1.6694-3(c)(1) - know this regulation

Section 1.6694-3(c)(1) of the existing 6694 regulations provides:

Except as provided in paragraphs (c)(2) and (c)(3) of this section, a preparer is considered to have recklessly or intentionally disregarded a rule or regulation if the preparer takes a position on the return or claim for refund that is contrary to a rule or regulation (as defined in paragraph (f) of this section) and the preparer knows of, or is reckless in not knowing of, the rule or regulation in question. A preparer is reckless in not knowing of a rule or regulation if the preparer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable preparer would observe in the situation.

Section 1.6694-3(c)(1) was not changed by the proposed 6694 prposed regulations and do not expect it to be changed in the final 6694 regulations.


Section 1.6694-3(c)(2) of the proposed section 6694 regulations provide that the 6694(b) penalty will not apply if the position taken is properly disclosed and there is a reasonable basis for the disclosure. If a return preparer does not know that the position taken is not in conformity with the applicable tax regulations, how can that position be disclosed? Return preparer mistakes and negligence are all undisclosed positions................................

I have been trying to demonstrate in a few of the recent negligence cases that most of the negligence penalties involve misapplication of existing law and regulations dealing with substantiation issues and other failures to correctly apply tax regulations. A return preparer will not be saved by the disclosure and “reasonable basis” standards if the return prepare simply DOES NOT KNOW A RULE OR REGULATION. This is an obvious point. Return preparer “negligence” is going to be ipso facto “reckless” and, therefore, trigger the 6694(b) $5,000 penalties.

Example: a return is filed without the substantiation required for any Schedule C business expense of a Schedule A deduction. These are situations where you cannot rely on the data provided by your client. These are the situations that will trigger the section 6694(b) "reckless" penalty in the amount of $5,000 for each error.

I have been making this point repeatedly in different ways. Return preparers will have to put much more time into return preparation and they will need to have first hand knowledge of the regulations dealing with all of the Schedule A, Schedule C , as well as the other return Schedules.