20.1.6. Preparer and Promoter Penalties

(1) Tax return preparer and promoter penalties are important tools for IRS enforcement. Penalties provide the IRS with an important tool to enhance voluntary compliance by taxpayers. See IRM 1.2.1.12.1, Policy Statement 20–1 (Formerly P-1–18), Penalties are used to enhance voluntary compliance.

(1) Pertinent Internal Revenue Code (IRC) sections related to tax return preparers and promoters include:

• IRC 6694

• IRC 6695

• IRC 6700

• IRC 6701

• IRC 6713

• IRC 7402

• IRC 7407

• IRC 7408

(1) IRM 20.1.6 provides servicewide policy for the administration of tax return preparer penalties and promoter penalties.

(2) IRM 20.1.13 provides servicewide policy for the administration of material advisor and reportable transactions penalties.

(3) IRS operating divisions/business unit (OD/BU) functions may develop additional guidance or reference materials for their specific OD/BU functional administrative needs. These reference materials must receive approval from OSP prior to distribution and must remain consistent with the following:

1. The procedures set forth in this IRM, and

2. The philosophy of Policy Statement 20-1. See IRM 1.2.1.12.1.

(4) Overall responsibility for the penalty programs is assigned to the OSP. The OSP is charged with coordinating policy and procedures concerning the administration of penalty programs and ensuring consistency with the penalty policy statement.

(5) Every function in the IRS has a role in proper tax return preparer and promoter penalty administration. It is essential each function conduct its operations with an emphasis on promoting voluntary compliance.

(6) Examiners should keep in mind the following objectives when handling each tax return preparer and promoter penalty case:

1. Make a good decision from the onset. A wrong decision, even though eventually corrected, may have a negative impact on voluntary compliance.

2. Afford each taxpayer the opportunity to have the taxpayer’s interests heard and considered.

3. Provide opportunity for incorrect decisions to be corrected.

4. Treat each case in an impartial and honest way.

5. Use each tax return preparer penalty and promoter penalty case as an opportunity to educate the taxpayer, help the taxpayer understand legal obligations and rights, assist the taxpayer in understanding procedural rights, and observe the taxpayer’s procedural rights.

6. Promptly process and resolve each taxpayer’s case.

(7) All actions will be done in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).

(8) Taxpayers may express concern having had difficulty obtaining a solution to a problem or timely and appropriate response to an inquiry. In these instances, see IRM 20.1.1.1.6.2, Taxpayer Advocate Service (TAS), for more information.

(1) Every function in the IRS has a role in proper penalty administration. It is essential each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with the penalty policy statement (Policy Statement 20-1) and philosophy. Attention should be directed to the coordination of penalty programs between offices and functions to ensure approaches are consistent and penalty information is used for identifying and responding to compliance problems.

(2) Supervisors should continuously review information for trends which may suggest changes in compliance programs, training courses, educational programs, penalty design, and penalty administration. Supervisors should institute, on an ongoing basis, a quality review system to evaluate the timely and correct disposition of penalty cases and encourage consistent administration of penalties.

(1) Internal Management Document (IMD) Certification: this IRM is annually recertified as required by SPDER and regularly updated when new legislation or policy is published.

(1) Refer to Exhibit 20.1.6-2, Acronyms, for a list of acronyms used within this IRM section.

(1) Additional forms and resources include:

• Form 5809, Preparer Penalty Case Control Card, for operating divisions using Examination Returns Control System (ERCS).

  Note: TE/GE penalty investigations will be controlled and established on Reporting Compliance Case Management System (RCCMS).

• Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, for assertion of various civil penalties.

• Form 5816, Report of Tax Return Preparer Penalty Case, an examination report for IRC 6694/6695/6713 penalties.

• Exhibit 20.1.6-1 for inflation adjusted penalty rates for applicable IRC sections contained within this IRM.

(1) The IRS’s approach to tax return preparer and promoter penalty administration must ensure the following:

1. Accuracy: The IRS must arrive at the correct conclusion for each penalty decision. Accuracy is essential. Erroneous penalty assessments and incorrect calculations confuse taxpayers and undermine the overall competency of the IRS.

2. Impartiality: IRS employees are responsible for administering penalties in an even-handed manner which is fair and impartial to both the government and the taxpayer.

3. Consistency: The IRS should apply the tax return preparer and promoter penalty equally in similar situations. Taxpayers base their perceptions about the fairness of the system on their own experience and the information they receive from the media and others. If the IRS does not administer penalties uniformly (guided by the applicable statutes, regulations, and procedures), overall confidence in the tax system is jeopardized.

4. Representation: Taxpayers must be given the opportunity to have their interests heard and considered. Employees need to take an active and objective role in case resolution so all factors are considered.

(1) IRC 6751(b), Approval of Assessment, provides, in general, no penalty under the Code shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher-level official as the Secretary may designate. This provision is effective for notices issued and penalties assessed after December 31, 2000.

(2) Penalties asserted as listed in this IRM must secure supervisory approval in accordance with IRC 6751(b) and the manual provisions in the above Note.

(1) As of October 1, 2022, SB/SE field examiners may refer a preparer penalty case to the RPPWG instead of working the preparer penalty examination themselves.

(2) SB/SE Field examiners submitting referrals need to complete the required taxpayer and preparer information on the RPPWG SharePoint site and submit. Return Preparer Penalty Working Group (RPPWG) (sharepoint.com)

(3) Penalty case file actions for contacting LDC, CI and obtaining supervisory approval will be completed in the RPPWG.

(1) The applicable penalty reference number (PRN) is provided on Form 8278. Therefore, it is crucial the examiner always use the most current version of the form available from the Electronic Publishing Services catalog.

(2) The PRN is used to generate the notice language the taxpayer receives.

