section 6694 penalty + injuction

U.S. v. DOVE, Cite as 107 AFTR 2d 2011-XXXX, 01/26/2011
________________________________________
UNITED STATES OF AMERICA, Plaintiff, v. SIDNEY DOVE, individually, and d/b/a Sid's Tax, Defendant.
Case Information:
Code Sec(s):
Court Name: UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION,
Docket No.: 10 C 60,
Date Decided: 01/26/2011.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION,
MEMORANDUM OPINION
Judge: CHARLES P. KOCORAS, District Judge:
This case comes before the court on two motions submitted by Plaintiff the United States of America (“the Government”). The Government moves for the entry of summary judgment on Count I of the Complaint pursuant to Fed. R. Civ. P. 56. The Government also asks for a permanent injunction against Defendant Sidney Dove, individually, and doing business as Sid's Tax, pursuant to 26 U.S.C. § 7407. For the reasons set forth below, the motions are granted.
BACKGROUND 1
Defendant Sidney Dove (“Dove”) operated a business, Sid's Tax, out of his home in Joliet, Illinois. Dove prepared or assisted in the preparation of federal income tax returns for others in return for monetary compensation. Dove prepared nearly 330 federal income tax returns in 2008, 263 returns in 2009, and 95 returns in 2010.
Dove was recently the subject of an investigation by the Internal Revenue Service (“IRS”). The IRS examined 79 of the returns Dove prepared and assessed additional tax for all but one of those tax returns. 2 As a consequence of its limited examination of the returns Dove prepared, the IRS assessed an additional $610,000 in taxes. The IRS' investigation revealed a pattern of overstatement of charitable contributions, employee business expenses, and Schedule C expenses on the examined returns. The IRS also sent an undercover special agent to Dove's place of business. Dove prepared a return for the undercover agent which included education credits that the agent would not have been entitled to under the tax code.
Dove later described some of his tax preparation practices during a preliminary injunction hearing. Dove testified that he routinely deducted 10% of a client's income as a charitable contribution without determining whether his customer had documentation to support such a deduction. Dove also stated that he prepared a return for a customer in which he improperly reported various deductions for a piece of investment property that the customer never used as rental property. Dove also testified that he would report whatever information his customers told him without requesting any documents to support their oral representations.
The Government instituted this action against Dove on January 6, 2010. Count I of the Complaint alleges that Dove prepared income tax returns which understated the taxpayer's liability in violation of 26 U.S.C. § 6694. On March 23, 2010, we held a preliminary injunction hearing and granted the Government's motion for a preliminary injunction against Dove precluding him from preparing 2009 tax returns for the duration of the filing season. The Government now moves for summary judgment under Fed. R. Civ. P. 56 and for a permanent injunction against Dove pursuant to 26 U.S.C. § 7407. 3
LEGAL STANDARDS
I. Motion For Summary Judgment Pursuant To Fed. R. Civ. P. 56
Summary judgment is appropriate only when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. Proc. 56(c). A genuine issue of material fact exists when the evidence is such that a reasonable jury could find for the nonmovant. Buscaglia v. United States, 25 F.3d 530, 534 (7th Cir. 1994). The movant in a motion for summary judgment bears the burden of demonstrating the absence of a genuine issue of material fact by specific citation to the record; if the party succeeds in doing so, the burden shifts to the nonmovant to set forth specific facts showing that there is a genuine issue of fact for trial. Fed. R. Civ. Proc. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). In considering motions for summary judgment, a court construes all facts and draws all inferences from the record in favor of the nonmoving party.Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 255 (1986).
II. Motion For Permanent Injunction Under 26 U.S.C. § 7407
When a party requests an injunction which is explicitly authorized by statute, courts refrain from using the standard permanent injunction test and instead determine whether the moving party has established that the statutory conditions for injunctive relief are present. SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975). To enjoin an individual from acting as a tax preparer pursuant to section 7407, the Government must show that: (1) the defendant is an “income tax return preparer” within the meaning of 26 U.S.C. § 7701(a)(36); (2) the defendant continually or repeatedly engaged in conduct described in 26 U.S.C. § 7407(b)(1)(A)–(D); and (3) an injunction prohibiting such conduct would not be sufficient to prevent that person's further interference with the proper administration of the tax code.See 26 U.S.C. § 7407(b)(2); United States v. Reddy, 500 F. Supp. 2d 877, 882 [99 AFTR 2d 2007-2742] (N.D. Ill. 2007).
DISCUSSION
We will discuss the Government's motion for summary judgment first before turning to its motion for a permanent injunction.
I. Motion For Summary Judgment As To Count I
The Government asks that we grant summary judgment in its favor on Count I because no genuine issues of fact exist regarding whether Dove violated 26 U.S.C. § 6694. To demonstrate an individual's liability under section 6694, the Government must show that: (1) the individual qualified as an “income tax preparer” as defined in 26 U.S.C. § 7701(a)(36); (2) a tax return prepared by the individual contained an understatement of tax liability due to a position for which there was not a realistic possibility of being sustained on the merits; (3) the individual knew (or reasonably should have known) of such position; and (4) such position was not disclosed pursuant to section 6662(d)(2)(B)(ii) and was not frivolous. 26 U.S.C. § 6694(a)(1)–(3).
The undisputed facts demonstrate that Dove violated 26 U.S.C. § 6694. From 2008 until 2010, Dove acted as an “income tax preparer” as that term is defined by the Internal Revenue Code in that he prepared hundreds of income tax returns in exchange for compensation. 26 U.S.C. § 7701(a)(36). Dove prepared a number of returns that significantly understated the taxpayer's liability because of positions that had no possibility of being sustained on the merits. For example, Dove habitually deducted 10% of his clients' income as charitable donations without ensuring whether the taxpayer had any documents to support the deduction. Additionally, the record contains no evidence to suggest that Dove disclosed the positions in a manner authorized by the tax code or that the positions could be considered frivolous. In the absence of disputes regarding Dove's repeated preparation of returns with unrealistic positions, we find the Government is entitled to summary judgment as to Count I.
II. Motion For Permanent Injunction Pursuant To 26 U.S.C. § 7407
The Government also moves for a permanent injunction against Dove prohibiting him from acting as an income tax preparer. To enjoin an individual from acting as a tax preparer pursuant to section 7407, the Government must show that: (1) the defendant is an “income tax return preparer” within the meaning of 26 U.S.C. § 7701(a)(36); (2) the defendant continually or repeatedly engaged in any of the conduct described in 26 U.S.C. § 7407(b)(1)(A)–(D); and (3) an injunction prohibiting such conduct would not be sufficient to prevent that person's further interference with the proper administration of the tax code. We have already concluded that Dove may be classified as an income tax preparer because he operated a business in which he prepared returns for other taxpayers in exchange for money. The court also finds that Dove repeatedly committed one of the improper tax preparation practices listed in 26 U.S.C. § 7404(b)(1)(A)–(D). Specifically, Dove prepared dozens of returns over the course of three years that understated the taxpayer's liability and contained assertions that had little chance of being sustained on the merits in violation of 26 U.S.C. § 6694.
Finally, we find that the circumstances surrounding Dove's conduct in this case show that an injunction prohibiting further violations of the tax code would be insufficient to prevent his continued interference with the tax code. In assessing the likelihood of an individual's future violations of the Internal Revenue Code, a court should examine the totality of the circumstances, including factors as:
the gravity of harm caused by the offense; the extent of the defendant's participation and his degree of scienter; the isolated or recurrent nature of the infraction and the likelihood that the defendant's customary business activities might again involve him in such transaction; the defendant's recognition of his own culpability; and the sincerity of his assurances against future violations.
United States v. Kaun, 827 F.2d 1144, 1149–50 [60 AFTR 2d 87-5623] (7th Cir. 1987) (quoting SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982). The IRS' limited investigation into Dove's tax practices revealed that he had prepared 78 returns which understated his customers' tax liability by $610,000. Dove knowingly violated section 6694 on a number of occasions by asserting positions on returns that had little chance of surviving scrutiny and deliberately refusing to obtain documents to determine the validity of his customers' contentions. See United States v. Nobles, 69 F.3d 172, 185 (7th Cir. 1995) (“It is well settled that willful blindness or conscious avoidance is the legal equivalent to knowledge[]”). Additionally, Dove has submitted a document to the court indicating that he desires to continue preparing tax returns for others. Dove's continuous and knowing violations of the tax laws over the last three years and his stated intention to continue preparing tax returns in the future demonstrates the need for the Government's requested relief in this case. Accordingly, the motion for a permanent injunction under 26 U.S.C. § 7407 is granted.
CONCLUSION
The Government's motion for summary judgment is granted. The Government's motion for permanent injunction is granted.
PERMANENT INJUNCTION
Upon Plaintiff United States of America's Motion for Permanent Injunction against Defendant Sidney Dove, it is hereby:
ORDERED that Defendant Sidney Dove, individually or doing business as Sid's Tax, or any other name or using any other entity is permanently enjoined from directly or indirectly acting as income tax return preparers and are hereby prohibited from preparing, filing, or assisting in the preparing and filing of federal income tax returns, amended returns, or other related forms and documents on behalf of any person other than himself;
ORDERED that Defendant Sidney Dove, individually or doing business as Sid's Tax, or any other name or using any other entity is permanently enjoined from advising, assisting, counseling, or instructing anyone about the preparation of a federal tax return;
ORDERED that Defendant Sidney Dove prepare and provide counsel for the United States of America a list of everyone for whom he has prepared (or helped to prepare) a federal income tax return since January 1, 2006, and set forth on said list all of the names, addresses, e-mail addresses, telephone numbers, and Social Security numbers within fifteen (15) days of the entry of this order;
ORDERED that Defendant Sidney Dove shall mail or otherwise deliver a copy of this Permanent Injunction and the Memorandum Opinion and Order to all customers for whom he has prepared federal income tax returns or assisted in the preparation of their federal income tax returns, on or before February 28, 2011. By March 4, 2011, Defendant Dove shall file with this Court — and serve upon Plaintiff — an affidavit stating, under penalty of perjury, that he has fully complied with this Order. In that affidavit, Defendant Dove shall specifically name the clients to whom he has mailed or otherwise delivered a copy of this Permanent Injunction and the Memorandum Opinion and Order.
Charles P. Kocoras
United States District Judge
Dated: January 26, 2011
________________________________________
1
On October 28, 2010, the Government sent Dove a statement advising him of the required procedures for answering their motion for summary judgment pursuant to Local Rule 56.2. Despite Dove's receipt of this notice, he did not submit a response to the Government's statement of facts or a statement of facts of his own. The Seventh Circuit Court of Appeals has “consistently held that a failure to respond by the nonmovant as mandated by the local rules results in an admission.” Smith v. Lamz, 321 F.3d 680, 683 (7th Cir. 2003). While courts must construe pro se pleadings liberally, Dove's unrepresented status does not absolve him from complying with Local Rule 56.1. See Greer v. Bd. of Ed. of City of Chicago, 267 F.3d 723, 727 (7th Cir. 2001). As Dove has neglected to submit a response in compliance with Local Rule 56.1, by operation of the rule all facts asserted by the Government are admitted.
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2
One improperly prepared return resulted in the refund of $33 to the taxpayer.
________________________________________
3
The Government has also requested preliminary injunction under 26 U.S.C. § 7402 and a permanent injunction pursuant to 26 U.S.C. § 7408. As a result of our conclusion that the Government is entitled to an injunction under 26 U.S.C. § 7407, we need not address the Government's alternative grounds for injunctive relief.

