Revenue Ruling 86-55, 1986-1 CB 373

[Code Sec. 7701. Also, Code Secs. 6107, 6109, 6694, 6695 and 7216]


Return preparers: Penalties: Assignment of refund checks.--A person in a business other than tax return preparation who fills out or reviews income tax returns for its customers may be an income tax return preparer under section 7701(a)(36) of the Code and subject to potential penalities. The assignment of the customers' refund checks before the returns are processed by the Service is not a valid assignment and the Service may mail the checks directly to the taxpayers.

ISSUE 1


In the situations described below, if a person in a business other than tax return preparation fills out or reviews income tax returns for the person's customers without charging a separate fee, is the person an income tax return preparer under section 7701(a)(36) of the Internal Revenue Code?


ISSUE 2


If such person is an income tax preparer, then what requirements and potential penalties apply to that person under the Internal Revenue Code?


ISSUE 3


If, under state law, a taxpayer attempts to assign to another person an income tax refund that the taxpayer expects to receive and if the address of that other person is shown on the taxpayer's return as the taxpayer's address, must the Internal Revenue Service send any refund check to that address?


FACTS


Situation 1. X, a used car dealer, advertises that it will fill out and review income tax returns and that any resulting refund will be applied as a down payment on a used car. These services are available to those who purchase a vehicle. X or X's employee then either fills out a complete return or reviews a return prepared by the customer for both substantive correctness and mechanical accuracy. X does not charge its customers a separate fee for these services. The customer executes a power of attorney authorizing X to receive and endorse or negotiate the refund check. The address of X is substituted for that of the customer on the return. When X receives the customer's refund check, X endorses it and applies it as a down payment.


Situation 2. Y is a firm that offers discounted cash payments for tax refunds. Y or Y's employee either fills out a complete return or reviews a return prepared by the customer for both substantive correctness and mechanical accuracy. After the return is filled out or reviewed, Y pays the customer the amount of the refund requested on the return, less a discount typically equal to 20 to 40 percent of the refund amount requested. As in situation 1, the customer executes a power of attorney, and Y's address is substituted on the return for that of the taxpayer. Y does not charge a separate fee for its services in filing out or reviewing the return. Upon receipt of the customer's refund check, Y endorses the customer's name on the back of the check and deposits it in Y's account.


LAW AND ANALYSIS

ISSUE 1


Section 7701(a)(36)(A) of the Code defines an income tax return preparer as any person who prepares any return of tax, or any claim for refund of tax, imposed by subtitle A, for compensation, or any person who employs one or more persons to prepare such returns or claims for refund for compensation.


Section 301.7701-15(a) of the Regulations on Procedure and Administration provides the general rule that an income tax return preparer is any person who prepares for compensation, or who employs (or engages) one or more persons to prepare for compensation, other than for the person, all or a substantial portion of any return of tax under subtitle A of the Code or any claim for refund of tax under subtitle A.


Section 301.7701-15(a)(4) of the regulations provides that a person must prepare a return or claim for refund for compensation to be an income tax return preparer. A person who prepares a return or claim for refund for a taxpayer with no explicit or implicit statement for compensation is not a preparer.


In Papermaster v. United States, No. 79-C-710 (E.D. Wis., Apr. 21, 1980), aff'd by unpublished order, No. 80-1612 (7th Cir, June 25, 1982), an individual who was both an attorney and an accountant prepared a taxpayer's individual income tax return. He also prepared a return for a corporation in which the taxpayer was a shareholder. The attorney/accountant received compensation for preparing the corporation return, but was not separately compensated for preparing the taxpayer's individual return. The court held that he was an income tax return preparer under section 7701(a)(36) of the Code with respect to taxpayer's individual return. The court reasoned that he was offering the businessman a "package deal" for preparing the individual return; his compensation was included in the compensation for the corporate return.


In both situations 1 and 2, X and Y either fill out the entire return or review information on returns prepared by others. That action is preparation of the return for purposes of section 7701(a)(36) of the Code. See Rev. Rul. 84-3, 1984-1 C.B. 264.


In situation 1, although X does not charge the customers a separate fee for the preparation of their returns, X is offering its customers a "package deal." X's compensation is included in the price of the cars required to be purchased by the customers. Similarly, in situation 2, Y's compensation for filling out or reviewing the return is a part of, or is incident to, the various discount charges (ranging from 20 to 40 percent) that Y charges its customers for their refund checks.


ISSUE 2


Sections 6694(a) and 6694(b) of the Code provide that any person who is an income tax return preparer with respect to a return or claim for refund may be subject to a penalty if any part of an understatement of liability with respect to that return or claim is due to a negligent or intentional disregard of rules or regulations by that preparer, or if the understatement is due to a willful attempt by that preparer to understate the liability.


