Comment #2 Final 6694 regulations

6694(b)(1) IN GENERAL . --Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of --

6694(b)(1)(A) $5,000, or

6694(b)(1)(B) 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

6694(b)(2) WILLFUL OR RECKLESS CONDUCT . --Conduct described in this paragraph is conduct by the tax return preparer which is --
6694(b)(2)(A) a willful attempt in any manner to understate the liability for tax on the return or claim, or
6694(b)(2)(B) a reckless or intentional disregard of rules or regulations

Reg. section 1.6694-3(a)(1)(ii) repeats the “reckless” language of section 6694(b)(2)(B). Reg. section 1.6694-3(c)(2) notes that If the return preparer will not be “reckless” if the position is disclosed and there is a “reasonable basis” for the position.

The "reckless" language is used in section 6662(c)

6662(c) NEGLIGENCE. --For purposes of this section, the term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term "disregard" includes any careless, reckless, or intentional disregard.

§1.6662-3(b) (2) Disregard of rules or regulations. --The term "disregard" includes any careless, reckless or intentional disregard of rules or regulations. The term "rules or regulations" includes the provisions of the Internal Revenue Code, temporary or final Treasury regulations issued under the Code, and revenue rulings or notices (other than notices of proposed rulemaking) issued by the Internal Revenue Service and published in the Internal Revenue Bulletin. A disregard of rules or regulations is "careless" if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. A disregard is "reckless" if the taxpayer 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 person would observe. A disregard is "intentional" if the taxpayer knows of the rule or regulation that is disregarded. Nevertheless, a taxpayer who takes a position (other than with respect to a reportable transaction, as defined in §1.6011-4(b) or §1.6011-4T(b), as applicable) contrary to a revenue ruling or notice has not disregarded the ruling or notice if the contrary position has a realistic possibility of being sustained on its merits.

I have little doubt reaching the conclusion that if a return preparer prepars a return and does not adhere to ALL of the technical requirements of a tax regulation, that error is clear "negligence" and clearly "reckless" and will result in a $5,000 penalty for each reckless error.

What this means is that any tax return preparer dealing with a technical issue of any kind (e.g, the substantiation requirements of a charitable deduction) and there is a resulting underpayment of tax, the $5,000 penalty will be easily justifief.

The 6694 regulations and the 6694(b) statute make it clear that you will be viewed as "reckless" (negligent) unless you maticulously track every tax regulation and IRS published position and apply all of those technical requirements.

Commit to memory the folloging language of section 1.6694-1(e) of the regulations:
""The taxs return preparer must make appropriate inquiries to determine the existence of facts and curcumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit."

This means, if you prepare a tax return with any deduction or credit (that would include every return preparer), each negligent error is a $5,000 penalty.

The era of just putting numbers into software given to you by your client are OVER even if you disclose those position. You do not meet the "reasonable basis" standard of conduct if you are negligent in the determination of any deduction or credit due to any technical error.

Let me know if you have any problematical issues that give you concern about any deduction or credit. Contact ab@irstaxattorney.com