1.6694-1(e) - most important part of final regs

I have identified the following quoted language of the regulations as the most important part of the regulations because if you are not careful, it is a trap. Read the language slowly and digest the highlighted portion. How can a return preparer rely on information supplied by a client whan at the same time the return preparer has to make sure that the data complies with the substantive requirements of the IRS Code, IRS regulations, published positions and the rest of the tax law? All items in the schedules filed with any income tax return are based on the technical requirements of the IRS Code, IRS regulatins, etc.

It is my opinion that the reliance on the client information without verification is misleading. Yes, you do not have to verify that your client paid $600 to a charity, but you still have to make sure that charitable deduction meets IRS substantiation requirements which were recently modified. The point is guys & gals, you can no longer just put numbers into software and expect that you will nlot be hit with a $5,000 "reckess" payment for negligently not checking the technical requirements for substantiation.

The language in 1.6694-1(e)and (f) is essentially a trap for the unwary tax return preparer if they think there will be no penalty if they do not check the technical substantiation standards.

There is one important thing you must know. The standard of conduct, even for disclosed positions, is higher than not being negligent. This means that if the return preparer is "negligent" the reckless penalty is predictable.

(e) Verification of information furnished by taxpayer or other party --(1) In general . For purposes of sections 6694(a) and (b) (including demonstrating that a position complied with relevant standards under section 6694(a) and demonstrating reasonable cause and good faith under §1.6694-2(e)) , the tax return preparer generally may rely in good faith without verification upon information furnished by the taxpayer. A tax return preparer also may rely in good faith and without verification upon information and advice furnished by another advisor, another tax return preparer or other party (including another advisor or tax return preparer at the tax return preparer's firm). The tax return preparer is not required to audit, examine or review books and records, business operations, documents, or other evidence to verify independently information provided by the taxpayer, advisor, other tax return preparer, or other party. The tax return preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some provisions of the Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintain specific documents) before a deduction or credit may be claimed. The tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit.


(2) Verification of information on previously filed returns . For purposes of section 6694(a) and (b) (including meeting the reasonable to believe that the position would more likely than not be sustained on its merits and reasonable basis standards in §§1.6694-2(b) and (d)(2), and demonstrating reasonable cause and good faith under §1.6694-2(e)) , a tax return preparer may rely in good faith without verification upon a tax return that has been previously prepared by a taxpayer or another tax return preparer and filed with the IRS. For example, a tax return preparer who prepares an amended return (including a claim for refund) need not verify the positions on the original return. The tax return preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. The tax return preparer must confirm that the position being relied upon has not been adjusted by examination or otherwise.


With this last blog of the year, let me wish you all a very Happy New Year without and 6694 penalties.

This web page picks up about 50 new IP addresses each day of the week. We have received lots of positive feedback. The comment comes in through ab@irstaxattorney.com. However you can make comment to these blogs. I would like nothing better than to have blogs like the one above debated or apended. I could write an article on just the analysis of 1.6694-1(e) and (f). You are welcome to make negative comment and disagree on any point made. Or if you wish, comment or related technical issues.

I deal with the IRS examiners regularly. They are aggressive. They will be motivated to go after the penalties. If there is a substantiation problem in the soon to be filed tax returns, expect to be changed with the penalty. I have been pounding the table saying that any compliance matters will be viewed as your fault and per se negligence. "Negligence" is sufficient to trigger the 6694 penalty even under pre-1979 law. If the penalty would be triggered under pre-1979 law, is it not obvious that it would trigger the "reckless" 6694(b) $5,000 penalty even for disclosed positions that the IRS has determined to be negligent for missing substantiation requirements? I believe that is an obvious conclusion. If I have dwelled on this, it is because I consider the above language to be a "trap."

Thank you all for all of the kind message you have sent to my office.

Alvin S. Brown, Esq.