voluntary reporting requirements

Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also: Part 1, §§ 6662, 6694, 1.6662-4, 1.6694-2)

Rev. Proc. 2011-13

SECTION 1. PURPOSE

This revenue procedure updates Rev. Proc. 2010-15, 2010-7 I.R.B. 404, and
identifies circumstances under which the disclosure on a taxpayer's income tax return
with respect to an item or a position is adequate for the purpose of reducing the
understatement of income tax under section 6662(d) of the Internal Revenue Code
(relating to the substantial understatement aspect of the accuracy-related penalty), and
for the purpose of avoiding the tax return preparer penalty under section 6694(a)
(relating to understatements due to unreasonable positions) with respect to income tax
returns. This revenue procedure does not apply with respect to any other penalty
provisions (including the disregard provisions of the section 6662(b)(1) accuracy-related 2
penalty, the section 6662(i) increased accuracy-related penalty in the case of
nondisclosed noneconomic substance transactions, and the section 6662(j) increased
accuracy-related penalty in the case of undisclosed foreign financial asset
understatements).
This revenue procedure applies to any income tax return filed on 2010 tax
forms for a taxable year beginning in 2010, and to any income tax return filed on
2010 tax forms in 2011 for short taxable years beginning in 2011.
SECTION 2. CHANGES FROM REV. PROC. 2010-15
01 This revenue procedure has been updated to include reference to: (i) the.
section 6662(i) increased accuracy-related penalty in the case of nondisclosed
noneconomic substance transactions; (ii) the section 6662(j) increased accuracy-related
penalty in the case of undisclosed foreign financial asset understatements; and (iii) the
Schedule UTP, Uncertain Tax Position Statement, a new schedule required of certain
corporations.

01 If SECTION 3. BACKGROUND
01 If section 6662 applies to any portion of an underpayment of tax required to.
be shown on a return, an amount equal to 20 percent of the portion of the
underpayment to which the section applies is added to the tax (the penalty rate is 40
percent in the case of gross valuation misstatements under section 6662(h),
nondisclosed noneconomic substance transactions under section 6662(i), or
undisclosed foreign financial asset understatements under section 6662(j)). Section
6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a 3
substantial understatement of income tax.
02 Section 6662(d)(1) provides that there is a substantial understatement of.
income tax if the amount of the understatement exceeds the greater of 10 percent of the
amount of tax required to be shown on the return for the taxable year or $5,000.
Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than
an S corporation or personal holding company) has a substantial understatement of
income tax if the amount of the understatement exceeds the lesser of 10 percent of the
tax required to be shown on the return for a taxable year (or, if greater, $10,000) or
$10,000,000. Section 6662(d)(2) defines an understatement as the excess of the
amount of tax required to be shown on the return for the taxable year over the amount
of the tax that is shown on the return reduced by any rebate (within the meaning of
section 6211(b)(2)).
03 In the case of an item not attributable to a tax shelter, section.
6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the
portion of the understatement attributable to the item if the relevant facts affecting the
item’s tax treatment are adequately disclosed in the return or in a statement attached to
the return, and there is a reasonable basis for the tax treatment of the item by the
taxpayer..
04 Section 6694(a) imposes a penalty on a tax return preparer who prepares a.
return or claim for refund reflecting an understatement of liability due to an
“unreasonable position” if the tax return preparer knew (or reasonably should have
known) of the position. A position (other than a position with respect to a tax shelter or 4
a reportable transaction to which section 6662A applies) is generally treated as
unreasonable unless (i) there is or was substantial authority for the position, or (ii) the
position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a
reasonable basis. If the position is with respect to a tax shelter (as defined in section
6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the
position is treated as unreasonable unless it is reasonable to believe that the position
would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3
I.R.B. 309 (January 21, 2009) for interim penalty compliance rules for tax shelter
transactions.

05 In general, this revenue procedure provides guidance for determining when.
disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and section
6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must furnish all
required information in accordance with the applicable forms and instructions, and the
money amounts entered on these forms must be verifiable..
06 Fiscal and short tax year returns. (a) In general. This revenue procedure.
may apply to a return for a fiscal tax year that begins in 2010 and ends in 2011. This
revenue procedure may also apply to a short year return for a period beginning in 2011
if the return is to be filed before the 2011 forms are available. (Note that individuals are
generally not put in this position as a decedent's final return for a fractional part of a
year is due the fifteenth day of the fourth month following the close of the 12-month
period which began with the first day of such fractional part of the year. See Treas.
Reg. § 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must 5
take into account any tax law changes that are effective for tax years beginning after
December 31, 2010, even though these changes are not reflected on the form.
(b) Tax law changes effective after December 31, 2010. This document does not
take into account the effect of tax law changes effective for tax years beginning after
December 31, 2010. If a line referenced in this revenue procedure is affected by such a
change and requires additional reporting, a taxpayer may have to file Form 8275,
Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, until the
Service prescribes criteria for complying with the requirement.
07 A complete and accurate disclosure of a tax position on the appropriate.
year’s Schedule UTP, Uncertain Tax Position Statement, will be treated as if the
corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a
Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a
Schedule UTP.
SECTION 4. PROCEDURE
01 General.
(1) Additional disclosure of facts relevant to, or positions taken with respect to,
issues involving any of the items set forth below is unnecessary for purposes of
reducing any understatement of income tax under section 6662(d) (except as otherwise
provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms
and attachments are completed in a clear manner and in accordance with their
instructions.
(2) The money amounts entered on the forms must be verifiable, and the 6
information on the return must be disclosed in the manner described below. For
purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can
prove the origin of the amount (even if that number is not ultimately accepted by the
Internal Revenue Service) and the taxpayer can show good faith in entering that
number on the applicable form.

(3) The disclosure of an amount as provided in section 4.02 below is not
adequate when the understatement arises from a transaction between related parties.
If an entry may present a legal issue or controversy because of a related-party
transaction, then that transaction and the relationship must be disclosed on a Form
8275 or Form 8275-R.
(4) When the amount of an item is shown on a line that does not have a
preprinted description identifying that item (such as on an unnamed line under an “Other
Expense” category) the taxpayer must clearly identify the item by including the
description on that line. For example, to disclose a bad debt for a sole proprietorship,
the words “bad debt” must be written or typed on the line of Schedule C that shows the
amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other
income (loss) items with differences, or Part III, line 35, Other expense/deduction items
with differences, the entry must provide descriptive language; for example, "Cost of noncompete agreement deductible not capitalizable.” If space limitations on a form do not
allow for an adequate description, the description must be continued on an attachment.

(5) Although a taxpayer may literally meet the disclosure requirements of this
revenue procedure, the disclosure will have no effect for purposes of the section 6662 7
accuracy-related penalty if the item or position on the return: (1) Does not have a
reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) Is attributable to a tax
shelter item as defined in section 6662(d)(2); or (3) Is not properly substantiated or the
taxpayer failed to keep adequate books and records with respect to the item or position.
(6) Disclosure also will have no effect for purposes of the section 6694(a) penalty
as applicable to tax return preparers if the position is with respect to a tax shelter (as
defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A
applies.

