6694 penalties affect ALL return preparers

section 1.6694-2(b)(1) of the proposed regulations states that a return preparer may rely in good faith without verification upon information furnished by the taxpayer, advisor, other tax return preparer, or other party.

That is not a safe harbor because that reliance wlll not stand for a number of reasons. The same regulation says that you cannot make and unreasonable assumptions and you must not unreasonably rely on the representations, statements, fndings, or agreements of the taxpayer or any other person.

That hole is large engough to drive a tank through. If the IRS wants to nail you with a $1,000 or $5,000 penalty. It is easy for the to say that you should have made an inquirity before you relied on that statement. That is a discretionary issue. It is impossible to win a case against the IRS by arguing that they abused their discretion. That "reliance" language is a trap for the unwary. It is far better to put extra time into a return and verify data.

The $1,000 penalties are large, and, if there is a serious mistake, the IRS can claim you were reckless and hit you with the $5,000 6694(b) penalty.

Just as important is the fact that even if you are dealing with a simple case you can be hit with a large penalty. Assume a return with with a Schedlure A itemized deduction. Let's say it is a theft loss issue. That is a technical issue and a factual issue. If you are wrong with a misapplication of the statute or the regulation because you claimed it for the wrong year or you misapplied the regulation or even if the facts are wrong, that would easily be a $1,000 penalty at a minimum.

My point is that even in the most simple of cases, return preparers can be hit with $1,000 and $5,000 penalties.

There are 4 examples in that regulation. They all deal with interpreting a tax statute. If your analysis is wrong the penalty will apply under these examples.

DO NOT ASSUME THAT THE 6694 PENALTIES WILL NOT APPLY TO SMALL TAX RETURNS AND LOW INCOME TAXPAYERS.

Even if the examination change is small (assume $100) there is no rule in the proposed regulations that says the 6694 penalty of $1,000 or $5,000 will not apply to a small audit change.

Therefore, expect that the 6694 penalties will apply to all small taxpayers and simple tax returns even more than the larger tax returns because there are more small tax returns than large tax returns. Therefore, the 6694 penalty will fall mostly on the lowest volume tax return preparers and the lowest income tax return preparers just as much as the larger volume and high end return preparers.

The IRS and the DOJ like to target CPAs to make examples of them. The IRS is especially aggressive with CPAs.

This penalty tsunami will affect all tax return preparers.





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