6694 proposed regs - the "responsible preparer"

The proposed regulations eliminate the "one preparer per firm" rule. A return preparer is the person primarily responsible for the position on the return or claim for refund giving rise to the understatement. Under proposed §1.6694-1(b)(1), only one person within a firm will be considered primarily responsible for each position giving rise to an understatement and subject to the penalty. Proposed §1.6694-1(b)(2) provides that the individual who signs the return or claim for refund as the tax return preparer will generally be considered the person that is primarily responsible for all of the positions on the return or claim for refund giving rise to an understatement. The "one preparer per firm" rule, however, is revised by these proposed regulations if it is concluded based upon information received from the signing tax return preparer (or other relevant information from a source other than the signing tax return preparer) that another person within the signing tax return preparer's same firm was primarily responsible for the position(s) giving rise to the understatement. However, the proposed regulations also consider reliance on another professional at the same firm with greater knowledge of, and responsibility for, the accuracy of a position giving rise to the understatement.

With a one penalty per position rule within the tax preparation firm, the IRS could create fights within the firm. Suppose the firm has three persons who look at the return: A, B, and C. Client paid $6,000 for the 1120 return. A signs the return and does most of the data input. B is the reviewer and C is the technical advisor. If the IRS says B should be hit with the penalty, B might be able to argue that C has the "greater knowlede." This scenario is probable because the penaly would be $3,000 and there is a predictable conflict within the tax preparation firm. B and C could each present argument to the IRS that the other person should be hit with the penalty. Given the word "reckless" in 6694(b), I believe that the penalty can be $5,000 in any case that the IRS argues "reckless" conduct. Who could argue that a return preparer is not "reckless" for misapplying a complex tax issue.
"Reckless" conduct is deemed "negligence" in section 6662(c).


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