02 Items.
(1) Form 1040, Schedule A, Itemized Deductions:
(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all
required information.
(b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8
must list each type of tax and the amount paid.
(c) Interest Expenses: Complete lines 10 through 15, supplying all required
information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under
section 163(d) unless Form 4952, Investment Interest Expense Deduction, is
completed, or (ii) amounts disallowed under section 265.
(d) Contributions: Complete lines 16 through 19, supplying all required
information. Enter the amount of the contribution reduced by the value of any
substantial benefit (goods or services) provided by the donee organization in
consideration, in whole or in part. Entering the value of the contribution unreduced by
the value of the benefit received will not constitute adequate disclosure. If a contribution
of $250 or more is made, this section will not apply unless a contemporaneous written
acknowledgment, as required by section 170(f)(8), is obtained from the donee
organization. If a contribution of cash of less than $250 is made, this section will not
apply unless a bank record or written communication from the donee, as required by
section 170(f)(17), is obtained from the donee organization. If a contribution of property
other than cash is made and the amount claimed as a deduction exceeds $500, attach
a properly completed Form 8283, Noncash Charitable Contributions, to the return. In
addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane
has a value of more than $500, this section will not apply unless a contemporaneous
written acknowledgment, as required by section 170(f)(12), is obtained from the donee
organization and attached to the return. An acknowledgment under section 170(f)(8) is
not required if an acknowledgment under section 170(f)(12) is required.
(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts,
and attach to the return. Each item or article for which a casualty or theft loss is claimed
must be listed on Form 4684.
(2) Certain Trade or Business Expenses (including, for purposes of this section,
the following six expenses as they relate to the rental of property):
(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e)
must be followed.

(b) Legal Expenses: The amount claimed must be stated. This section does not
apply, however, to amounts properly characterized as capital expenditures, personal 9
expenses, or non-deductible lobbying or political expenditures, including amounts that
are required to be (or that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off: The amount written off must be stated.
(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E,
Compensation of Officers, must be completed when required by its instructions. The
time devoted to business must be expressed as a percentage as opposed to "part" or
"as needed." This section does not apply to "golden parachute" payments, as defined
under section 280G. This section will not apply to the extent that remuneration paid or
incurred exceeds the employee-remuneration deduction limitations under section
162(m), if applicable.
(e) Repair Expenses: The amount claimed must be stated. This section does
not apply, however, to any repair expenses properly characterized as capital
expenditures or personal expenses.
(f) Taxes (other than foreign taxes): The amount claimed must be stated.
(3) Differences in book and income tax reporting.
For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below,
the information provided must reasonably apprise the Service of the potential
controversy concerning the tax treatment of the item. If the information provided does
not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately
disclose the item (see Part II of the instructions for those forms).
Note: An item reported on a line with a pre-printed description, shown on an
attached schedule or “itemized” on Schedule M-1, may represent the aggregate 10
amount of several transactions producing that item (i.e., a group of similar items,
such as amounts paid or incurred for supplies by a taxpayer engaged in
business). In some instances, a potentially controversial item may involve a
portion of the aggregate amount disclosed on the schedule. The Service will not
be reasonably apprised of a potential controversy by the aggregate amount
disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R
regarding that portion of the item.

Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an
attachment when directed by the instructions), will not constitute an adequate
disclosure.

Additionally, for taxpayers that file the Schedule M-3 (Form 1120), the new
Schedule B, Additional Information for Schedule M-3 Filers, must also be completed.
For taxpayers that file the Schedule M-3 (Form 1065), the new Schedule C, Additional
Information for Schedule M-3 Filers, must also be completed. When required, these
new Schedules are necessary to constitute adequate disclosure.

(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for
Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II
(reconciliation of income (loss) items) and Column (a), Expense per Income Statement,
of Part III (reconciliation of expense/deduction items); Column (b), Temporary
Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income
(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d),
Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and 11
Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction
items).

(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books
With Income per Return.
(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for
Corporations with Total Assets of $10 Million or More: Column (a), Income (Loss) per
Income Statement, of Part II (reconciliation of income (loss) items) and Column (a),
Expense per Income Statement, of Part III (reconciliation of expense/deduction items);
Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II
(reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction
items) and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of
income (loss) items); and Column (d), Deduction per Tax Return, of Part III
(reconciliation of expense/deduction items).


(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss)
Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or
More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of
income (loss) items) and Column (a), Expense per Income Statement, of Part III
(reconciliation of expense/deduction items); Column (b), Temporary Difference, and
Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and
Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per
Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction
per Tax Return, of Part III (reconciliation of expense/deduction items).

(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss)
Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets
of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II
(reconciliation of income (loss) items) and Column (a), Expense per Income Statement,
of Part III (reconciliation of expense/deduction items); Column (b), Temporary
Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income
(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d),
Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and
Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction
items).

(e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation
for S Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss)
per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a),
Expense per Income Statement, of Part III (reconciliation of expense/deduction items);
Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II
(reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction
items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of
income (loss) items) and Column (d), Deduction per Tax Return, of Part III
(reconciliation of expense/deduction items).
(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation
for Foreign Corporations With Total Assets of $10 Million or More: Column (b),
Temporary Difference, Column (c), Permanent Difference, and Column (d), Other 13
Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of
income (loss) items) and Part III (reconciliation of expense/deduction items).

(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form 5713,
International Boycott Report; Schedule A, International Boycott Factor (Section
999(c)(1)); Schedule B, Specifically Attributable Taxes and Income (Section 999(c)(2));
and Schedule C, Tax Effect of the International Boycott Provisions, must be completed
when required by their instructions.
(b) Treaty-Based Return Position: Transactions and amounts under section
6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position
Disclosure Under Section 6114 or 7701(b), must be completed when required by its
instructions.

(5) Other:
(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to
the return.
(b) Employee Business Expenses: Complete Form 2106, Employee Business
Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach
to the return. This section does not apply to club dues, or to travel expenses for any
non-employee accompanying the taxpayer on the trip.
(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and
attach to the return.
(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the 14
return.

SECTION 5. EFFECTIVE DATE
This revenue procedure applies to any income tax return filed on a 2010 tax form
for a taxable year beginning in 2010, and to any income tax return filed on a 2010 tax
form in 2011 for a short taxable year beginning in 2011.
SECTION 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Francis M. McCormick of the
Office of Associate Chief Counsel (Procedure & Administration). For further information
regarding this revenue procedure, contact Branch 2 of Procedure and Administration at
(202) 622-4940 (not a toll free cal

