OPR violations

No Automatic Referral to OPR for Code Sec. 6694(a) Violation

IRS officials assured practitioners on January 21 that a Code Sec. 6694(a) penalty will not trigger an automatic referral to the Service's Office of Professional Responsibility (OPR). Barbara Fiebach, senior program manager, Exam Policy, IRS Small Business/Self-Employed (SB/SE) Division, and Michael Hara, attorney-advisor, IRS Office of Chief Counsel, spoke during a teleconference on the final Code Sec. 6694 regulations that was sponsored by the Service (T.D. 9436, I.R.B. 2009-3, 268; TAXDAY, 2008/12/16, I.2). Hara also briefly touched on interim guidance in applying Code Sec. 6694 to tax shelter transactions (Notice 2009-5, I.R.B. 2009-3, 309; TAXDAY, 2008/12/16, I.2).


Referral


Since Congress overhauled the Code Sec. 6694 regime, first, in the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) and, second, in the Emergency Economic Stabilization Act of 2008 (EESA) (P.L. 110-343), many practitioners have expressed concern that, when the IRS imposes a Code Sec. 6694(a) penalty, the OPR would be automatically notified. "If we assert a penalty under Code Sec. 6694(a), the examiner is not required to make a referral to OPR," Fiebach emphasized. "We're not looking for a "gotcha" situation," Hara noted.



Unenrolled preparers may also be subject to a Code Sec. 6694(a) penalty, Fiebach explained. However, the OPR only has jurisdiction over practitioners governed by Circular 230, such as enrolled agents and CPAs. "Unenrolled return preparers' limited representation privileges may be suspended under Revenue Procedure 81-38," Fiebach said. Additionally, unenrolled return preparers' limited representation privileges may be revoked by Examination Area directors.


Disclosure


The final regulations require preparers to disclose a tax position on a return when the Code Sec. 6694(a) substantial authority standard cannot be satisfied, Hara explained. "There can be no general disclaimer. No boilerplate language is allowable."



A general disclaimer, the IRS explained in the final regulations, will not satisfy the requirement that the tax return preparer provide and contemporaneously document advice regarding the likelihood that a position will be sustained on the merits and the potential application of penalties as a result of that position. However, tax return preparers may rely on established forms or templates in advising clients regarding the operation of the penalty provisions of the Internal Revenue Code, the IRS noted in the final regulations.



"In many cases, the taxpayer is handed a return and it may have some aggressive positions the taxpayer does not understand," Hara said. The prohibition on any general disclaimer is intended to encourage dialogue between the taxpayer and the practitioner; for example, over an aggressive position.


Shelters


Tax shelter transactions, Hara noted, receive special treatment under the EESA. If the position is with respect to a tax shelter --as defined in Code Sec. 6662(d)(2)(C)(ii), or a reportable transaction to which Code Sec. 6662A applies, including both reportable transactions with a significant purpose of federal tax avoidance or evasion and listed transactions --the more-likely-than-not standard applies.



After Congress passed the EESA, the IRS issued Notice 2005-9, which provides an interim compliance rule for tax shelter transactions that are not listed or otherwise reportable, Hara explained. "A position will not be deemed an "unreasonable position" if there is substantial authority for the position and the tax return preparer advises the taxpayer of the penalty standards applicable to the taxpayer." However, the interim compliance rules do not apply to a reportable transaction with a significant purpose of federal tax avoidance or evasion or a listed transaction, Hara added.


Moving Forward


In other news, a Treasury Department staffer indicated that the department is beginning to move past Code Sec. 6694 to other projects. "When I say we are moving past Code Sec. 6694, we need to think about other areas that need to be supplemented," the staffer said on January 21 in Washington, D.C. Open projects include regulations under Code Secs. 6662, 6662A and 6664.