The liability for the 6694 penalty by the "firm"

§1.6694-2(a)(2) provides, as follows:

(a) (2) Special rule for corporations, partnerships, and other firms. A firm that employs a tax return preparer subject to a penalty under section 6694(a) (or a firm of which the individual tax return preparer is a partner, member, shareholder or other equity holder) is also subject to penalty if, and only if --

(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(a);

(ii) The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) Such review procedures were disregarded by the corporation, partnership, or other firm entity through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

§1.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct.

(a) (2) Special rule for corporations, partnerships, and other firms. A firm that employs a tax return preparer subject to a penalty under section 6694(b) (or a firm of which the individual tax return preparer is a partner, member, shareholder or other equity holder) is also subject to penalty if, and only if --

(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(b);

(ii) The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) Such review procedures were disregarded by the corporation, partnership, or other firm entity through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

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COMMENT:

1. None of the "principal management" knew of the position. Who is a "principal manager?" A reviewer? Since a reviewer "manages" another person, it would appear that any return preparation firm with a "reviewer" makes the return preparation firm liabile for the 6694 penalty. This would be an absurd result. The "principal manager" could be an equity owner or key management. My personal opinion is that the term reaches the same type of person would would be a "responsible person" within the meaning of the section 6672 statute. The final regulations should address this ambiguity. But the term is so braod that most of the return preparation firms should be concerned that the firm will be vulnerable to the 6694 penalty if any employee is subject to the penalty. To minimize this risk, all questionable positions should be reported to the IRS in order to take advantage of the lesser "reasonable basis" standard. There is a massive risk to "firms" for the undisclosed positions.


2. The reasonable and appropriate procedures for review of the position are ambiguous terms and they are subjective terms. Even if a firm has a perceive adequate review process by a comptent reviewer, that review process can always be challanged as insufficient and inappropriate. Moreover, this terminology does not permit any mistakes. Here again, it would be very easy for the IRS examiner to find the firm liabile for the penalty if any other employee is liable for the penalty.

To play it safe, all questionalble positions can be sent to an outside tax consultant or tax attorney. Both the employee and the firm could get the benefit of the "reasonable cause" exception. I would advise all key employees dealing with the issue and the firm request advice from the outside tax advisor in the same document so that all of the parties dealing with the return are given the safe haven of "reasonable cause."

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