Restitution cannot be abated in an Offer in Compromise

Thomas M. Gillum v. Commissioner, TC Memo 2010-280 , Code Sec(s) 6330; 7122.
________________________________________
THOMAS M. GILLUM, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s): 6330; 7122
Docket: Docket No. 16110-07L.
Date Issued: 12/22/2010
Judge: Opinion by THORNTON
HEADNOTE
XX.
Reference(s): Code Sec. 6330 ; Code Sec. 7122
Syllabus
Official Tax Court Syllabus
Counsel
Kenneth R. Boiarsky, for petitioner.
Elizabeth Downs, for respondent.
Opinion by THORNTON
MEMORANDUM FINDINGS OF FACT AND OPINION
Pursuant to sections 6320(c) and 6330(d), petitioner seeks judicial review of respondent's determination sustaining the filing of a Federal tax lien with respect to petitioner's Federal income tax liabilities for 1998, 2000, 2001, and 2002, and sustaining a proposed levy to collect petitioner's Federal income tax liabilities for each of the years 1996 through 2002. 1Petitioner also seeks judicial review of various letters that respondent allegedly sent to various entities, as petitioner's nominees or alter egos, denying them collection due process hearings with respect to respondent's filing of Federal tax liens.
FINDINGS OF FACT
The parties have stipulated some facts, which we incorporate by this reference. When he filed his petition, petitioner resided in Arkansas.
Petitioner is a veterinarian. He operates his practice under the business name Cloverdale Animal Hospital, LLC (Cloverdale).
In 2004 petitioner was criminally prosecuted for willful failure to file tax returns, in violation of section 7203, for taxable years 1996 through 2002. In December 2005 petitioner pleaded guilty to one count of criminal failure to file a Federal income tax return for 2000. His criminal plea agreement provided, inter alia, for entry of an order of mandatory restitution under 18 U.S.C. section 3663A for “the full amount of the taxes due and owing for all prosecution years.” The plea agreement stated: “At this time, the United States and the defendant agree that the amount of restitution payable by the defendant is $416,210.” The plea agreement also stated: “Except to the extent otherwise expressly specified herein, this Agreement does not bar or compromise any civil or administrative claim pending or that may be made against the defendant, including but not limited to tax matters.” The plea agreement stated further: “This Agreement is binding only upon the United States Attorney's Office for the Eastern District of Arkansas and the defendant. It does not bind *** any other federal, state or local prosecuting, administrative, or regulatory authority.”
In its judgment filed December 12, 2005, the District Court reduced the amount of restitution, labeled “criminal monetary penalties”, to $246,226. 2 The District Court also ordered a schedule of payments, with a lump sum of $25 due immediately and the balance due in monthly installments equaling 10 percent of petitioner's monthly gross income. 3
While the criminal proceedings were pending against petitioner, on August 13, 2004, he filed amended returns for taxable years 1996, 1997, and 1998, and on September 7, 2004, he filed an amended return for taxable year 1999. 4 Also on September 7, 2004, petitioner filed delinquent returns for taxable years 2000, 2001, and 2002.
On October 25, 2004, respondent assessed the taxes that petitioner had reported on his delinquent returns for 2000, 2001, and 2002. On March 14, 2005, respondent assessed the tax that petitioner had reported on his amended 1998 return, and on June 26, 2006, respondent assessed the taxes that petitioner had reported on his amended returns for 1996, 1997, and 1999. In each instance, respondent also assessed applicable additions to tax and interest.
On October 18, 2006, respondent sent petitioner Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (the lien notice), with respect to petitioner's taxable years 1998, 2000, 2001, 2002, and 2003. On October 26, 2006, respondent sent petitioner Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing (the levy notice), with respect to petitioner's taxable years 1996 through 2003. The levy notice indicated that as of November 25, 2006, petitioner would owe $839,856 of tax, penalties, and interest for these years. 5
On November 21, 2006, petitioner timely submitted Form 12153, Request for a Collection Due Process Hearing, indicating that he disagreed with both the lien notice and the levy notice. 6
The request covered petitioner's tax years 1996 through 2002 but not 2003. In his request petitioner asserted that the criminal plea agreement and judgment reflected the full settlement of his tax liabilities for 1996 through 2002. He asserted that “payment on these years is exclusively covered under an agreed court order for restitution”, that he was making payments to the IRS for these tax years under this agreement, and that unless he failed to meet his obligations under the court order, the IRS must “cease and desist from further collection activity.” Petitioner did not propose any collection alternative in his hearing request.
On October 26, 2006, in anticipation of submitting a request for a hearing, petitioner submitted Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with respect to himself, and on October 27, 2006, petitioner submitted Form 433-B, Collection Information Statement for Businesses, with respect to Cloverdale. On these forms petitioner failed to provide complete information. For example, on Form 433-A he did not provide requested bank account numbers and routing information, detailed credit card information, the estimated value of three vehicles, or required information with respect to his personal assets and living expenses. In response to a question asking whether he had transferred any assets for less than their actual value within the past 10 years, he checked “No” but then wrote “Possible”. The form required several attachments, including proof of current expenses, which petitioner failed to provide.
On Form 433-B petitioner did not provide detailed information with respect to Cloverdale's accounts receivable, business assets, bank accounts, or available credit. In response to a question requesting detailed information with respect to Cloverdale's income and expenses, petitioner replied “see statement attached”, but did not attach any such statement. The form also required several other attachments, which petitioner failed to provide.
On May 15, 2007, the settlement officer held the first of three telephone conferences with petitioner's representative. In this conference the settlement officer opined that neither the criminal plea agreement nor the judgment barred the IRS from any civil or administrative actions with respect to petitioner's civil tax liabilities and did not compromise those liabilities. The settlement officer asked the representative whether he wished to propose any collection alternatives. The representative proposed as a collection alternative that the IRS limit its collection action to the terms of the plea agreement and judgment. They agreed to have a second conference.
Before the second conference the settlement officer reviewed the collection administrative case file, which included, among other things: (1) A memorandum, dated February 22, 2007, from Revenue Officer Robert Brown to IRS district counsel in Oklahoma City, Oklahoma, requesting approval to file alter ego and nominee liens and levies against several entities created by petitioner
(the request); (2) a memorandum from respondent's associate area counsel in Oklahoma City responding to the request (the memorandum); and (3) several diagrams detailing petitioner's alleged alter ego and nominee activities. 7
The request indicated on the basis of findings contained therein that, notwithstanding his prior criminal conviction, petitioner was still using various sham trusts, nominees, and alter egos to shield assets and income from taxation. More particularly, the request included findings that petitioner had funneled unreported cash payments from Cloverdale to grantor trusts and other entities to pay his and his family's personal expenses, including cable TV bills, college tuition, life insurance premiums, vacation expenses, car payments, and hardwood flooring for petitioner's residence. The request concluded that petitioner had created certain nominee entities, including a trust known as Lestat Ops, to hold personal assets and real estate for the purpose of placing them out of the reach of creditors, mainly the Government. 8
The memorandum indicates that “nominee” refers to an entity or person to whom a taxpayer has transferred property in an attempt to conceal it. According to the memorandum, a Federal tax lien encumbers such property because although a third party may have legal title, the taxpayer actually owns the property and enjoys its full use and benefit. The memorandum also indicates that an alter ego generally involves a sham corporation or other entity used by the taxpayer as an instrumentality to avoid his or her own legal obligations. In the memorandum respondent's associate area counsel approved nominee liens against three trusts created by petitioner, including Lestat Ops, as well as against petitioner's wife, and approved alter ego liens againstCloverdale, another limited liability company, and two other trusts that petitioner had created.
Cloverdale and Lestat Ops received from the IRS Letters 3172, dated May 15, 2007, providing notice of the filing of Federal tax liens and advising of the right to a collection due process (CDP) hearing. By letters dated June 20, 2007, requests for CDP hearings with respect to these two entities were timely submitted. Shortly thereafter, Cloverdale and Lestat Ops received letters from Revenue Officer Robert Brown, dated June 25, 2007, acknowledging receipt of the hearing requests but advising that CDP rights were not available to these entities because petitioner previously had been afforded CDP rights with respect to the same tax periods listed in the lien notices. The letters indicated, however, that the entities were entitled to a “Collection Appeal” with the revenue officer's manager.
On May 21, 2007, the settlement officer held a second telephone conference with petitioner's representative. Petitioner's representative continued to maintain, as a collection alternative to the proposed levy, that collection should be limited to the amount specified in the criminal plea agreement and judgment. The settlement officer indicated that he had reviewed financial statements and related information in the collection administrative file and concluded that the financial statements did not provide full disclosure of petitioner's income and assets. Consequently, he was unable to recommend acceptance of petitioner's proposed collection alternative. Petitioner's representative requested details of the alleged nondisclosure. The settlement officer declined to discuss the details at that time, indicating that he would research the matter. They agreed to have another conference.
After seeking advice of IRS counsel, on May 24, 2007, the settlement officer held the third and final telephone conference with petitioner's representative. The settlement officer asserted that petitioner had failed to completely disclose his income, expenses, and assets, making it impossible to adequately evaluate his ability to pay. Without specifically referencing the request or memorandum that he had reviewed, the settlement officer asserted that petitioner had diverted income into various entities and paid personal expenses through these entities for no apparent legitimate business reason. He also asserted that petitioner had attempted to place numerous assets beyond respondent's reach in various nominee or alter ego entities. According to the settlement officer's case activity record, petitioner's representative expressed surprise at this information, indicated that petitioner apparently had not disclosed all the facts to him, and stated that he understood why the settlement officer could not consider a collection alternative. After another discussion about the effect of the criminal plea agreement and judgment, the settlement officer advised the representative that the proposed collection actions would be sustained.
On June 15, 2007, respondent's Office of Appeals mailed petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (the determination), sustaining the Federal tax lien filing and the proposed levy. With respect to petitioner's underlying liability the determination stated:
In this case the taxpayer agreed to pay restitution for the full amount of the taxes due for all prosecution years (1996 through 2002), but the judge, who is not bound by the plea agreement, subsequently ordered payment of restitution in the amount that is equivalent of the tax liability for only one count of the total criminal case. The restitution amount relates to the tax liability, but it is not the equivalent of the tax liability. It is the determination of Appeals that neither the plea agreement nor the court judgment represent a settlement or compromise of the tax liability, and do not bar IRS from taking additional collection actions. The determination also rejected petitioner's proposed collection alternative of limiting collection to the terms of the criminal plea agreement and judgment, stating:
Appeals has determined from this review that the taxpayer has not accurately reported income and expenses, which make it impossible to determine his true ability to pay the tax liability. The taxpayer has done this by diverting income through various entities (trusts, limited liability companies, and his wife) and paying personal expenses through these entities for no apparent reason other than to avoid taxes and the collection of taxes. He has also placed assets beyond the reach of IRS by purchasing them in the name of various entities he controls or transferring them to these entities. It is clear that the taxpayer maintains full use and benefits of these assets, which include real estate, vehicles, watercraft, and all-terrain vehicles. Because these assets and any encumbrances against these assets have not been disclosed, Appeals is not able to determine their net equity and collection potential. For these reasons Appeals cannot accept the only collection alternative proposed by the taxpayer's representative. The determination also concluded that the proposed tax lien filing and levy action properly balanced the need for efficient collection of taxes with the concern that collection action be no more intrusive than necessary.
