No automatic referral to OPR for 6694 penalties

The fact that the IRS had considered this connection is troubling. The news release does not say that the IRS will not keep a record of 6694 penalties as a grading system for return preparers. There is little IRS transparency on OPR considerations.

There are some famous practicing return preparers such as J K Harris. I am arware of multiple claims of misconduct to the BBB, to the attorney generals of some states, and settlement of some class action law suits. If return preparers like J K Harris can still prepare tax returns in those circumstances, I see no reason why return preparers need to be concerned about 6694 mistakes in reading and applying some of the tax returnlations.

But where there is "smoke" there is fire, and the IRS apparently things there is a large nexus between 6694 errors and misparctice by return preparers.

Read the following maaterial.



No Automatic Referral to OPR for Code Sec. 6694(a) Violation, IRS Officials Emphasize

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.

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.



IRS Withdraws SB/SE Examiner Instructions Calling for Mandatory Referral of Code
Sec. 6694(a) Cases

Recently issued IRS Small Business/Self-Employed Division (SB/SE) interim guidance for employment tax examiners opening preparer penalty cases under Code Sec. 6694 has been withdrawn, a spokesperson for the Service told CCH. The interim guidance incorrectly instructed examiners that a Code Sec. 6694 penalty will trigger an automatic referral to the Service's Office of Professional Responsibility (OPR).

Expanded Scope
Under the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28), all return preparers, not just preparers of income tax returns, could be held liable for the Code Sec. 6694(a) first-tier preparer penalty and the Code Sec. 6694(b) second-tier penalty. Thus, preparer penalties became applicable to employment and excise tax returns. Although Congress further amended Code Sec. 6694 in the Emergency Economic Stabilization Act of 2008 (EESA) (P.L. 110-343), it did not change the expanded scope of the provision. The IRS subsequently issued final regulations, T.D. 9436, I.R.B. 2009-3, 268, and interim guidance, Notice 2009-5, I.R.B. 2009-3, 309 (TAXDAY, 2008/12/16, I.2).

OPR

In January, Barbara Fiebach, senior program manager, Exam Policy, SB/SE, said that a Code Sec. 6694(a) penalty will not trigger an automatic referral to OPR (TAXDAY, 2009/01/22, I.2). "If we assert a penalty under Code Sec. 6694(a), the examiner is not required to make a referral to OPR," Fiebach said.

CCH discovered that the SB/SE interim employment guidance contained contrary instructions. "When a Code Sec. 6694(a), 6694(b) or 6694(f) penalty is asserted against an attorney, a certified public accountant, enrolled agent or enrolled actuary, and is closed agreed by the examiner or sustained in Appeals, or closed unagreed without Appeal contact, a referral to the Director, Office of Professional Responsibility is mandatory," the guidance stated.

"The memo SB/SE issued was based on earlier guidance, which has been superseded," the IRS spokesperson explained. "The memo has been withdrawn and will be re-issued with corrections. A referral to OPR is not required when a penalty is asserted under Code Sec. 6694(a)."

Excise Tax Returns
The SB/SE also described procedures for examiners to follow in excise tax cases. It identified examples of questions that examiners should ask the taxpayer and preparer.
Preparer Penalty Provisions Under Code Secs. 6694 and 6695

January 22, 2009

Internal Revenue Service : Penalties, civil : Tax shelters : Preparer penalties .


PREPARER PENALTY PROVISIONS UNDER I.R.C. §6694 and §6695


Michael E Hara, Office of Chief Counsel Barbara J. Fiebich, SB/SE Examination
Small Business/Self-Employed

National Phone Forum, January 2009


General Field Examination Procedures

 Determine if potential penalties apply including preparer penalties

 Gather written evidence and oral testimony during the client examination process

 Make the initial return preparer penalty determination

 After the audit is complete, when appropriate, examiners will open a separate penalty investigation, to contact the preparer for additional information to determine if penalties apply


Proposal, Assessment, and Appeal Procedures

 If it is determined that a penalty applies:

- a detailed report is prepared

- the preparer is provided with a copy

 The preparer has 30 days to request an appeal before the penalty is assessed

 For IRC §6700 and §6701 penalties, the penalty is assessed and the preparer must part pay and file a claim if they do not agree


Additional Actions for Circular 230 Practitioners


Potential referrals to the Office of Professional Responsibility include
- IRC §6695(f) , 6700, and 6701

- IRC §6694(a) and (b)

- IRC §7407 and 7408

- IRC §6695A and §6701(a) asserted against appraisers


Additional Actions for Unenrolled Return Preparers

 Unenrolled return preparers' limited representation privileges may be suspended under Revenue Procedure 81-38

 Unenrolled return preparers' limited representation privileges may be revoked by Examination Area Directors


Program Action Cases

 A Program Action Case is opened when a preparer's misconduct:

- appears to be pervasive and

- extends to multiple taxpayers

 A Return Preparer Coordinator will:

- monitor the examinations of the preparer's clients and assessment of return preparer penalties