(3) The PRN is used to assess the penalty on Master File (MF) by posting a TC 240 on either Master File Tax (MFT) 13 for Business Master File (BMF) entities or MFT 55 for Individual Master File (IMF) entities.

(4) The notice received by the taxpayer provides an explanation of the penalty being assessed (or references the explanation provided by the examiner), the amount due, and is the notice and demand required by IRC 6671 for payment and the other actions available.

(5) The following is a list of the PRN’s relating to this IRM:

(6) Computer programming is expected to be completed 01/01/2025 for the PRN 624 changes in the table above.

(1) When completing Form 8278, Column 9(c) should be blank for no-change and discontinued investigation cases. In addition, Column 9(d) corresponding to the affected penalty, should be 0.00.

(2) The Form 8278, Item 9(d) of 0.00 results in the PRN with a 0.00 amount posting to the MFT 55 (for IMF entities) or MFT 13 (for BMF entities) Civil Penalty Master File and the DLN of the administrative case file.

(1) Form 2363, Master File Entity Change, is not required to establish the civil penalty name line when the related MFT 30 filing status is married filing joint (MFJ).

(2) Form 8278 Item 1, Name of Taxpayer (single name) is used to establish the civil penalty for all MFT 55 accounts including taxpayers with an MFT 30, MFJ filing status.

(3) The civil penalty name line is automatically established using Form 8278, Items 1, 2, 3, 5, and 7 when there is an entity module.

1. Use IMFOL "E" for IMF and BMFOL "E" for BMF to verify there is an entity module for non-filers.

2. When there is not an entity module, complete Form 2363, Trans. Code 000, to create an entity. Complete the name, address, and EIN or SSN. Send to Centralized Case Processing (CCP) two weeks before closing the case.

(1) See IRM 4.20.1.3, Issue Resolution - Solicit Payment, for guidelines for using the tiered interview approach for soliciting payment, securing levy source information, and coordinating with Collection.

(1) Preparer penalties and actions to enjoin are as follows:

• IRC 6694, Understatement of Taxpayer's Liability by Tax Return Preparer

• IRC 6695, Other Assessable Penalties With Respect to the Preparation of Tax Returns for Other Persons

• IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability

• IRC 6713, Disclosure or Use of Information by Preparers of Returns

• IRC 7402, Jurisdiction of District Courts

• IRC 7407, Action to Enjoin Tax Return Preparers

(1) Promoter penalties and actions to enjoin are as follows:

• IRC 6700, Promoting Abusive Tax Shelters, Etc.

• IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability

• IRC 7402, Jurisdiction of District Courts

• IRC 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions

(1) This section includes the following:

• IRC 6694(a), Understatement Due to Unreasonable Positions

• IRC 6694(b), Understatement Due to Willful or Reckless Conduct

(1) Section 8246 of The Small Business Work Opportunity Tax Act of 2007 (SBWOTA) amended IRC 7701(a)(36), Tax Return Preparer, expanding the definition of tax return preparer for periods after May 25, 2007, to any person (including a partnership or corporation) who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of a tax return or claim for refund.

(2) 26 CFR 301.7701-15(a) and various revenue rulings provide information on the definition of a tax return preparer, including nonsigning tax return preparers.

(3) 26 CFR 301.7701-15(f) provides guidance on persons who are not tax return preparers.

(4) See Chapter 1 of Training Publication 26809-102, Return Preparer Penalties IRC 6694 and 6695, Catalog Number 74638Q.

(5) A nonsigning tax return preparer who prepares a schedule, entry, or portion constituting a substantial portion of the return may be considered a tax return preparer. In making the decision as to what constitutes a "substantial portion," examiners should consider the size and complexity of the item relative to the taxpayer’s gross income and the size of the understatement attributable to the item in comparison to the taxpayer’s reported tax liability. To determine whether an individual is a nonsigning tax return preparer, see 26 CFR 301.7701-15(b)(2) and 26 CFR 301.7701-15(b)(3).

(6) See IRC 7701(a)(36)(B), Tax Return Preparer, for exceptions to the general definition of tax return preparer.

(1) Prior to January 1, 2009, regulations encompassed a "one preparer per firm" rule treating the signing preparer as the tax return preparer subject to the IRC 6694 penalty. Under the prior regulations, if there is no signer in a firm, the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim is the non signer subject to penalty.

(2) After December 31, 2008, 26 CFR 1.6694-1(b) changed the rule under previous regulations. During the course of identifying the individual who is primarily responsible for the position, the IRS may advise multiple individuals within the firm they may be deemed the individual within the firm who is primarily responsible for the position. A penalty, however, may only be assessed against the individual in the firm who is the primarily responsible tax return preparer. See 26 CFR 301.7701-15(b)(3).

(1) For years after December 31, 2008, 26 CFR 1.6694-2(a)(2) provides corporations, partnerships, and other firms who employ a tax return preparer may be subject to a penalty under IRC 6694(a).

