Liability of return preparer firms - 6694 regs

The proposed regulations confirm that the firm employing the tax return preparer is also liable for the 6694 penalty by reference to the fact that section 1.6694-2(a)(2) and section 1.6694-3(a)(2) of the existing regulations still apply. In short, a firm employing a tax return preparer will also be liable for the 6694 penalty in the following circumstances:


(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 employer or partnership 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 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.


How many tax preparation firms have no member of prinicpal management or principal officers not involved in reviewing a tax position?

How many tax preparation firms prvide reasonable and appropriate procedures for the preparation of a return? And if there are such procedures, are they "reasonable" and "appropriate?"


The fact is that the prior $250 penalty was so low that there has been close to not attention paid to section 6694 either by the IRS or tax practitioners. I have had numerous tax return preparers involved in civil and criminal examinations and the IRS never raised a 6694 issue. The large size of the penalty will change IRS enforcdement. IRS examiners will not overlook the potential liability of the firm.
Additionally, the word "reckless" in section 6694(b) suggests to me that it should be fairly easy to go after the larger $5,000 penalty because any "negligence" can be viewed as "reckless."

This would be the time for the return preparer professional organizations to write some standards of "review" of a position that industry practice that the industry proposes are "reasonable" and "appropriate" geared to the various size of the return firms. The proposed regulations suggest that the IRS will follow industry practice.

Quite frankly the terms "reasonable" and "appropriate" are so broad that most IRS examiners can charge the "firm" with the negligence penalty.