- initiate an injunction investigation, if applicable


Return Preparer Penalties Published Guidance

 The Service published final regulations ( T.D. 9436 ) on December 22, 2008, reflecting amendments to the Code made by Congress in the Small Business and Work Opportunity Tax Act of 2007 and the Tax Extenders and Alternative Minimum Tax Act of 2008

 Notice 2009-5 , as well as Revenue Procedure 2009-11 , were issued simultaneously with the final regulations

 The Regulation and the Revenue Procedure are applicable to returns and claims for refund filed (and advice given) after December 31, 2008. Notice 2009-5 has special effective date rules for application of the substantial authority standard, and for Tax Shelters as defined by §6662(d)(2)(C)(ii) and Reportable Transactions under §6662A


Small Business and Work Opportunity Tax Act of 2007


The 2007 Act:

 Extended the application of the income tax return preparer penalties to include preparers of estate and gift tax, employment tax, and excise tax returns, and returns of exempt organizations

 Heightened the standards of conduct that must be met by preparers from nonfrivolous to reasonable basis for disclosed positions and from realistic possibility of success on the merits (33% chance that a position would be sustained) to reasonable belief that the position would more likely than not be sustained on the merits (greater than 50% chance that the position would be sustained) for undisclosed positions in order to avoid the §6694(a) penalty

 Increased the §6694 (a) penalty for understatements due to unreasonable positions from $250 to the greater of $1,000 or 50 percent of the income derived by the preparer

 Increased the 6694(b) penalty for willful or reckless conduct from $1,000 to the greater of $5,000 or 50% of the income derived by the preparer


TRANSITIONAL RELIEF & INTERIM GUIDANCE FOR 2007 ACT

 Transitional relief for the 2007 year was provided in Notice 2007-54 and Notice 2008-11

 Notice 2008-12 stated that future regulations would implement the signature requirements under §6695(b) on preparers of most tax returns

 Notice 2008-13 provided interim guidance about the standards of conduct that must be met by a tax return preparer during 2008 to avoid a penalty for an understatement of tax that may result from a position taken on a tax return

 Tax return preparers must now look to the final regulations, Rev. Proc. 2009-11 , and Notice 2009-5 for guidance


Tax Extenders and Alternative Minimum Tax Relief Act of 2008

 §506 of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 retroactively changed the general standard for preparers under §6694(a) for undisclosed positions from reasonable belief of more likely than not (greater than 50%) to substantial authority (approximately 35-40%, which is now the same general standard for taxpayers under section 6662 )

 Thus, under the current statute, a position would be treated as unreasonable unless:

- There is or was substantial authority for the position, or

- The position was properly disclosed and had a reasonable basis

 If the position is a tax shelter or reportable transaction under §6662A , however, the standard is a greater than 50% standard, i.e., is it reasonable to believe that the position would more likely than not be sustained

 This rule for tax shelters and reportable transactions is prospective


Revenue Procedure 2009-11

 Identifies the relevant categories of tax returns and claims subject to the §6694 penalty

 Identifies the returns and claims required to be signed by a tax return preparer in order to avoid a penalty under §6695(b)


FINAL REGULATIONS T.D. 9436 Definition of Tax Return Preparer

 A "signing tax return preparer" is the individual preparer who has primary responsibility for the overall accuracy of the preparation of the return or claim for refund

 A "nonsigning tax return preparer" is any preparer who is not a signing tax return preparer but who prepares all or a substantial portion of a return or claim for refund with respect to events that have occurred at the time the advice is rendered

 The final regulations provide that whether a schedule, entry, or other portion of a return or claim for refund is a substantial portion is determined based upon facts and circumstances, including the size and complexity of the income relative to the taxpayer's gross income, and the size of the understatement attributable to the item compared to the taxpayer's reported tax liability


FINAL REGULATIONS T.D. 9436 Definition of Preparer Within Firm

 Under the final regulations, only one person within a firm will be considered primarily responsible for each position giving rise to an understatement and, accordingly, would be subject to the penalty

 In the course of identifying the individual who is primarily responsible for the position, the IRS may advise multiple individuals within the firm that it may be concluded that they are the individual within the firm who is primarily responsible for the position

 Under the final regulations, the IRS may assess the penalty against either the signing tax return preparer or the nonsigning tax return preparer depending on the facts and circumstances, but not both


FINAL REGULATIONS T.D. 9436 Reliance on Information Provided

 Preparers may generally rely in good faith without verification upon information furnished by the taxpayer

 The final regulations allow a preparer to rely in good faith and without verification on information furnished by another advisor, another tax return preparer, or other party (even when the advisor or tax return preparer is within the tax return preparer's same firm). Similarly, 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

 The preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer, and must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete


FINAL REGULATIONS T.D. 9436 Income Derived

 The final regulations define "income derived (or to be derived)" with respect to a return or claim for refund as all compensation the preparer receives or expects to receive with respect to the engagement of preparing the return or claim for refund or providing tax advice (including research and consultation) with respect to the position(s) taken on the return or claim for refund that gave rise to the understatement

 Specific allocation rules apply when preparer is compensated directly by firm, rather than by taxpayer, and when there are multiple firm engagements