(2) A firm employing a tax return preparer subject to the penalty under IRC 6694 (or a firm in which the individual tax return preparer is a partner, member, shareholder, or other equity holder) is also subject to the penalty if, and only if, the following:

1. One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by IRC 6694(a);

2. The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

3. The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

(1) Rev. Proc. 2009-11, Section 3, Returns and Claims for Refund Subject to the Section 6694 Penalty, identifies categories of returns to which the penalties under IRC 6694 apply. The categories are as follows:

1. Income Tax Returns–Subtitle A (e.g., Form 1040, U.S. Individual Income Tax Return, Form 1041, U.S. Income Tax Return for Estates and Trusts, Form 1120, U.S. Corporation Income Tax Return)

2. Estate and Gift Tax Returns–Subtitle B (e.g., Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return)

3. Employment Tax Returns–Subtitle C (e.g., Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, Form 941, Employer's Quarterly Federal Tax Return, Form 943, Employer's Annual Tax Return for Agricultural Employees)

4. Miscellaneous Excise Tax Returns–Subtitle D (e.g., Form 720, Quarterly Federal Excise Tax Return, Form 2290, Heavy Highway Vehicle Use Tax Return)

5. Alcohol, Tobacco, and Certain Other Excise Taxes–Subtitle E (e.g., Form 8725, Excise Tax on Greenmail)

   Note: Rev. Proc. 2009–11, obsoleted Notice 2008-12, IRB 2008-3 280, Notice 2008-46, IRB 2008-18 868. Rev. Proc. 2009–11 modified and superseded the list of forms in Notice 2008-13 and IRB 2008-3 282

   .

(1) SBWOTA both increased the penalty amount under IRC 6694(a) and made it applicable with respect to all tax returns, amended returns and claims for refund, including estate tax returns and gift tax returns, generation-skipping transfer tax returns, employment tax returns, and excise tax returns. SBWOTA and Tax Extenders and Alternative Minimum Tax Relief Act (TEAMTRA) also changed the standards of conduct return preparers must meet in order to avoid imposition of the IRC 6694(a) penalty. The tax return preparer penalty under IRC 6694(a) applies to tax returns and claims for refund filed after May 25, 2007, if there is an understatement of a taxpayer’s liability due to an unreasonable position, and either of the following:

1. The position was properly disclosed, but there was no reasonable basis for the position, or

2. The position was not properly disclosed and there was not substantial authority for the position.

(2) SBWOTA increased the penalty applicable to IRC 6694(a), Understatement Due to Unreasonable Positions, to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to returns, amended returns and claims for refund prepared after May 25, 2007.

(1) The standard for the disclosed position is reasonable basis.

(2) The standard for positions not disclosed is substantial authority if the position is not a tax shelter (as defined in IRC 6662(d)(2)(C)(ii)) or a reportable transaction to which IRC 6662A, Imposition of Accuracy-related Penalty on Understatements With Respect to Reportable Transactions, applies.

(1) The criteria for adequate disclosure is outlined and defined in the following IRM sections:

1. See IRM 20.1.6.4.8.1, Signing Tax Return Preparer Adequate Disclosure.

2. See IRM 20.1.6.4.8.2, Nonsigning Tax Return Preparer Adequate Disclosure.

(2) See 26 CFR 301.7701-15(b)(2) for definition of nonsigning tax return preparer.

(1) Notice 2009-5, IRB 2009-3 309, provides TEAMTRA’s standard of more likely than not for tax shelters and reportable transactions applies for taxable years ending after October 3, 2008.

1. It is reasonable to believe positions have a "more likely than not" chance of being upheld on their merits if a tax return preparer has analyzed the pertinent facts and authorities and concluded, in good faith, there is greater than a 50 percent likelihood the tax treatment will be upheld if the IRS challenges it.

2. The analysis prescribed by 26 CFR 1.6662-4(d)(3)(iii) (or any successor provision) for purposes of determining whether substantial authority is present applies for purposes of determining whether the more likely than not standard is satisfied. Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer’s due diligence.

3. Notice 2009-5, IRB 2009-3 309, also provides an interim compliance rule for tax shelter transactions not listed or otherwise reportable under IRC 6662A, Imposition of Accuracy-related Penalty on Understatements With Respect to Reportable Transactions. A position will not be deemed an "unreasonable position" if there is substantial authority for the position and the tax return preparer advises the taxpayer of the penalty standards applicable to the taxpayer.

   Note: These interim compliance rules do not apply to a position, described in IRC 6662A, that is a reportable transaction with a significant purpose of federal tax avoidance or evasion or a listed transaction.

(1) The penalty under IRC 6694(a) will not be imposed if, considering all the facts and circumstances, it is determined the understatement was due to reasonable cause and the tax return preparer acted in good faith. See 26 CFR 1.6694-2(e). A tax return preparer may be found to have acted in good faith when the tax return preparer relied on the advice of a third-party who is not in the same firm as the tax return preparer and who the tax return preparer had reason to believe was competent to render the advice. The advice may be written or oral, but in either case the burden of establishing the advice was received is on the tax return preparer.

(2) The other factors to consider include the following:

1. Nature of the error causing the understatement: Whether the error resulted from a provision so complex, uncommon, or highly technical a competent tax return preparer of returns or claims of the type at issue reasonably could have made the error. The reasonable cause and good faith exception does not apply to an error apparent from a general review of the return or claim for refund by the tax return preparer.

2. Frequency of errors: Whether the understatement was the result of an isolated error (such as an inadvertent mathematical or clerical error) rather than a number of errors. Although the reasonable cause and good faith exception generally applies to an isolated error, it does not apply if the isolated error is so obvious, flagrant or material it should have been discovered during a review of the return or claim. Furthermore, the reasonable cause and good faith exception does not apply if there is a pattern of errors on a return or claim for refund even though any one error, in isolation, would have qualified for the reasonable cause and good faith exception.

3. Materiality of errors: Whether the understatement was material in relation to the correct tax liability. The reasonable cause and good faith exception generally applies if the understatement is of a relatively immaterial amount. Nevertheless, even an immaterial understatement may not qualify for the reasonable cause and good faith exception if the error or errors creating the understatement are sufficiently obvious or numerous.