Under section 6107(a) of the Code, an income tax return preparer has an obligation to furnish a completed copy of the return to the taxpayer and may be penalized under section 6695(a) for failure to do so. Under section 6107(b), an income tax return preparer has an obligation to retain a copy of the return or a list of taxpayers for whom returns have been prepared and may be penalized under section 6695(d) for failure to do so. When one preparer employs or engages another, the responsibility for these acts falls on the employer. See section 1.6107-1(c)(1) of the Income Tax Regulations.


Section 6695(b) of the Code imposes an obligation to sign the return and imposes a penalty for failure to do so. Under Section 1.6695-1(b)(2) of the regulations, this obligation falls on the individual preparer with primary responsibility for the overall substantive accuracy of the return


Section 6109(a)(4) of the Code provides that any return or claim for refund prepared by an income tax return preparer shall bear such identifying number for securing proper identification of such preparer, such preparer's employer, or both, as may be prescribed.


Section 1.6109-2(a) of the regulations requires that a return prepared by an income tax return preparer shall bear the identifying number of the preparer required to sign the return or claim for refund. In addition, if there is a partnership or employment arrangement between two or more preparers the identifying number of the partnership or the person who employs (or engages) one or more other persons to prepare for compensation the return or claim for refund shall also appear on the return or claim for refund. In general, if the preparer is an individual, the preparer's social security number shall be affixed, but if the preparer is a person (whether an individual, corporation, or partnership) that employs (or engages) one or more persons to prepare the return or claim for refund, the preparer's employer identification number shall generally be used. Special rules apply to preparers that are not citizens or residents of the United States.


Under sections 6060 of the Code and 1.6060-1 of the regulations, any person who employs an income tax return preparer to prepare a return or claim for refund other than for that employer must retain a record concerning each preparer so employed and may be penalized under section 6695(e) for failure to do so.


Section 6695(f) of the Code imposes a penalty of $500 on income tax return preparers who endorse or otherwise negotiate refund checks that are issued to taxpayers. There is no reasonable cause exception.


Section 7216 of the Code imposes a criminal penalty for unlawful disclosure or use of return information by persons who prepare or provide services in connection with the preparation of returns.


ISSUE 3


Although X and Y require their customers to execute powers of attorney authorizing them to receive and endorse or negotiate the refund checks, in both situation 1 and situation 2 the assignment of the taxpayers' claims is not valid against the United States. The Anti-Assignment Act, 31 U.S.C. section 3727 (1982), nullifies assignments made before a claim is allowed by the Government, the correct amount of the payment is decided, and a warrant (refund check) for payment of the claim has been issued. A purpose of the statute is to protect the Government from having to deal with multiple persons with respect to a claim, in this case a preparer and the preparer's customers. Patterson v. United States, 354 F.2d 327 (Ct. Cl. 1965). The statute has been held to be specifically applicable to refunds of overpayments of taxes. See Wooton v. United States, 86 F. Supp. 143 (Ct. Cl.1960), cert. denied, 339 U.S. 903 (1960); New York v. Hanley Milling Co., 41 F. Supp. 844 (N.D. Ohio, 1941), aff'd, 123 F.2d 819 (6th Cir. 1941). The assignment is therefore not valid against the United States. Accordingly, if the Internal Revenue Service determines that the address shown on the return is not the taxpayer's address, any refund checks may be mailed directly to the taxpayer and not to the preparer.


HOLDINGS

ISSUE 1


X and Y are income tax return preparers with respect to their customers' income tax returns.


ISSUE 2


As income tax return preparers, X and Y are subject to the various requirements and potential penalties applicable to preparers, as previously set forth in this ruling. X and Y are potentially subject to penalties under sections 6694(a) or 6695(b) of the Code if any part of an understatement of liability on a customer's return is due to a negligent or intentional disregard of rules or regulations by the preparer, or if the understatement is due to the preparer's attempt to willfully understate the liability.


X and Y are required to furnish copies of the returns to the customers and retain a list of taxpayers for whom returns have been prepared. They may be subject to penalties under sections 6695(a) or 6695(d) of the Code for failure to do so.


The individual preparer with primary responsibility for the overall substantive accuracy of the customer's return is required to sign the return as preparer and is subject to the penalty under section 6695(b) of the Code for failure to do so. X and Y are required to furnish their identifying numbers on the customers' returns and they may be subject to the penalty under section 6695(c) for failure to do so.


Under section 6060 of the Code, X and Y must keep records of all persons in their employ that meet the definition of income tax return preparer, and X and Y are subject to the penalty under section 6695(e) of the Code for failure to do so.


X and Y are subject to the penalty under section 6695(f) of the Code when they endorse or otherwise negotiate a customer's refund check.


X and Y may be subject to the criminal penalty under section 7216 of the Code if they make unlawful disclosure or use of return information.


ISSUE 3


The assignment of the customers' refund checks before the returns are processed by the Internal Revenue Service is not a valid assignment against the United States. Accordingly, the Service need not mail the checks to the preparers and may mail them directly to the taxpayers in question.