6707 and 6707A penalties for return preparers

If a return preparer is a "material advisor, the very large penalties described below may apply. Brace yourself!

Sec. 6111(b)(1)(A) defines a material advisor as any person:
(1) who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and

(2) who directly or indirectly derives gross income in excess of a “threshold amount”(or such other amount as may be prescribed by the Secretary) for such aid, assistance, or advice.

There is little question that return preparers can be viewed by the IRS as providing "advice" and "assistance" to clients. Obviously, preparing a tax return is "assistance" and any communication with a client can be viewed as "advice."
A client can use the prepared tax return as a marketing tool, arguably facilitated by the return preparer. Remember that IRS examiners are aggressive. The examiners assigned to tax shelter cases are not only extraordinarly aggressive, they look for fraud issues in the tax return (e.g., filing a false statement).

6707(a) pertains to a person who is required to file a return under section 6111(a) with respect to any reportable transaction, fails to file such return on or before the date prescribed therefor, or files false or incomplete information with the Secretary with respect to such transaction, such person shall pay a penalty with respect to such return in the amount determined under subsection (b).

6707(b) notes that failure to file will result in a penalty of $50,000. However, the penalty for any listed transaction shall be an amount equal to the greater of $200,000, or 50% of the gross income derived by such person with respect to aid, assistance, or advice which is provided with respect to the listed transaction before the date the return is filed under section 6111. For an intentional failure 75% will be substituted for 50%.

Sec. 6707A(a) --Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).

Sec. 6707A(b)(1) - the amount of the penalty under subsection shall be $10,000 in the case of a natural person, and $50,000 in any other case.

Sec. 6707A(b)(2) listed transactions The amount of the penalty under subsection (a) with respect to a listed transaction shall be $100,000 in the case of a natural person, and $200,000 in any other case.

Sec. 6707A(c)(1) - The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

Sec. 6707A(c)(2) - The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.

The clear language of 6111 and its underlying regulations will facilitate the above penalties under 6707 and 6707A in addition to 6694 penalties.

How can return preparers avoid the 6707 and 6707A penalties? The answer is simple: either stay away from these transactions or report them to the IRS under the IRS procedures without supporting the transaction.

If you have any doubt about the transaction, get the opinion of an independant tax attorney (one who is not associated, directly or indirectly, with the reportable transaction.

The Department of Justice web page is loaded with prosecutions of return preparers who have been directly or indirectly involved with tax shelter transaction that would meet the definition of reportable or listed transactions.

Send an e-mail to ab@irstaxattorney.com if you have any questions about any transaction that gives you some concern. Beware of any transaction that may have the effect of "tax avoidance."