4. Preparer's normal office practice: Whether the tax return preparer's normal office practice, when considered together with other facts and circumstances, such as the knowledge of the tax return preparer, indicates the error in question would rarely occur and the normal office practice was followed in preparing the return or claim in question. Such a normal office practice must be a system for promoting accuracy and consistency in the preparation of returns or claims and generally would include, in the case of a signing tax return preparer, checklists, methods for obtaining necessary information from the taxpayer, a review of the prior year's return, and review procedures. Notwithstanding the above, the reasonable cause and good faith exception does not apply if there is a flagrant error on a return or claim for refund, a pattern of errors on a return or claim for refund, or a repetition of the same or similar errors on numerous returns or claims.

5. Reliance on Advice of Others: Whether the tax return preparer relied on the advice of a third-party who is not in the same firm as the tax return preparer and who the tax return preparer had reason to believe was competent to render the advice. The advice may be written or oral, but in either case the burden of establishing the advice was received is on the tax return preparer. A tax return preparer is not considered to have relied in good faith if the advice is unreasonable on its face, if the tax return preparer knew or should have known the third-party advisor was not aware of all relevant facts, or if the tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the tax return or claim for refund was prepared, the advice was no longer reliable due to developments in the law since the time the advice was given.

6. Reliance on generally accepted administrative or industry practice: Whether the tax return preparer reasonably relied in good faith on generally accepted administrative or industry practice in taking the position that resulted in the understatement. A tax return preparer is not considered to have relied in good faith if the tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the return or claim for refund was prepared, that the administrative or industry practice was no longer reliable due to developments in the law or IRS administrative practice since the time the practice was developed.

(1) SBWOTA increased the IRC 6694(a) penalty for understatements due to unreasonable positions from $250 to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim with respect to which the penalty was imposed. Examiners calculating the penalty using 50 percent of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim must elevate the calculation determination through the examiner’s supervisor to the functional RPC. For SB/SE Examination, the area RPC is used in lieu of the functional RPC. The RPC will then consult with the appropriate local Counsel contact person.

(1) Standard of conduct for IRC 6694(b) remains the same for both pre- and post-SBWOTA.

(2) There must be an understatement of liability for the penalty under IRC 6694(b) to be considered. It should be imposed when the following conditions are met:

1. Any part of the understatement was due to a willful attempt by a tax return preparer to understate the liability for tax on the return or claim; or

2. Reckless or intentional disregard of rules or regulations by a tax return preparer.

(3) Prior to SBWOTA, IRC 6694(b) was applied only to income tax return preparers.

(4) For information about IRC 6694(b) and referrals to the Office of Professional Responsibility (OPR), see IRM 20.1.6.12, Office of Professional Responsibility (OPR).

(5) For statute of limitations information as it relates to IRC 6694(b), see IRM 20.1.6.18, Statute of Limitations.

(6) For appeal rights information, see IRM 20.1.6.16, Appeal Rights.

(1) The IRC 6695(a) penalty applies if the tax return preparer fails to comply with IRC 6107(a), Furnishing Copy to Taxpayer. Under IRC 6107(a) a tax return preparer is required to furnish a completed copy of the return or claim for refund to the taxpayer before (or at the same time) the return or claim for refund is presented to the taxpayer for signature.

1. This copy may be given to the taxpayer in any media, including electronic media, acceptable to both the taxpayer and the tax return preparer.

2. In the case of an electronically filed return, a complete copy of a taxpayer's return or claim for refund consists of the electronic portion of the return or claim for refund, including all schedules, forms, attachments, and jurats, which were filed with the IRS. The copy provided to the taxpayer must include all information submitted to the IRS to enable the taxpayer to determine what schedules, forms, electronic files, and other supporting materials have been filed with the return.

3. The copy, however, need not contain the identification number of the paid tax return preparer. The electronic portion of the return or claim for refund may be contained on a replica of an official form or on an unofficial form. On an unofficial form, however, data entries must reference the line numbers or descriptions on an official form. See 26 CFR 1.6107-1(a)(2).

(2) If there is an employment arrangement between two or more tax return preparers, the requirement to furnish a copy only applies to the person who employs (or engages) one or more other tax return preparers. Similarly, if there is a partnership arrangement, the requirement to furnish a copy only applies to the partnership. See 26 CFR 1.6707-1(c).

(3) The IRC 6695(a) penalty does not apply if the failure is due to reasonable cause and not due to willful neglect.

(4) The penalty for failure to furnish a copy to the taxpayer will not be imposed solely if the following are true:

1. A person is a nonsigning tax return preparer under 26 CFR 301.7701-15(b)(2), or

2. A person is a tax return preparer under 26 CFR 301.7701-15(b)(3) on account of having prepared another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner's return).

(5) The IRC 6695(a) penalty will also not be imposed where a tax return preparer deletes certain information from the copy furnished to the taxpayer if the taxpayer holds an elected or politically appointed position with the government of the United States or a state or political subdivision thereof and who in order to carry out their official duties, has arranged their affairs so the taxpayer has less than full knowledge of the property held or of the debts they’re responsible for. See 26 CFR 1.6695-1(a)(2).

(1) The IRC 6695(b) penalty applies if the tax return preparer, who is required by regulations to sign the taxpayer’s return or claim for refund, fails to sign the return or claim for refund. Tax return preparers must sign the return or claim for refund that are not signed electronically, using the appropriate method prescribed by the Secretary after it is completed and before it is presented to the taxpayer for signature.

1. In the case of electronically signed tax returns, the signing tax return preparer need not sign the return prior to presenting a completed copy of the return to the taxpayer. The signing tax return preparer, however, must furnish to the taxpayer all information that will be transmitted as the electronically signed tax return contemporaneously with furnishing the Form 8879, IRS e-file Signature Authorization. The information may be furnished on a replica of an official form. The signing tax return preparer shall electronically sign the return in the manner prescribed by the commissioner in forms, instructions, or other appropriate guidance. See 26 CFR 1.6695-1(b)(2). Also, see IRM 3.42.5.7.1.3, IRS e-file Signature Authorization Forms, for signatures on electronically filed returns.