 The final regulations provide that the amount of penalties assessed against the individual and the firm shall not exceed 50 percent of the income derived (or to be derived) by the firm from the relevant engagement(s) relating to the position(s) giving rise to an understatement


FINAL REGULATIONS T.D. 9436 Reasonable Basis

 In cases in which the taxpayer discloses the position on the tax return, the new law requires there must be a reasonable basis for the tax treatment of the position taken on the tax return

 The "reasonable basis" standard that must be met for disclosed positions is the same standard as defined in Treas. Reg. §1.6662-3(b)(3)

 To meet the "reasonable basis" standard, a tax return preparer may rely in good faith, without verification, upon information furnished by a taxpayer, advisor, another preparer, or other party (even when the advisor or preparer is within the tax return preparer's same firm)


FINAL REGULATIONS T.D. 9436 Adequate Disclosure

 For a signing preparer, the final regulations provide that a position may be disclosed in one of three ways:

- On a properly completed and filed Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, as appropriate, or on the tax return in accordance with the applicable annual revenue procedure

- The preparer provides the taxpayer with a prepared tax return that includes the appropriate disclosure in accordance with §1.6662-4(f)

- For tax returns or claims for refund that are subject to penalties other than the accuracy-related penalty for substantial understatements under §6662(b)(2) and (d), the tax return preparer advises the taxpayer of the penalty standards applicable to the taxpayer under §6662

 In the case of a nonsigning tax return preparer, the final regulations in maintain the same three disclosure rules that were in the proposed regulations


FINAL REGULATIONS T.D. 9436 Reasonable Cause

 The Final Regulations include the same rules as before, but also provide that whether a position is supported by a generally accepted administrative or industry practice is an additional factor to consider in determining whether the preparer acted with reasonable cause and good faith

 The reasonable cause provisions are also expanded to allow a preparer to reasonably rely on information or advice furnished by a taxpayer, advisor, another preparer, or other party (even when the advisor or preparer is within the tax return preparer's same firm)


INTERIM GUIDANCE FOR 2008 ACT



Notice 2009-5

 Notice 2009-5 provides substantive interim guidance on the 2008 Act's changes to §6694(a)

 The Notice provides a definition of substantial authority consistent with the definition under the §6662 penalty regulations. The substantial authority standards is an objective standard involving an analysis of the law to relevant facts, and is less stringent than the more likely than not standard but more stringent than the reasonable basis standard. Conclusions reached in treatises, legal periodicals, legal opinions, or opinions rendered by tax professionals (including tax return preparers) are not authority. The authorities underlying such expressions of opinion, if applicable to the facts of a particular case, however, may give rise to substantial authority for the position

 A tax return preparer will meet the substantial authority standard if the tax return preparer relies in good faith and without verification on the advice of another advisor, another tax return preparer, or other party. Factors used in evaluating a tax return preparer's good faith reliance on the advice of another are found in Treas. Reg. § 1.6694- 2(e)(5)


2008 Act Special Rule for Tax Shelters and Reportable Transactions Under §6662A

 For undisclosed positions on a tax return, the 2008 Act maintains the reasonable to believe that the tax treatment of the position would more likely than not be sustained on its merits standard for tax shelters and reportable transactions under §6662A

 It is reasonable to believe that positions have a "more likely than not" chance of being upheld on their merits if a preparer has:

- Analyzed the pertinent facts and authorities; and

- Concluded, in good faith, that there is greater than 50 percent likelihood that the tax treatment will be upheld if IRS challenges it

 Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer's due diligence


Interim Penalty Compliance Rules for Tax Shelter Transactions - Notice 2009-5

 Notice 2009-5 provides an interim compliance rule for tax shelter transactions that are not listed or otherwise reportable. 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

 These rules do not apply to a reportable transaction with a significant purpose of Federal Tax avoidance or evasion or a listed transaction


Notice 2009-5 Effective Dates


Notice 2009-5 effective date provisions provide:
- Tax return preparers may rely on the transitional rules provided in Notice 2007-54 and Notice 2008-11

- Notice 2008-13 provided interim guidance on the standards of conduct applicable to tax return preparers. For positions other than with respect to tax shelters and reportable transactions to which §6662A applies, tax return preparers may apply the substantial authority standard consistent with the 2008 Act or may rely upon the interim guidance provided in Notice 2008-13 when preparing returns or claims for refund for the periods covered by that notice

- The 2008 Act's special rule for tax shelters and reportable transactions to which §6662A applies does not apply retroactively, and the provisions of Notice 2008-13 will apply to tax shelter and §6662A reportable transaction positions on returns or claims for refund for tax years ending prior to October 3, 2008 and otherwise covered by Notice 2008-13 . The interim guidance with respect to tax shelters (as defined in §6662(d)(2)(C)(ii) ) and reportable transactions to which §6662A applies is effective for returns or claims for refund for tax years ending after October 3, 2008


---------------------

The reater concern for return prearers for the 2008 tax year is that the IRS will be aggressive in targeting 6694 errors in any case that suggests tax negligence when tax returns are filed for gthe 2008 tax year.

Contact ab@irstaxattorney.com for any OPR issues.