Rev. Proc. 80-40

Section 1. Purpose

The purpose of this revenue procedure is to provide guidelines for the application of the penalty under section 6694(a) of the Internal Revenue Code for the negligent disregard of rules and regulations by an income tax return preparer. The revenue procedure indicates some of the factors that will be taken into consideration in determining whether this penalty will be applied.

Sec. 2. Background

.01 Section 6694(a) of the Code provides that if any part of any understatement with respect to any return or claim for refund is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim.

.02 Section 6694(e) of the Code provides that an "understatement of liability" means any understatement of the net amount payable with respect to any income tax.

.03 Section 1.6694-1(a)(1) of the Income Tax Regulations provides that a preparer is not considered to have negligently or intentionally disregarded a rule or regulation if the preparer exercises due diligence in an effort to apply the rules and regulations to the information given to the preparer to determine the taxpayer's correct liability for tax.

.04 Section 1.6694-1(a)(5) of the regulations provides that the preparer bears the burden of proof on the issue of whether the preparer has negligently or intentionally disregarded a rule or regulation.

.05 The Conference Report on the Revenue Act of 1978 relating to Technical Corrections to the Tax Reform Act of 1976, H.R. Rep. No. 95-1800, 95th Cong., 2d Sess. 284 (1978), 1978-3 C.B. (Vol. 1) 521, 618, states that the Service shall reasonably interpret section 6694(a) according to the standards of section 6653(a) and in light of all the facts and circumstances of each case taking into account any and all mitigating factors.

.06 The case of Marcello v. Commissioner, 380 F. 2d 499, 506 (5th Cir. 1967) holds that negligence is lack of due care or failure to do what a reasonable and ordinary prudent person would do under the circumstances.

Sec. 3. Scope

The scope of this revenue procedure is to provide guidelines for the application of the penalty under section 6694(a) of the Code for the negligent disregard of rules and regulations by an income tax return preparer. These guidelines do not apply to the penalty under section 6694(a) for the intentional disregard of rules and regulations by an income tax return preparer.

Sec. 4. Application

.01 In determining whether the penalty under section 6694(a) of the Code is to be asserted, all the relevant facts and circumstances of each case will be taken into account. In making this determination, the following factors will be taken into consideration.

1 Nature of the Error Causing the Understatement. Was the provision that was misapplied or not discovered so complex, uncommon, or highly technical that a competent preparer of returns of the type at issue might reasonably be unaware or mistaken as to its applicability? Should a general review of the return have disclosed the error to the preparer? For example, although an isolated mathematical or clerical error ordinarily reflects no more than mere inadvertence and thus will not result in the assertion of the penalty, such an error may be of such a magnitude or be so conspicuous that it should have been discovered after its commission.

2 Frequency of Errors. Is the understatement the result of an isolated error or is it the result of a number of errors? Although an isolated error may result in the assertion of the penalty if sufficiently obvious, flagrant or material, the negligence penalty generally will not be asserted for an isolated error. On the other hand, a pattern of errors on a return is presumptive of negligence and generally will result in the assertion of the penalty even though no one error occurring in isolation would have triggered the penalty.

3 Materiality of Errors. Is the understatement material in relation to the correct tax liability? The negligence penalty generally will not be asserted if the understatement is of a relatively immaterial amount. Nevertheless, the understatement, even though immaterial in amount, may result in the assertion of the penalty if the error or errors creating the understatement are sufficiently obvious, flagrant or numerous. An error resulting in a material understatement may be a greater indication of negligence than a similar error resulting in a less material understatement.

.02 Where all the relevant facts and circumstances suggest that the return was negligently prepared, the penalty under section 6694(a) of the Code generally will not be asserted if (1) the preparer's normal office practice, when considered together with other facts and circumstances such as the knowledge of the preparer, indicates that the error in question would rarely occur and (2) the normal office practice was followed in preparing the return in question. Examples of normal office practice include a system to promote accuracy and consistency in the preparation of returns, such as a checklist, a method for obtaining the necessary information from the taxpayer, examining the prior year's return, and review procedures. The normal office practice of the preparer will not be relevant where the error is flagrant, or there is either a pattern of errors on a particular return or an error is repeated on numerous returns.

.03 The penalty under section 6694(a) of the Code generally will not apply where a preparer in good faith relies without verification upon information furnished by the taxpayer. Thus, the preparer is not required to audit, examine or review books and records, business operations, or documents or other evidence in order to verify independently the taxpayer's information. However, the preparer may not ignore the implications of information furnished to the preparer or which was actually known by the preparer. The preparer shall make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some sections of the Code require the existence of specific facts and circumstances, such as maintenance of specific documents, before a deduction may properly be claimed. The preparer shall make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulations as a condition to claiming a deduction.

¹ Also released as New Release IR-80-94 dated Sept. 15, 1980.