Petitioner timely petitioned this Court for judicial review of this determination. The petition also seeks judicial review of letters which petitioner asserts respondent mailed on June 25, 2007, to four entities created by petitioner, including Cloverdale and Lestat Ops, denying them the opportunity for CDP hearings with respect to the filing of tax liens against them as petitioner's alleged nominees, transferees, or alter egos. 9
OPINION
I. Statutory Framework Section 6321 imposes a lien in favor of the United States on all property and property rights of a person who is liable for and fails to pay tax after demand for payment has been made. The lien arises when assessment is made and continues until the liability is paid or becomes unenforceable by lapse of time. Sec. 6322. For the lien to be valid against certain third parties, the Secretary must file a notice of Federal tax lien; within 5 business days thereafter, the Secretary must provide written notice to the taxpayer. Secs. 6320(a), 6323(a). The taxpayer then has 30 days to request an administrative hearing before an Appeals officer. Sec. 6320(a)(3)(B), (b)(1); sec. 301.6320-1(c)(1), Proced. & Admin. Regs. To the extent practicable, a hearing requested under section 6320 is to be held in conjunction with a related hearing requested under section 6330. Sec. 6320(b)(4).
Section 6330 requires the Secretary to furnish a person notice and opportunity for a hearing before levying on the person's property. At the hearing, the person may raise any relevant issue relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. The person may challenge the underlying tax liability if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. Sec. 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604 (2000). After receiving a notice of determination, the person may seek judicial review in this Court. Sec. 6330(d)(1); Pension Protection Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019. If the validity of the underlying tax liability is properly at issue, we review Sego v. Commissioner, supra. Other issues that issue de novo. we review for abuse of discretion. Id.
II. Petitioner's Challenge to His Underlying Liabilities
Petitioner contends that respondent erred in sustaining the lien and levy notices because they contravene the criminal plea agreement and judgment. Petitioner's contention represents in part a challenge to his underlying liabilities for 1996 through 2002. 10 Respondent concedes that petitioner is entitled to make such a challenge but contends that it is without merit.
Respondent assessed petitioner's taxes for the years in question on the basis of the amounts petitioner self-reported on his amended or delinquent returns for these years. Petitioner does not contend that he incorrectly reported his tax liabilities on these returns. Rather, he contends that his aggregate tax liability for 1996 through 2002 is limited to the $246,226 of restitution ordered in the criminal judgment. We disagree.
Pursuant to 18 U.S.C. section 3663(a) (2006), a District Court may order restitution to the victim of a criminal offense. In some circumstances, as in petitioner's criminal case, restitution is mandatory. See 18 U.S.C. sec. 3663A (2006). An order to pay restitution is a criminal penalty rather than a Creel v. Commissioner, 419 F.3d 1135, 1140 [96 AFTR 2d 2005-5487] (11th civil penalty. Cir. 2005). Although restitution is based upon an estimation of civil tax liability, it is not a determination of civil tax liability and generally does not bar the Commissioner from assessing a greater amount of civil tax liability. See Morse v. Commissioner, 419 F.3d 829, 833-835 [96 AFTR 2d 2005-5814] (8th Cir. 2005), affg. T.C. Memo. 2003-332 [TC Memo 2003-332]; Hickman v. Commissioner, 183 F.3d 535, 537-538 [84 AFTR 2d 99-5346] (6th Cir. 1999), affg. T.C. Memo. 1997-566 [1997 RIA TC Memo ¶97,566]; M.J. Wood Associates, Inc. v. Commissioner, T.C. Memo. 1998-375 [1998 RIA TC Memo ¶98,375]. In fact, the restitution statute expressly contemplates that a civil claim may be brought after the criminal prosecution by providing that the amount paid under a restitution order “shall be reduced by any amount later recovered as compensatory damages for the same loss by the victim in *** any Federal civil proceeding”. 18 U.S.C. 3664(j)(2) (2006). 11
Petitioner relies upon Creel v. Commissioner, supra, in support of his contention that respondent's proposed collection actions contravene the restitution order. Petitioner's reliance on Creel is misplaced. In Creel, the Court of Appeals found that a restitution order, which specifically encompassed “any interest and penalties which may be imposed by the Internal Revenue Service”, included the civil penalties that the Id. at Commissioner later sought to recover in a civil suit. 1140. Furthermore, at the time of the civil suit the taxpayer in Creel had fully settled the ordered restitution, and the U.S. attorney had filed a satisfaction of judgment and had also recorded a cancellation and release that of the judgment lien.
Taking into account these unusual circumstances, the Court Id. of Appeals held that the Government had discharged the taxpayer's civil tax liabilities as part of the criminal case.
By contrast, petitioner's plea agreement expressly states that it “does not bar or compromise any civil or administrative claim pending or that may be made against the defendant, including but not limited to tax matters.” Further, the plea agreement states that it is “binding only upon the United States Attorney's Office for the Eastern District of Arkansas and the defendant” and “does not bind *** any other federal, state or 11(...continued) this statement or the appropriateness of this treatment. Consequently, we give this issue no further consideration. local prosecuting, administrative or regulatory authority.” The criminal judgment refers to the restitution payments as “criminal monetary penalties” and makes no mention of civil liabilities or penalties. Furthermore, there is no evidence that petitioner has satisfied his criminal restitution order or received any discharge.
We conclude and hold that petitioner's criminal plea agreement and judgment ordering restitution did not discharge, and do not limit respondent's assessment and collection of, petitioner's civil tax liabilities for his taxable years 1996 through 2002.
III. Petitioner's Proposed Collection Alternative We review the settlement officer's denial of a collection alternative for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604 (2000). The U.S. Court of Appeals for the Eighth Circuit, to which any appeal of this case would lie, describes the abuse of discretion standard as “markedly deferential: if the amount of tax owed is not in dispute, courts may disturb the administrative decision only if it constituted `a clear abuse of discretion in the sense of clear taxpayer abuse and unfairness by the IRS.” Fifty Below Sales & Mktg., Inc. v. United States, 497 F.3d 828, 830 [100 AFTR 2d 2007-5551] (8th Cir. 2007) (quoting Robinette v. Commissioner, 439 F.3d 455, 459 [97 AFTR 2d 2006-1391] (8th Cir. 2006), revg. 123 T.C. 85 (2004)).
The only collection alternative that petitioner has proposed is to limit his 1996 through 2002 liability to $246,226; i.e., the amount of restitution ordered by the District Court in the criminal proceeding. Insofar as this “collection alternative” represents petitioner's reassertion of his challenge to his underlying civil tax liabilities, it was properly rejected for the reasons just discussed. And for essentially those same reasons, the restitution order does not require respondent to adhere to the restitution payment schedule set forth therein to collect petitioner's civil tax liabilities.
Insofar as petitioner's “collection alternative” might be viewed as representing, in effect, an offer-in-compromise, the settlement officer did not abuse his discretion in rejecting it. The regulations set forth three grounds for compromising a liability: (1) Doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. As just discussed, petitioner has put forward no legitimate issue regarding his civil tax liabilities. Nor has he expressly argued that his collection alternative was for the promotion of effective tax administration. 12 That leaves doubt as to collectibility.
For purposes of evaluating an offer-in-compromise, doubt as to collectibility exists “where the taxpayer's assets and income are less than the full amount of the liability.” Sec. 301.7122- 1(b)(2), Proced. & Admin. Regs. Because he submitted incomplete Forms 433-A and 433-B, petitioner failed to provide the settlement officer all financial information necessary to evaluate his ability to fully pay his civil tax liabilities. For that reason, if for no other, the settlement officer did not abuse his discretion in rejecting any collection alternative based on doubt as to collectibility. See, e.g., Kansky v. Commissioner, T.C. Memo. 2007-40 [TC Memo 2007-40]; Criner v. Commissioner, T.C. Memo. 2003-328 [TC Memo 2003-328].
IV. Fair Hearing Petitioner complains that he was denied a fair collection hearing because the settlement officer did not disclose to his representative all the information in the collection administrative file which the settlement officer had reviewed in reaching his conclusions. 13
Collection hearings are conducted in an informal setting that does not include the right to discovery. See Katz v. Commissioner, 115 T.C. 329 (2000), Davis v. Commissioner, 115 T.C. 35, 41-42 (2000). The information that the settlement officer reviewed related to matters that should have been within petitioner's knowledge, and the settlement officer did in fact share with petitioner's representative the nature of his concerns about petitioner's nondisclosure of income and assets. 14 More fundamentally, as just discussed, petitioner's failure to provide the settlement officer all required financial information was reason enough for the settlement officer to reject his collection alternative. We do not see that the settlement officer's disclosure or nondisclosure of the materials in question had any significant bearing on the fairness or outcome of petitioner's hearing.
V. Denial of CDP Hearings for Nominees and Alter Egos Petitioner asserts that certain entities, including Cloverdale and Lestat Ops, received nominee or alter ego lien notices but were improperly denied CDP hearings. 15 According to the regulations, nominees and alter egos holding property for a taxpayer are not entitled to CDP hearings. Sec. 301.6330- 1(b)(2), Q&A-B5, Proced. & Admin. Regs. In any event, we cannot enter a decision affecting the entities in question because they are not parties to this proceeding. See Dalton v. Commissioner, 135 T.C. , (2010) (slip op. at 15).
V. Conclusion
We sustain respondent's determinations sustaining the filing of the notice of Federal tax lien and the proposed levy.
Decision will be entered for respondent.
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1
Unless otherwise indicated, all section references are to the Internal Revenue Code. All figures are rounded to the nearest dollar.
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2
This amount corresponded to the amount stated in the plea agreement as representing petitioner's total tax liability for the years 1999 through 2001. The record does not conclusively show why the District Court reduced the restitution in this manner.
________________________________________
3
The record does not establish whether petitioner has complied with the restitution order.
________________________________________
4
Insofar as the record shows, these were the first returns that petitioner filed for these years. Apparently, they were characterized as “amended” returns because respondent had previously prepared substitutes for returns for petitioner's taxable years 1996 through 1999.
________________________________________
5
The notice indicates that $47,567 of this amount relates to petitioner's 2003 taxable year.
________________________________________
6
After petitioner submitted his request for a collection due process (CDP) hearing, on Dec. 8, 2006, respondent issued to petitioner a notice of deficiency with respect to petitioner's taxable years 1998 through 2002. The parties agree that the deficiencies determined in the notice are not at issue in this case.
________________________________________
7
The record does not reveal who prepared these diagrams.
________________________________________
8
The request describes Lestat Ops as a trust which holds the real estate upon which petitioner's veterinary clinic is located and indicates that the trust's beneficiaries are petitioner's children.
________________________________________
9
The record contains the June 25, 2007, letters, described supra , from Revenue Officer Robert Brown to Cloverdale and Lestat Ops. The petition seems to assert that two other entities, Piraeus Group and MRMLBS, received similar letters also dated June 25, 2007. The record does not contain copies of any such letters.
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10
Petitioner has stipulated that his 2003 liability (which was encompassed by the lien and levy notices but was not included either in petitioner's request for a CDP hearing or in respondent's determinations) is not at issue in this case.
________________________________________
18

