Rev. Rul. 84-3

ISSUE

Does the penalty under section 6695(b) of the Internal Revenue Code for failure to sign an income tax return apply to tax consultants under the following situations?

FACTS

SITUATION 1. Taxpayer A submits books and records to consultant B, who fills out an income tax return and presents it to A. A files the return without making any changes.

SITUATION 2. S submits books and records to B, who sends back a statement of all necessry information, making it merely a mechanical process for A to fill out the return.

SITUATION 3. A submits a draft of a return to B to review in its entirety for both substantive correctness and mechanical accuracy. B recommends substantial changes. A adopts all the recommendations and fills out a return based on those recommendations.

SITUATION 4. A submits a signed return to B who thoroughly reviews it in its entirety for both substantive correctness and mechanical accuracy. Although B questioned certain entries, B is satisfied that the return was correct as submitted to B and makes no changes. B mails it to the Internal Revenue Service, pursuant to A's instructions to do so if no changes were recommended.

In all situations, B does not sign A's return as the preparer.

LAW AND ANALYSIS

Section 6695(b) of the Internal Revenue Code imposes a $25 penalty on any inocme tax return preparer required by regulations to sign a return or claim for refund who fails to do so, unless the failure is due to reasonable cause.

Under section 7701(a)(36) of the Code and section 301.7701-15 of the regulaitons, an "inocme tax return preparer" is defined as any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or claim for refund under subtitle A. Those sections provide further that the preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund.

Section 1.6695-2(b) of the Income Tax Regulaitons provides that an individual who is an income tax return preparer with respect to a return or claim for refund under subtitle A of the Code must manually sign the return in the appropriate place on the return after it is completed and before it is presented to the taxpayer for signature.

Section 1.6695-1(b)(5) of the regulations provides that the penalty under section 6695(b) of the Code will not be imposed on an individual solely because the individual is a preparer either under section 301.7701-15(a)(2) and (b) of the regulations on account of having given advice on specific issues of law or section 301.7701-15(b)(3) on account of having prepared another return that affects amounts reported on the return in question.

Under section 301.7701-15(a)(1) of the regulations, a person who furnishes to a taxpayer or other preparer sufficient information and advice so that completion of the return or claim for refund is largely a mechanical or clerical matter is considered a preparer, even though that person does not actually place or review placement of information on the return or claim for refund.

Section 301.7701-15(a)(2) of the regulations provides that a person who only gives advice on specific issues of law is not considered a preparer unless the advice is given with repect to events that have occurred at the time the advice is rendered and not given with respect to the consequences of contemplated actions, and the advice is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund.

Section 301.7701-15(b) of the regulations provides that only those persons who prepare all or a substantial portion of a return or claim for refund will be considered preparers of that return or claim for refund. Persons who render advice that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund are regarded as having prepared that entry. Additionally, a preparer of one return may be considered the preparer of another return, if the entries on the prepared return are directly reflected on the other return.

A preparer cannot avoid the requirement to sign a return by, for example, sending "statements" or "drafts" of the return to a taxpayer. However, a preparer who makes a bona fide effort to sign a return will not be penalized for not doing so if the taxpayer disregards the preparer's attempts to present a signed return to the taxpayer.

HOLDINGS

SITUATION 1. B is an inocme tax return preparer with respect to A's return under the specific language of section 7701(a)(36) of the Code. B is subject to the penalty because of the failure to sign the return after it was completed and before it was presented to A for signing.

SITUATION 2. B is an income tax return preparer with respect to A's return under section 301.7701-15(a)(1) of the regulations. B does not alter his status as a return preparer by sending a "statement" or "draft" to A. Accordingly, B is required to ask A to submit the final form for B's signature and will be subject to the penalty unless it is whown that A would not honor B's request to be allowed to sign the return. B could discharge this obligation, however, by actually preparing a return, signing it and then submitting it to A.

SITUATION 3. This is similar to situation 2 in that B is an inocme tax return preparer under section 301.7701-15(a)(1) of the regulations. Accordingly, B is required to ask A to submit the final form for B's signature and will be subject to the penalty unless it is shown that such a request was made by B but not honored by A. As in situation 2, B can discharge this obligation by preparing a return, signing it, and then submitting it to A.

SITUATION 4. B is an income tax return preparer with respect to A's return under section 301.7701-15(a)(1) of the regulations. Because of A's instructions to B to mail the return if no changes were made, B is deemed to have presented the return to A before mailing because B is obligated to return it to A if changes were made. B cannot avoid the duty to sign merely because of A having signed it first. B is subject to the penalty for not signing the return.