6694 cannot rely on client data

TRAPS IN RELIANCE ON CLIENT DATA

§1.6694-1 (e) Verification of information furnished by taxpayer

§1.6694-1 (e)(1) In general . For purposes of sections 6694(a) and (b) ‘reasonable cause and good faith under §1.6694-2(e));

The tax return preparer generally may rely in good faith without verification upon information furnished by the taxpayer and upon information and advice furnished by another advisor, another tax return preparer or other party (including another advisor or tax return preparer at the tax return preparer's firm).

The tax return preparer is not required to audit, examine or review books and records, business operations, documents, or other evidence to verify information provided by the taxpayer, advisor, other tax return preparer, or other party.

The tax return preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer. The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some provisions of the Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintain specific documents) before a deduction or credit may be claimed. The tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit.

COMMENT: Vagueness of terms: implications – must make reasonable inquiries –must make appropriate inquiries – facts and circumstances -
Subjective terms: actually known – good faith

The exceptions to the "reliance on client data" are so large that it would be relatively easy for the IRS to impose section 6694(b) penalties on an allegation that the tax return preparer did not make reasonable inquiries.

Also the mandatory "must" word in this regulation leaved no doubt that if there is a statutory notice requirement of a regulation substantiation requirement is not being filed, I see no possibility of escapint the 6694(a) penalty. It is my opinion that the IRS examiner will go for the 6694(b) penalty because failure to follow a regulation is easily within the "reckless" term under 6694(b).