________________________________________
11
Conversely, payments made pursuant to restitution orders are applied against tax liabilities. See United States v. Clayton, 613 F.3d 592 [106 AFTR 2d 2010-5556] (5th Cir. 2010); United States v. Tucker, 217 F.3d 960, 962 [89 AFTR 2d 2002-409] (8th Cir. 2000); M.J. Wood Associates, Inc. v. Commissioner, T.C. Memo. 1998-375 [1998 RIA TC Memo ¶98,375]. The record is silent as to what amounts, if any, of restitution petitioner has paid. On brief respondent states that petitioner's “restitution payments will ultimately be applied to his civil tax liability for the taxable year 2000, and if in excess of that liability to other years”. Petitioner, who filed no reply brief, has not challenged
________________________________________
11

________________________________________
12
The Commissioner may compromise a tax liability for promotion of effective tax administration if: (1) Collection in full could be achieved but would cause economic hardship; or (2) if there are compelling public policy or equity considerations identified by the taxpayer. Sec. 301.7122-1(b)(3), Proced. & Admin. Regs.; see Speltz v. Commissioner, 124 T.C. 165, 172-173 (2005), affd. 454 F.3d 782 [98 AFTR 2d 2006-5364] (8th Cir. 2006). Petitioner has not argued and the record does not suggest that he meets these conditions. Nor does the record suggest that petitioner raised these issues at the collection hearing; accordingly, he is not entitled to raise them in this proceeding. See Giamelli v. Commissioner, 129 T.C. 107, 114 (2007).
________________________________________
13
The materials which the settlement officer reviewed included Revenue Officer Brown's request to IRS district counsel to file alter ego and nominee liens and levies and district counsel's memorandum approving the filing of alter ego and nominee liens. Petitioner contends that these materials were not included in the administrative file. The parties have stipulated, however, that the stipulated exhibits, which include the materials in question, “constitute the complete administrative record in this case”. Petitioner has not raised, and consequently we do not consider, any issue as to whether the settlement officer's review of such materials entailed any improper ex parte communication.
Over respondents' objection, petitioner called the settlement officer as a witness at trial, attempting to show that the settlement officer failed to adequately explain the reasons for his determination. Cf. Robinette v. Commissioner, 439 F.3d 455, 461 [97 AFTR 2d 2006-1391] (8th Cir. 2006) (indicating that judicial review based on the administrative record may permit “the receipt of testimony or evidence explaining the reasoning behind the agency's decision”), revg. 123 T.C. 85 (2004). The settlement officer's testimony, however, had little probative value or relevancy. On brief respondent renews his objection to the settlement officer's testimony. Because we have not relied upon this testimony in our analysis or holdings, it is unnecessary to address further respondent's objection.
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14
Shortly before the second telephone conference between petitioner's representative and the settlement officer on May 21, 2007, the IRS had mailed to Cloverdale and Lestat Ops (and, according to petitioner's allegations, at least two other entities) nominee notices of Federal tax lien filing.
________________________________________
15
Respondent issued the nominee notices of Federal tax lien filing for Cloverdale and Lestat Ops (and, according to petitioner's allegations, for at least two other entities) on May 15, 2007, months after respondent had issued petitioner the notice of Federal tax lien filing upon which this case is predicated.

PTIN numbers

Notice 2011-6, 2011-3 IRB, 12/30/2010, IRC Sec(s).

Headnote:


Reference(s):

Full Text:

Purpose

This notice provides guidance regarding the implementation of new Treasury regulations governing tax return preparers. Section 1 of this notice provides guidance regarding the requirement to obtain a preparer tax identification number (PTIN) under section 1.6109-2 and identifies the forms that qualify as tax returns or claims for refund for purposes of those regulations. Section 2 of this notice provides interim rules applicable to certain PTIN holders during the implementation phase of the new regulations governing tax return preparers.

Background

The IRS made findings and recommendations in Publication 4832, “ Return Preparer Review,” which was published on January 4, 2010, concerning the results of an in-depth review of the tax return preparer industry. The IRS recommended increased oversight of tax return preparers through the issuance of regulations governing tax return preparers. The IRS published: (1) final regulations (75 FR 60309) addressing tax return preparer PTIN requirements on September 30, 2010; (2) final regulations (75 FR 60316) regarding the user fee to apply for or renew a PTIN on September 30, 2010; and (3) proposed regulations (REG-138637-07) addressing competency testing requirements, continuing education requirements, and extension of the ethics rules under 31 CFR Part 10 (reprinted in Treasury Department Circular 230 (Circular 230)) for tax return preparers on August 23, 2010.

1. Guidance under section 1.6109-2

.01 PTINs Obtained After September 28, 2010

Section 1.6109-2 provides that beginning after December 31, 2010, all tax return preparers must have a PTIN that was applied for and received at the time and in the manner as prescribed by the IRS. This notice confirms that tax return preparers who obtain a PTIN or a provisional PTIN and pay any applicable user fee after September 28, 2010, have applied for and received a PTIN in the manner prescribed by the IRS for purposes of the section 6109 regulations.

.02 Individuals Who May Obtain a Ptin

Section 1.6109-2(d) provides that for returns or claims for refund filed after December 31, 2010, the identifying number of a tax return preparer is the individual's PTIN or other number prescribed by the IRS. Additionally, after December 31, 2010, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax must have a PTIN.

Section 1.6109-2(d) also provides that, except as provided in paragraph (h), beginning after December 31, 2010, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer to obtain a PTIN. Section 1.6109-2(h) provides that the IRS may prescribe exceptions to the PTIN rules in appropriate guidance, including the requirement that an individual be an attorney, certified public accountant, enrolled agent, or registered tax return preparer before receiving a PTIN.

The IRS has decided to allow certain individuals who are not attorneys, certified public accountants, enrolled agents, or registered tax return preparers to obtain a PTIN and prepare, or assist in the preparation of, all or substantially all of a tax return in certain discrete circumstances.

a. Tax Return Preparers Supervised by Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Retirement Plan Agents, and Enrolled Actuaries

Until further guidance is issued, the IRS, in accordance with the authority to provide exceptions to the PTIN rules under section 1.6109-2(h), will permit any individual eighteen years or older to pay the applicable user fee and obtain a PTIN permitting the individual to prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund for compensation if:

(i) the individual is supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS under Circular 230 § 10.3(a) through (e);
(ii) the supervising attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary signs the tax returns or claims for refund prepared by the individual;
(iii) the individual is employed at the law firm, certified public accounting firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and
(iv) the individual passes the requisite tax compliance check and suitability check (when available).
For purposes of this provision, a law firm is a law partnership, professional corporation, sole proprietorship, or any other association authorized to practice law in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A certified public accounting firm is a partnership, professional corporation, sole proprietorship, or any other association that is registered, permitted, or licensed to practice as a certified public accounting firm in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A recognized firm is a partnership, professional corporation, sole proprietorship, or any other association, other than a law firm or certified public accounting firm, that has one or more employees lawfully engaged in practice before the IRS and that is 80 percent or a greater percent owned by one or more attorneys, certified public accountants, enrolled agents, enrolled actuaries, or enrolled retirement plan agents authorized to practice before the IRS under sections 10.3(a) through (e) of Circular 230, respectively.

Individuals applying for a PTIN under this provision will be required to certify on the PTIN application that they are supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual and provide a supervising individual's PTIN or other number if prescribed by the IRS. If at any point the individual is no longer supervised by the signing attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary, the individual must notify the IRS as prescribed in forms, instructions, or other appropriate guidance and will not be permitted to prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation under this provision.

Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not be subject to a competency examination or continuing education requirements. These individuals, however, may not sign any tax return they prepare or assist in preparing for compensation, represent taxpayers before the IRS in any capacity, or represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner.

Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.

b. Individuals Who Prepare Tax Returns Not Covered by the Registered Tax Return Preparer Competency Examination(s)

The Treasury Department and the IRS have proposed rules that will require an individual to pass a registered tax return preparer minimum competency examination (competency examination). The IRS anticipates, however, that the tax returns and claims for refund covered by the competency examination(s) initially offered will be limited to individual income tax returns (Form 1040 series tax returns and accompanying schedules). Although the IRS anticipates the types of returns and claims for refunds covered by the competency examination(s) may expand in the future, the IRS recognizes that certain compensated tax return preparers do not prepare Form 1040 series tax returns or related claims for refunds and that the tax returns and claims for refunds prepared by some of these individuals may not be covered by the competency examinations for a significant period of time. The IRS has determined that individuals should not be required, as a condition to obtaining a PTIN, to pass a competency examination covering tax returns and claims for refunds not prepared by the individual. Therefore, until further guidance, this notice, in accordance with the authority under section 1.6109-2(h), provides that any individual eighteen years or older may pay the applicable user fee and obtain a PTIN if:

(i) the individual certifies that the individual does not prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund covered by the competency examination(s) for registered tax return preparers administered under IRS oversight (1040 series until further notice); and
(ii) the individual passes the requisite tax compliance check and suitability check (when available).
Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not yet be subject to a competency examination. These individuals are not currently required to satisfy the same continuing education requirements that a registered tax return preparer must complete to renew their PTIN. In the future, the IRS may require through forms, instructions, or other appropriate guidance that these individuals complete continuing education to renew their PTIN.

Individuals who obtain or renew a PTIN under this provision may sign the tax returns or claims for refunds that they prepare for compensation as the paid preparer. These individuals may also represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination if the individual signed the tax return or claim for refund for the taxable year under examination. They may not, however, represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner. Enrolled retirement plan agents and enrolled actuaries who obtain a PTIN under this provision may continue to practice and represent as provided in Circular 230.

Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.

.03 Forms Requiring a Ptin

Section 1.6109-2(h) provides that the IRS may specify in appropriate guidance the returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the PTIN regulations. Consistent with that authority, the IRS hereby specifies that all tax returns, claims for refund, or other tax forms submitted to the IRS are considered tax returns or claims for refund for purposes of section 1.6109-2 unless otherwise provided by the IRS. For purposes of this provision, the term tax forms is interpreted broadly. An individual must obtain a PTIN to prepare for compensation all or substantially all of any form except those specifically identified by the IRS as not subject to the requirements of § 1.6109-2. At this time, the IRS identifies the following forms as not subject to the requirements of § 1.6109-2:

Form SS-4, Application for Employer Identification Number;

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding;

Form SS-16, Certificate of Election of Coverage under FICA;

Form W-2 series of returns;

Form W-7, Application for IRS Individual Taxpayer Identification Number;

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding;

Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment;

Form 872, Consent to Extend the Time to Assess Tax;

Form 906, Closing Agreement On Final Determination Covering Specific Matters;

Form 1098 series;

Form 1099 series;

Form 2848, Power of Attorney and Declaration of Representative;

Form 3115, Application for Change in Accounting Method;

Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits;

Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners;

Form 4419, Application for Filing Information Returns Electronically;

Form 5300, Application for Determination for Employee Benefit Plan;

Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans;

Form 5310, Application for Determination for Terminating Plan;

Form 5500 series;

Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips;

Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests;

Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests;

Form 8508, Request for Waiver From Filing Information Returns Electronically;

Form 8717 User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request;

Form 8809, Application for Extension of Time to File Information Return;

Form 8821, Tax Information Authorization;

Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program

The IRS may in future guidance modify the list of documents that do not qualify as tax returns or claims for refund for purposes of section 1.6109-2(h).