2. If the tax return preparer required to sign the return or claim for refund is unavailable to sign, another tax return preparer must review the entire return or claim for refund and then sign the return or claim for refund. If more than one tax return preparer is involved in the preparation of the return or claim for refund, the tax return preparer with primary responsibility for the overall substantive accuracy of the return or claim for refund is the tax return preparer who must sign the return or claim for refund. See 26 CFR 1.6695-1(b)(1).

(2) A signing tax return preparer must provide a signature on returns or claims for refund filed on or after January 1, 2009. Rev. Proc. 2009-11, IRB 2009–3 313, section 4.02, identifies categories of returns and claims for refund required to be signed by a tax return preparer in order to avoid a penalty under IRC 6695(b).

(3) IRC 6695(b) no longer requires a manual signature. The IRS will permit tax return preparers to sign original returns and amended returns by rubber stamp, mechanical device, or computer software program. These alternative methods of signing must include either a facsimile of the individual tax return preparer's signature or the individual tax return preparer's printed name. Tax return preparers utilizing one of these alternative means are personally responsible for affixing their signatures to returns. See Notice 2004-54, IRB 2004-33 209. The signature requirement may also be satisfied if the tax return preparer signs the completed return, makes a photocopy of the return, and the taxpayer signs and files the photocopy. See Rev. Rul. 78–370, 1978–2 C.B. 336.

(4) If a tax return preparer is physically unable to sign a return because of a temporary or permanent disability, the IRC 6695(b) penalty should not be imposed if the words "Unable to Sign" are printed, typed, or stamped on the tax return preparer signature line. Also, the tax return preparer’s name should be printed, typed, or stamped under the signature line after the return is completed, and before it is presented to the taxpayer for signature. See Rev. Proc. 79-7, 1979-1 C.B. 486.

(5) The IRC 6695(b) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect. If a tax return preparer asserts reasonable cause, the tax return preparer should provide a written statement to substantiate the tax return preparer’s claim of reasonable cause.

(6) The penalty for failure to sign will not be imposed if the following are true:

1. A person is a nonsigning tax return preparer under 26 CFR 1.301.7701-15(b)(2), or

2. A person is a tax return preparer under 26 CFR 1.301.7701-15(b)(3) on account of having prepared another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner’s return).

(1) The IRC 6695(c) penalty applies if the tax return preparer fails to comply with IRC 6109(a)(4), Furnishing Identifying Number of Tax Return Preparer. Under IRC 6109(a)(4) and the regulations thereunder, the return or claim for refund must contain the following:

1. The identifying number of the tax return preparer required to sign the return or claim for refund under IRC 6695(b), and

2. The identifying number of the partnership or employer (if there is a partnership or employment arrangement between two or more tax return preparers).

(2) A tax return preparer is not required to affix an identification number to the taxpayer’s copy of the return. See preamble to T.D. 9436, IRB 2009-3 268.

(3) Effective January 1, 2011, tax return preparers must have a valid Preparer Tax Identification Number (PTIN) to prepare returns. The PTIN is to be used as of January 1, 2011, as the tax return preparer identifying number. See PTIN Requirements for Tax Return Preparers at https://www.irs.gov/tax-professionals/ptin-requirements-for-tax-return-preparers and Treas. Reg 1.6109-2(d). If there is an employment arrangement or association the related EIN must also be on the tax return.

(4) The IRC 6695(c) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect.

(5) The penalty will not be imposed if the following are true:

1. A person is a nonsigning tax return preparer under 26 CFR 1.301.7701-15(b)(2) or

2. A person is a tax return preparer under 26 CFR 1.301.7701-15(b)(3) on account of preparing another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner’s return).

(6) IRC 6695(c) penalties will not be imposed against the following:

1. A tax return preparer who is employed or engaged by a person who is also a tax return preparer of the return or claim for refund, or

2. A tax return preparer who is a partner in a partnership which is also a tax return preparer of the return or claim for refund.

(1) The IRC 6695(d) penalty applies if the tax return preparer fails to comply with IRC 6107(b), Copy or List to Be Retained by Tax Return Preparer. Under IRC 6107(b) and the regulations thereunder, a tax return preparer must do the following:

1. Retain a completed copy of the return or claim for refund, or alternatively retain a record (by list, card file, electronically, or otherwise) of all the taxpayers, their taxpayer identification numbers, the taxable years, and the type of returns or claims for refund prepared.

2. Retain a record (by copy of the return or claim for refund or by a list, card file, electronically, or otherwise) of the name of the tax return preparer required to sign the return or claim for refund under IRC 6695(b) for each return or claim for refund presented to the taxpayer.

3. Make such copy or list available for inspection upon request by the IRS for a three year period following the close of the return period. See IRC 6060(c), Return Period Defined.

(2) If there is an employment arrangement between two or more tax return preparers, the requirement to retain a copy or list only applies to the person who employs (or engages) one or more tax return preparers. Similarly, if there is a partnership arrangement, the requirement to retain a copy or list only applies to the partnership. See 26 CFR 1.6107-1(c).

(3) The IRC 6695(d) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect.

(4) The penalty for failure to retain a copy or list will not be imposed if the following are true:

1. A person is a nonsigning tax return preparer under 26 CFR 301.7701-15(b)(2), or

2. A person is a tax return preparer under 26 CFR 301.7701-15(b)(3) on account of having prepared another return (e.g., the partnership return) which affects the amounts reported on the return in question (e.g., the partner’s return).

