Rev. Rul. 78-344, 1978-2 CB 334


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 income tax return preparer who, following instructions from a taxpayer without consulting the regulations, excludes certain items from the gross income reported on the taxpayer's return that are required by the regulations to be included is subject to the panalty imposed by section 6694(a) of the Code for negligent or intentional disregard of rules and regulations.


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Advice has been requested whether, under the circumstances described below, an income tax return preparer is subject to the penalty imposed by section 6694(a) of the Internal Revenue Code of 1954 for negligent or intentional disregard of rules and regulations.


A, a tax return preparer, was engaged by B, a taxpayer, to prepare B's federal income tax return. B had certain items of income which B did not believe were properly includible in gross income, and instructed A not to include the items in gross income as reported on the tax return. Although the income tax regulations provide for the inclusion of these items in gross income, A did not bother to consult the regulations, but chose instead to follow B's insructions on the assumption that B was probably correct. A's failure to include these items in B's gross income resulted in an understatement of B's income tax liability.


Section 6694(a) of the Code imposes a penalty on an income tax return preparer who understates a taxpayer's liability by negligent or intentional disregard of rules and regulations. Section 1.6694-1(a)(3) of the Income Tax Regulations provides that the term "rules or regulations" includes the provisions of the Internal Revenue Code and the Treasury regulations issued under the Code.


Section 1.6694-1(a)(4) of the regulations provides that an income tax return preparer who fails to follow an income tax regulation is not considered to have negligently or intentionally disregarded the rules and regulations if the preparer in good faith and with reasonable basis takes the position that the regulation does not accurately reflect the Code. This section further provides that, for purposes of section 1.6694-1(a) the view of the taxpayer concerning a rule or regulation is not material.


In this case, not withstanding that B instructed A not to include the items in gross income because of the belief that they were not properly includible, A did not in good faith and with reasonable basis take the position that these items of income were not includible in B's gross income.


Accordingly, A is subject to the penalty under section 6694(a) of the Code for understating B's income tax liability due to negligent or intentional disregard of the regulations.