2. Interim Rules

.01 Provisional PTINs

As discussed in section 1 of this notice, an individual may be designated as a registered tax return preparer if the individual successfully completes a competency examination or otherwise meets requisite standards prescribed by the IRS. The IRS, however, does not expect to offer the competency examination before mid 2011. Therefore, to allow tax return preparers to obtain a PTIN and continue to prepare tax returns or claims for refund until the competency examination is available, the IRS, as an interim rule, will allow individuals who are not attorneys, certified public accountants, or enrolled agents to obtain a provisional PTIN before the date that the competency examination is first offered (“ initial test offering date” ). Individuals may obtain a provisional PTIN through the IRS' new online PTIN application system or by submitting to the IRS a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application. The individual must annually renew the provisional PTIN and pay the applicable user fee.

The IRS generally will not issue provisional PTINs in accordance with this provision after the initial test offering date. After the initial test offering date, only attorneys, certified public accountants, enrolled agents, and registered tax return preparers, or individuals defined in section 1.02(a) or (b) of this notice will be eligible to obtain a PTIN in accordance with section 1.6109-2, subject to any future IRS guidance identifying additional individuals who may obtain a PTIN.

Until December 31, 2013, a provisional PTIN may be renewed upon proper application and payment of the applicable user fee, even if the individual holding the provisional PTIN is not an attorney, certified public accountant, enrolled agent, or registered tax return preparer. After December 31, 2013, provisional PTINs generally will not be renewed, and the holder of a provisional PTIN obtained in accordance with this provision may keep the PTIN only if the holder of the provisional PTIN is eligible to obtain a PTIN in accordance with section 1.6109-2, section 1.02(a) or (b) of this notice, or future guidance.

.02 Return Preparation by Provisional Ptin Holders

Tax return preparers who properly obtain a provisional PTIN before the initial test offering date will be permitted, subject to the requisite federal tax compliance check and suitability check (when available), to prepare for compensation all or substantially all of any tax return or claim for refund until December 31, 2013. During the transition period from the initial test offering date through December 31, 2013, tax return preparers who hold a provisional PTIN may, subject to the payment of the applicable user fee, take the competency examination as often as the examination is offered.

These interim rules apply to those tax return preparers who obtain a provisional PTIN prior to the initial test offering date. An individual who is subject to the competency testing requirement for becoming a registered tax return preparer who does not obtain a PTIN before the initial test offering date must pass the competency examination and be designated as a registered tax return preparer to be permitted to prepare for compensation all or substantially all of a tax return or claim for refund.

The holder of a provisional PTIN may represent that the holder is authorized to practice before the IRS by preparing and filing tax returns or claims for refund, but the holder of a provisional PTIN may not represent that the holder is a registered tax return preparer or has passed the competency examination necessary to become a registered tax return preparer.

.03 Practice Based on Return Preparation

The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer generally is limited to preparing tax returns, claims for refund, or other documents for submission to the IRS and to limited representation as described below. A registered tax return preparer may prepare all or substantially all of a tax return or claim for refund. The IRS will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund that a registered tax return preparer may prepare and sign.

Registered tax return preparers may represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS during an examination if the registered tax return preparer prepared and signed (or prepared and was not required to sign) the tax return or claim for refund for the taxable period under examination.

Prior to January 1, 2011, any individual generally may prepare a tax return or claim for refund for compensation. An individual who prepares and signs a taxpayer's return or claim for refund as the preparer generally may represent that taxpayer during an examination of the taxable period covered by that return or claim for refund. The proposed Circular 230 regulations generally do not extend this right of representation to individuals who are not practitioners after December 31, 2010. To ensure that tax return preparers have sufficient time to become registered tax return preparers, these interim rules provide that an individual may represent a taxpayer during an examination provided the individual prepared and signed the taxpayer's return or claim for refund as the preparer for the taxable period under examination and the individual was permitted under the regulations or other published guidance to prepare the taxpayer's return or claim for refund for compensation. This right to represent the taxpayer does not, however, permit an individual who is not an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary to represent the taxpayer before appeals officers, revenue officers, Counsel, or similar officers or employees of the IRS or the Department of Treasury.

.04 Continuing Education

The proposed Circular 230 regulations require registered tax return preparers to complete fifteen hours of continuing education each registration year. As an interim rule, there is no continuing education requirement for registered tax return preparers or tax return preparers who obtain a provisional PTIN during the first year of registration, which commenced on September 30, 2010.

.05 Ethics and Conduct

The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer, therefore, will be subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Accordingly, as an interim rule, practice before the IRS by a tax return preparer who obtains a provisional PTIN or any individual who for compensation prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS also is subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Tax return preparers holding a provisional PTIN and other individuals who for compensation prepare, or assist in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS must not engage in disreputable conduct under section 10.51 of Circular 230. The IRS may, by written notification, revoke a provisional PTIN if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct under section 10.51 of Circular 230. The tax return preparer may, within 30 days after receipt of the notice of revocation of the provisional PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.

The interim rules described in this notice and any final regulations apply to all tax return preparers who prepare all or substantially all of a tax return or claim for refund for compensation. As discussed in section 1 of this notice, all tax returns, claims for refund, or other documents submitted to the IRS unless otherwise provided for in section 1 of this notice or other guidance are tax returns for purposes of the PTIN regulations.

Contact Information

The principal author of this notice is Matthew D. Lucey of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this notice contact Matthew D. Lucey on (202) 622-4940 (not a toll-free call).