(1) The IRC 6695(e) penalty applies if the tax return preparer fails to comply with IRC 6060, Information Returns of Tax Return Preparers. Under IRC 6060(a), and 26 CFR 1.6060-1(a)(1), each person who employs (or engages) one or more signing tax return preparers must retain a record of the name, taxpayer identification number, and place of work of each tax return preparer employed (or engaged) by the preparer. For purposes of IRC 6060, a partnership is treated as the employer of the partners.

(2) The record may be in any form of documentation so long as it discloses on its face which individuals were employed (or engaged) as tax return preparers during that period.

(3) The record must be retained and made available for inspection for a three-year period following the close of the return period to which it relates. The term "return period" means the twelve month period beginning on July 1st of each year.

(4) If a tax return preparer is not employed by another tax return preparer, such tax return preparer is treated as their own employer for purposes of this penalty. Therefore, if a tax return preparer is a sole proprietor, the tax return preparer must retain and make available a record.

(5) The IRC 6695(e) penalty does not apply if the failure was due to reasonable cause and not due to willful neglect.

(6) The IRC 6695(e) penalty must be assessed within three years after the return or claim for refund was filed.

(1) The IRC 6695(f) penalty applies if the tax return preparer endorses or otherwise negotiates (directly or through an agent) a refund check (including an electronic version of a check) issued to a taxpayer (other than the tax return preparer).

(2) The penalty applies to a tax return preparer who directs (either on Form 8888 or on the direct deposit line of the return) the IRS to deposit a taxpayer's refund into a bank account in the tax return preparer's name or into a bank account under the tax return preparer's control.

(3) Taxpayers sometimes request their refunds be direct deposited into a bank account in the tax return preparer’s name or into a bank account under the tax return preparer’s control when taxpayers do not have their own bank account. Even if a taxpayer has requested the direct deposit to be made in this manner, the tax return preparer is still subject to the IRC 6695(f) penalty for complying with the request.

(4) The tax return preparer may not endorse or negotiate a check for a taxpayer even though the tax return preparer was designated as the taxpayer's representative on a Form 2848, Power of Attorney.

(5) The penalty is imposed for each refund check or direct deposit of a refund. It does not vary based on how much compensation the tax return preparer receives from the taxpayer, the amount of the refund check, or the amount of the direct deposit.

(6) A person in a business other than tax return preparation who fills out or reviews returns for customers may be a tax return preparer and, thus, subject to the IRC 6695(f) penalty if such person endorses or otherwise negotiates the customer’s refund check. See Rev. Rul. 86-55, 19861 C.B. 373.

(1) The IRC 6695(g) penalty applies if a tax return preparer fails to comply with due diligence requirements.

(2) The penalty has no reasonable cause exception.

(3) For exceptions to the penalty see 26 CFR 1.6695-2, Tax return preparer due diligence requirements for certain tax returns and claims.

(4) Visits with tax return preparers to determine compliance with the due diligence requirements are not third-party contacts. See IRM 20.1.6.19, Third Party Contacts - IRC 7602(c) for more information on third-party contacts.

(5) See Treas. Reg. 1.6695-2(b)(4) regarding record retention.

(6) See Treas. Reg. 1.6695-2(c) regarding special rule for firms.

(7) See Treas. Reg. 1.6695-2(d) regarding exceptions to the penalty.

(1) Revenue officers and examiners (e.g., tax auditors, tax compliance officers, estate and gift tax attorneys, and revenue agents) may assert IRC 6695 penalties or refer the penalty case to the RPPWG. See IRM 20.1.6.2.1, Optional Penalty Case Referral to Return Preparer Penalty Working Group (RPPWG).

(2) For information about referrals to OPR, see IRM 20.1.6.12, Office of Professional Responsibility (OPR).

(3) For statute of limitation information, see IRM 20.1.6.18, Statute of Limitations.

(4) For appeals information, see IRM 20.1.6.16, Appeal Rights.

(1) When Collection employees secure delinquent returns or claims for refund and determine a tax return preparer has not complied with the provisions of IRC 6695, a penalty will be asserted. The Collection employee who secures the delinquent return or claim will be responsible for requesting the assertion of these penalties.

(2) Effective January 1, 2011, tax return preparers must have and use a valid PTIN to prepare returns. See the PTIN application website at https://www.irs.gov/tax-professionals/ptin-requirements-for-tax-return-preparers. If there is an employment arrangement or association, the related EIN must also be on the tax return.

(3) The tax return preparer may be contacted if relevant information is needed.

(4) Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is used to assert tax return preparer penalties. Form 8278 will be forwarded to Collection CCP function for input.

(1) IRM 20.1.6.6, Program Action Case Overview, guidance is applicable to all OD/BU PAC.

(2) However, an OD/BU may have additional guidance it requires for its functional coordinators and it should also be followed.

(1) Examiners assert the penalty (e.g., tax auditors, tax compliance officers, estate and gift tax examiners, and revenue agents). IRC 6713 penalty cases are not referred to the RPPWG.

(2) If return information was used or disclosed pursuant to a provision of the Code permitting use or disclosure, then the penalty will not be asserted.

(3) Taxpayers, during examinations, may express concern their tax information was disclosed or used for a purpose other than to prepare, or assist in preparing, their income tax return.

(4) Written supervisory approval is required for this penalty’s assertion.

(5) ERCS controls are established using Form 5809, Preparer Penalty Case Control Card, or functional equivalent. See IRM 20.1.6.8, Operating Division Business Unit Return Preparer Penalty Functional Procedures, for OD/BU functional procedure cites.

(6) If any person prepares a return for compensation or provides services in connection with the preparation of an income tax return, and knowingly or recklessly discloses or uses return information improperly, the examiner should consider making a criminal referral under IRC 7216, Disclosure or Use of Information by Preparers of Returns, to the Treasury Inspector General for Tax Administration (TIGTA). Visit TIGTA's website at https://www.treasury.gov/tigta/contact_report.shtml for further guidance for a criminal referral under IRC 7216.

