INT showing the omitted amount was overlooked.


Situation 2


The taxpayer furnished the income tax return preparer with all of the Forms 1099-INT that the taxpayer had received. The preparer correctly listed all of the amounts shown on the Forms 1099-INT on schedule B of Form 1040 but made an error in totalling the separate amounts. Upon examination of the return by the Service, it was determined that the error resulted in an understatement of tax liability. However, the amount of the understatement was not substantial and the omissionwas the only error on the return.


LAW AND ANALYSIS


Rev. Proc. 80-40, page 774, 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. Rev. Proc. 80-40 specifically provides that an isolated mathematical or clerical error ordinarily reflects no more than mere inadvertence and thus will not result in the assertion of the penalty unless the error is of such magnitude or so conspicuous that it should have been discovered after its commission.


Under the facts as stated the error in situation 1 was clerical in nature and the error in situation 2 was mathematical in nature. Furthermore, in each situation, the error was the only error on the return and the amount of the understatement was not substantial.


HOLDING


The penalty for negligent disregard of rules and regulations does not apply to the preparers in either situation 1 or 2.


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