New 2011 6694 disclosure guidelines

IRS updates disclosure rules to lessen understatement and preparer penalties
Rev Proc 2011-13, 2011-3 IRB
A revised revenue procedure identifies when disclosure on a taxpayer's return for an item or a position is adequate to reduce a Code Sec. 6662(d)understatement of income tax under the accuracy-related penalty, and to avoid the Code Sec. 6694(a) preparer penalty for understatements due to unreasonable positions. It applies to any income tax return filed on 2010 tax forms for tax years beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short tax years beginning in 2011.
Background. Under Code Sec. 6662 , a 20% penalty applies to the portion of a tax underpayment that is attributable to a substantial understatement of income tax. The penalty rate is 40% in the case of gross valuation misstatements under Code Sec. 6662(h) , nondisclosed noneconomic substance transactions under Code Sec. 6662(i) , or undisclosed foreign financial asset understatements under section Code Sec. 6662(j) . An understatement is “substantial” if it exceeds the greater of 10% of the amount of tax required to be shown on the return for the tax year or $5,000. However, a corporation (other than an S corporation or personal holding company) has a substantial tax understatement if the understatement exceeds the lesser of (1) 10% of the tax required to be shown on the return for a tax year (or, if greater, $10,000), or (2) $10 million. ( Code Sec. 6662(d) )
For a non-tax shelter item, the understatement is reduced to the extent the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the taxpayer's tax treatment. ( Code Sec. 6662(d)(2)(B)(ii) )
Under Code Sec. 6694(a) , a penalty is imposed on a tax return preparer who prepares a return or refund claim reflecting an understatement of liability due to an “unreasonable position” if he knew (or reasonably should have known) of the position. A position (other than for a tax shelter or a reportable transaction) is generally treated as unreasonable unless (1) there is or was substantial authority for the position; or (2) the position was properly disclosed under Code Sec. 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter or a reportable transaction, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. ( Notice 2009-5, 2009-1 CB 309 )
Revised procedure. In Rev Proc 2011-13 , IRS sets out the circumstances under which disclosure of information on a return is considered to be adequate to avoid the substantial understatement penalty under Code Sec. 6662(d) and the preparer penalty under Code Sec. 6694(a) for understatements due to unreasonable positions. A corporation making a complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP (Uncertain Tax Position Statement), will be treated as if it had filed a Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) regarding the tax position. However, the filing of a Form 8275 or Form 8275-R, will not be treated as if the corporation filed a Schedule UTP.
Additional disclosure of relevant facts or positions taken with respect to issues involving any of the items listed in Rev Proc 2011-13 is unnecessary for purposes of reducing any understatement of income tax under Code Sec. 6662(d) (except as otherwise provided in Rev Proc 2011-13, Sec. 4.02(3) , concerning Schedules M-1 and M-3), if forms and attachments are completed in a clear manner and in accordance with instructions.
Although a taxpayer may literally meet Rev Proc 2011-13 's disclosure requirements, the disclosure won't have an effect for purposes of the Code Sec. 6662 accuracy-related penalty if the item or position on the return: (1) doesn't have a reasonable basis as defined in Reg. § 1.6662-3(b)(3) ; (2) is attributable to a tax shelter item as defined in Code Sec. 6662(d)(2) ; or (3) isn't properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position. Disclosure will have no effect for purposes of the Code Sec. 6694(a) penalty as applicable to tax return preparers 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. 6662Aapplies.
Rev Proc 2011-13, Sec. 4.01(2) provides that money amounts entered on forms must be verifiable, and the information on the return must be disclosed in the manner described in Rev Proc 2011-13, Sec. 4.02(3) . A number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by IRS) and can show good faith in entering that number on the applicable form. Further, the disclosure of an amount as provided in Rev Proc 2011-13, Sec. 4.02 , isn't adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on Form 8275 or Form 8275-R.
When the amount of an item is shown on a line that doesn't have a preprinted description identifying that item, the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a sole proprietorship's bad debt, the words “bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language (e.g., “Cost of non-compete agreement deductible not capitalizable”). If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment.
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Rev. Proc. 2011-13, 2011-3 IRB, 12/28/2010, IRC Sec(s).
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1. Purpose
This revenue procedure updates Rev. Proc. 2010-15, 2010-7 I.R.B. 404, and identifies circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. This revenue procedure does not apply with respect to any other penalty provisions (including the disregard provisions of the section 6662(b)(1) accuracy-related penalty, the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions, and the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements).
This revenue procedure applies to any income tax return filed on 2010 tax forms for a taxable year beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short taxable years beginning in 2011.
2. Changes From Rev. Proc. 2010-15
.01. This revenue procedure has been updated to include reference to: (i) the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions; (ii) the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements; and (iii) the Schedule UTP, Uncertain Tax Position Statement, a new schedule required of certain corporations.
3. Background
.01. If section 6662 applies to any portion of an underpayment of tax required to be shown on a return, an amount equal to 20 percent of the portion of the underpayment to which the section applies is added to the tax (the penalty rate is 40 percent in the case of gross valuation misstatements under section 6662(h), nondisclosed noneconomic substance transactions under section 6662(i), or undisclosed foreign financial asset understatements under section 6662(j)). Section 6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a substantial understatement of income tax.
.02. Section 6662(d)(1) provides that there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of the amount of tax required to be shown on the return for the taxable year or $5,000. Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than an S corporation or personal holding company) has a substantial understatement of income tax if the amount of the understatement exceeds the lesser of 10 percent of the tax required to be shown on the return for a taxable year (or, if greater, $10,000) or $10,000,000. Section 6662(d)(2) defines an understatement as the excess of the amount of tax required to be shown on the return for the taxable year over the amount of the tax that is shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)).
.03. In the case of an item not attributable to a tax shelter, section 6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the portion of the understatement attributable to the item if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer..
.04. Section 6694(a) imposes a penalty on a tax return preparer who prepares a return or claim for refund reflecting an understatement of liability due to an “ unreasonable position” if the tax return preparer knew (or reasonably should have known) of the position. A position (other than a position with respect to a tax shelter or a reportable transaction to which section 6662A applies) is generally treated as unreasonable unless (i) there is or was substantial authority for the position, or (ii) the position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3 I.R.B. 309 (January 21, 2009) for interim penalty compliance rules for tax shelter transactions.
.05. In general, this revenue procedure provides guidance for determining when disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and section 6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable.
.06. Fiscal and short tax year returns. (a) In general. This revenue procedure may apply to a return for a fiscal tax year that begins in 2010 and ends in 2011. This revenue procedure may also apply to a short year return for a period beginning in 2011 if the return is to be filed before the 2011 forms are available. (Note that individuals are generally not put in this position as a decedent's final return for a fractional part of a year is due the fifteenth day of the fourth month following the close of the 12-month period which began with the first day of such fractional part of the year. See Treas. Reg. § 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must take into account any tax law changes that are effective for tax years beginning after December 31, 2010, even though these changes are not reflected on the form.
(b) Tax law changes effective after December 31, 2010. This document does not take into account the effect of tax law changes effective for tax years beginning after December 31, 2010. If a line referenced in this revenue procedure is affected by such a change and requires additional reporting, a taxpayer may have to file Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, until the Service prescribes criteria for complying with the requirement.
.07. A complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP, Uncertain Tax Position Statement, will be treated as if the corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a Schedule UTP.
4. Procedure
.01. General
(1) Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under section 6662(d) (except as otherwise provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms and attachments are completed in a clear manner and in accordance with their instructions.
(2) The money amounts entered on the forms must be verifiable, and the information on the return must be disclosed in the manner described below. For purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by the Internal Revenue Service) and the taxpayer can show good faith in entering that number on the applicable form.
(3) The disclosure of an amount as provided in section 4.02 below is not adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on a Form 8275 or Form 8275-R.
(4) When the amount of an item is shown on a line that does not have a preprinted description identifying that item (such as on an unnamed line under an “ Other Expense” category) the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a bad debt for a sole proprietorship, the words “ bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language; for example, “Cost of non-compete agreement deductible not capitalizable.” If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment.
(5) Although a taxpayer may literally meet the disclosure requirements of this revenue procedure, the disclosure will have no effect for purposes of the section 6662 accuracy-related penalty if the item or position on the return: (1) Does not have a reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) Is attributable to a tax shelter item as defined in section 6662(d)(2); or (3) Is not properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position.
(6) Disclosure also will have no effect for purposes of the section 6694(a) penalty as applicable to tax return preparers if the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies.
.02. Items
(1) Form 1040, Schedule A, Itemized Deductions:
(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all required information.
(b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8 must list each type of tax and the amount paid.
(c) Interest Expenses: Complete lines 10 through 15, supplying all required information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under section 163(d) unless Form 4952, Investment Interest Expense Deduction , is completed, or (ii) amounts disallowed under section 265.
(d) Contributions: Complete lines 16 through 19, supplying all required information. Enter the amount of the contribution reduced by the value of any substantial benefit (goods or services) provided by the donee organization in consideration, in whole or in part. Entering the value of the contribution unreduced by the value of the benefit received will not constitute adequate disclosure. If a contribution of $250 or more is made, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(8), is obtained from the donee organization. If a contribution of cash of less than $250 is made, this section will not apply unless a bank record or written communication from the donee, as required by section 170(f)(17), is obtained from the donee organization. If a contribution of property other than cash is made and the amount claimed as a deduction exceeds $500, attach a properly completed Form 8283, Noncash Charitable Contributions, to the return. In addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane has a value of more than $500, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(12), is obtained from the donee organization and attached to the return. An acknowledgment under section 170(f)(8) is not required if an acknowledgment under section 170(f)(12) is required.
(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts, and attach to the return. Each item or article for which a casualty or theft loss is claimed must be listed on Form 4684.
(2) Certain Trade or Business Expenses (including, for purposes of this section, the following six expenses as they relate to the rental of property):
(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e) must be followed.
(b) Legal Expenses: The amount claimed must be stated. This section does not apply, however, to amounts properly characterized as capital expenditures, personal expenses, or non-deductible lobbying or political expenditures, including amounts that are required to be (or that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off: The amount written off must be stated.
(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E, Compensation of Officers , must be completed when required by its instructions. The time devoted to business must be expressed as a percentage as opposed to “part” or “as needed.” This section does not apply to “golden parachute” payments, as defined under section 280G. This section will not apply to the extent that remuneration paid or incurred exceeds the employee-remuneration deduction limitations under section 162(m), if applicable.
(e) Repair Expenses: The amount claimed must be stated. This section does not apply, however, to any repair expenses properly characterized as capital expenditures or personal expenses.
(f) Taxes (other than foreign taxes): The amount claimed must be stated.
(3) Differences in book and income tax reporting.
For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below, the information provided must reasonably apprise the Service of the potential controversy concerning the tax treatment of the item. If the information provided does not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately disclose the item (see Part II of the instructions for those forms).
Note: An item reported on a line with a pre-printed description, shown on an attached schedule or “ itemized” on Schedule M-1, may represent the aggregate amount of several transactions producing that item (i.e., a group of similar items, such as amounts paid or incurred for supplies by a taxpayer engaged in business). In some instances, a potentially controversial item may involve a portion of the aggregate amount disclosed on the schedule. The Service will not be reasonably apprised of a potential controversy by the aggregate amount disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R regarding that portion of the item.
Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an attachment when directed by the instructions), will not constitute an adequate disclosure.
Additionally, for taxpayers that file the Schedule M-3 (Form 1120), the new Schedule B, Additional Information for Schedule M-3 Filers, must also be completed. For taxpayers that file the Schedule M-3 (Form 1065), the new Schedule C, Additional Information for Schedule M-3 Filers, must also be completed. When required, these new Schedules are necessary to constitute adequate disclosure.
(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items).
(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return.
(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement , of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items) and Column (d), Income (Loss) per Tax Return , of Part II (reconciliation of income (loss) items); and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).
(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss) Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).
(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items).
(e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement , of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).
(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation for Foreign Corporations With Total Assets of $10 Million or More: Column (b), Temporary Difference, Column (c), Permanent Difference , and Column (d), Other Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).
(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form 5713, International Boycott Report; Schedule A, International Boycott Factor ( Section 999(c)(1)) ; Schedule B, Specifically Attributable Taxes and Income ( Section 999(c)(2)); and Schedule C, Tax Effect of the International Boycott Provisions , must be completed when required by their instructions.
(b) Treaty-Based Return Position: Transactions and amounts under section 6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), must be completed when required by its instructions.
(5) Other:
(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to the return.
(b) Employee Business Expenses: Complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach to the return. This section does not apply to club dues, or to travel expenses for any non-employee accompanying the taxpayer on the trip.
(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and attach to the return.
(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the return.
5. Effective Date
This revenue procedure applies to any income tax return filed on a 2010 tax form for a taxable year beginning in 2010, and to any income tax return filed on a 2010 tax form in 2011 for a short taxable year beginning in 2011.
6. Drafting Information
The principal author of this revenue procedure is Francis M. McCormick of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure, contact Branch 2 of Procedure and Administration at (202) 622-4940 (not a toll free call).