(1) For each unauthorized disclosure or use of return information under IRC 6713, a penalty of $250 may be asserted. The total amount cannot exceed $10,000 per person per calendar year.

(2) If a disclosure or use is made in connection with a crime relating to the misappropriation of another person’s taxpayer identity, whether or not such crime involves any tax filing, the penalty increases to $1,000 for each use or disclosure, with a maximum of $50,000 per person per calendar year. This penalty applies to disclosures or uses made on or after July 1, 2019 (the date the Taxpayer First Act of 2019 was enacted).

(3) The IRC 6713 penalty can be asserted in conjunction with any other tax return preparer penalty.

(4) For information about IRC 6713 referrals to OPR, see IRM 20.1.6.12, Office of Professional Responsibility (OPR).

(5) There is no statute of limitations for this penalty.

(6) For appeal rights information, see IRM 20.1.6.16, Appeal Rights.

(1) The OD/BU functional guidance addresses the following:

(2) The OD/BU functional guidance also provides guidelines for preparation of tax return preparer penalty and related forms:

Form	Title
Form 872-D	Consent to Extend the Time on Assessment of Tax Return Preparer Penalty
Form 5816	Report of Tax Return Preparer Penalty Case
Form 8278	Assessment and Abatement of Miscellaneous Civil Penalties
Form 8484	Report of Suspected Practitioner Misconduct
Form 4665	Report Transmittal
Form 3244-A	Payment Posting Voucher—Examination
Form 2859	Request for Quick or Prompt Assessment
Form 3198	Special Handling Notice for Examination Case Processing, or functional equivalent
Form 5809	Preparer Penalty Case Control Card, or the functional equivalent Note: TE/GE penalty investigations will be controlled and established on RCCMS.

(1) The OD/BU functional procedures are found in these locations:

• SB/SE, Examination: IRM 4.1.10, Return Preparer Program Coordinator, and SB/SE Return Preparer Knowledge Management.

• SB/SE, Estate and Gift: IRM 4.25.7.4, Return Preparer Penalties.

• SB/SE, Employment Tax: IRM 4.23.17, Preparer Penalty Procedures for SB/SE Employment Tax.

• TE/GE: IRM 4.75.40.23.4, Preparer Penalties

• LB&I Knowledge Management

(1) When multiple penalties apply to the same tax return preparer for the same period:

1. Input the first penalty to be assessed using Blocking Series 52X.

2. Input subsequent penalties using Blocking Series 53X.

3. Annotate Form 8278 with the correct blocking series opposite each penalty to facilitate terminal input.

4. With Blocking Series 53X, CP Notice 55 will be generated to alert Files to associate Form 5147, IDRS Transaction Record, for subsequent penalty assessments with the penalty case file containing the input and source documents. The notice is not generated until after the input of the Form 8278.

(2) Form 8278 instructions require both the originator and supervisor sign and date the form. A supervisor’s signature, which indicates the immediate supervisor’s approval of the penalty, is sufficient to meet the requirements of IRC 6751 and Form 8278. An acting supervisor with an approved designation to act is considered an immediate supervisor for the purpose of IRC 6751. See IRM 20.1.1.2.3, Approval Prerequisite to Penalty Assessments.

(3) Review Form 8278 for required signatures as follows:

1. Verify originator's signature in Block 10a: If Block 10a does not contain an originator's signature, Form 8278 and the associated case file should be returned to the supervisor using Form 3210 procedures.

2. Verify supervisor's signature in Block 11a: If Block 11a does not contain a supervisor's signature, the Form 8278 and the associated case file should be returned to the attention of the originator's supervisor using Form 3210 procedures.

   Note: If the case has an imminent statute and it must be returned for a signature, ensure expedite handling.

(4) Once the tax examiner verifies the required signatures are present, the tax examiner will input their name and date in Block 12a.

(1) Any examiner conducting an investigation under IRC 6694, IRC 6695, IRC 6700, or IRC 6701, will consider whether an injunction should be sought under IRC 7407 or IRC 7408. In addition, an injunction may be sought by an examiner to whom an investigation is assigned for activities specified in IRC 7407 or other specified conduct under IRC 7408.

(1) The injunction authorized under IRC 7407 is coordinated with civil penalties under IRC 6694 and IRC 6695 and criminal tax provisions. In addition, IRC 7407 can be used in conjunction with IRC 7408, if appropriate.

(2) An injunction may be sought without regard to whether penalties have been or may be assessed against any tax return preparer.

(1) Tax return preparers in the IRS e-file program must meet standards reflected in Rev. Proc. 2007–40, Pub 3112, IRS E-File Application and Participation, and Pub 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns. Penalties asserted against tax return preparers are a factor in determining suitability for the IRS e-file program. RPCs will notify electronic filing coordinators (EFCs) of all penalties asserted on tax return preparers.

(2) Section 6 of Rev. Proc. 2007-40 broadly defines the applicability of tax return preparer penalties for those participating in the IRS e-file program. The IRS may assert all appropriate tax return preparer, non-preparer, and disclosure penalties against an authorized IRS e-file provider as warranted under the circumstances.

(3) SB/SE area offices may establish multi-functional teams to visit electronic filers to determine their compliance with the IRS e-file program procedures. A team approach is preferred if resources are available. A team consists of two (2) representatives who may be from examination. Examiners who participate on these teams charge their time to Activity Code 522.

(4) See IRM 4.21.1, Monitoring the IRS e-file Program, for more information.

(5) See IRM 3.42.4, Electronic Tax Administration—IRS e-file for Business Tax Returns, and IRM 3.42.5, Electronic Tax Administration—IRS e-file for Individual Income Tax Returns, for more information on the e-file program.

(1) The Worker, Homeownership, and Business Assistance Act of 2009 added a special rule for tax return preparers of individual income tax returns. See IRC 6011(e)(3), Special Rule for Tax Return Preparers.

(2) The provision generally requires any individual income tax return prepared and filed by a tax return preparer be filed on magnetic media when such tax return preparer is a specified tax return preparer for the calendar year during which such return is filed.

(3) "Specified tax return preparer" means, with respect to any calendar year, any tax return preparer, as defined in IRC 7701(a)(36) and 26 CFR 301.7701-15, unless such tax return preparer reasonably expects to file 10 or fewer individual income tax returns during such calendar year. If a person who is a tax return preparer is a member of a firm, the person is a specified tax return preparer unless the firm members in the aggregate reasonably expect to file 10 or fewer individual income returns in a calendar year.

(4) Solely for the 2011 calendar year, a tax return preparer will not be considered a specified tax return preparer if the tax return preparer reasonably expects, or if the tax return preparer is a member of a firm, the firm's members in the aggregate reasonably expect, to file fewer than 100 individual income tax returns in the 2011 calendar year. See 26 CFR 301.6011-7(a)(3).

(5) The term "individual income tax return" means any return of the tax imposed by subtitle A on individuals, estates, or trusts.

(6) The effective date is for returns filed after December 31, 2010.

(1) Practice before the IRS encompasses all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the IRS.

(2) Such presentations include, but are not limited to the following:

1. Preparing documents

2. Filing documents

3. Corresponding and communicating on behalf of a client with the IRS

4. Rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion

5. Representing a client before the IRS at conferences, hearings and meetings

(3) Practice also may consist of providing written advice, including advice based on an unreasonable factual or legal assumption as well as giving a false opinion, knowingly, recklessly or through gross incompetence.

(4) An unenrolled tax return preparer who prepares and signs a taxpayer’s tax return as the tax return preparer may represent the taxpayer before examiners, customer service representatives, or similar officers and employees of the IRS during an examination of the taxable year or period covered by that tax return. This right does not permit these individuals to represent the taxpayer, regardless of the circumstances requiring representation, before appeals officers, revenue officers, counsel or similar officers or employees. For tax returns prepared and signed after 2015, Rev. Proc. 2014-42 requires participation in the Annual Filing Season Program in order to act as a taxpayer’s representative before the IRS.

(1) In general, OPR may sanction a practitioner, after notice and an opportunity for a proceeding, who is shown to be incompetent or disreputable (within the meaning of section 10.51 of Circular 230) or who willfully violates any regulation enumerated by Circular 230 or, who with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client.

(2) Sanctions available to OPR include issuing a censure (a public reprimand), and suspending or disbarring the practitioner's privilege to practice before the IRS.

(3) In certain situations, OPR may impose a monetary penalty on a practitioner who engages in conduct subject to sanction. If the practitioner was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the monetary penalty may also be imposed on such employer, firm, or entity if it knew, or reasonably should have known, of such conduct. The amount of the penalty may not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty. A monetary penalty imposed on a practitioner may be in addition to, or in lieu of, any suspension, disbarment or censure of the practitioner and may be in addition to a monetary penalty imposed on an employer, firm or other entity.

(4) OPR may also seek Department of Justice assistance in obtaining an injunction.

(5) OPR may also disqualify any appraiser for a violation of the rules applicable to appraisers.

(1) Circular 230 section 10.53 specifies if an officer or employee of the IRS has reason to believe a practitioner, as described above, has violated any provision of Circular 230, the officer or employee must promptly make a written report to the Director of OPR of the suspected violation.

(2) Based on the above, the decision to refer a particular matter to OPR is not an issue for negotiation with a taxpayer or practitioner. OPR referrals may not be negotiated as a settlement item with respect to any IRS or Title 26 tax matter.

(3) The potential for a matter to be referred to OPR should never be discussed with a taxpayer or a practitioner. In certain situations, it is acceptable to remind a practitioner of the practitioner’s duties relative to Circular 230; however, IRS employees should never imply or infer a referral to OPR will result in disciplinary action against a practitioner.

(4) Each referral to OPR should describe and document the practitioner's actions supporting disciplinary action. Include a summary of the suspected misconduct providing as much detail as possible regarding the alleged misconduct along with supporting documentation.

(5) Once an IRS employee makes a referral with the approval of the employee’s supervisor, OPR will contact the employee within 30 days to acknowledge the referral. OPR may request additional information once the referral undergoes review.

(6) Discretionary referrals to OPR include penalties assessed under:

• IRC 6694(a)

• IRC 6695(a) through (g)

(7) Mandatory referrals to OPR include penalties assessed under:

• IRC 6694(b)

• IRC 6700

• IRC 6701

(8) Federal courts have the authority to permanently prohibit individuals from practicing before the IRS. This usually results from an injunction suit after an IRC 6700 or IRC 6701 investigation. Examiners assigned promoter investigations should consider a referral to OPR where practitioner misconduct is present and a complaint for injunction is not filed for the practitioner misconduct.

(9) When making a referral to OPR involving a Circular 230 practitioner, examiners will do the following:

1. Complete and forward Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, to the Director of OPR through the area RPC based on a tax return preparer or promoter penalty(s).

2. Review IRM 4.11.55.5.2.1.2, Situations Which May Warrant a Referral, for other civil penalty examinations, return examinations that are not civil penalty examinations, and practitioner actions that may warrant a referral to OPR.

(10) Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility, is used for the referral to OPR. The referent must complete all parts of Form 8484 following the instructions attached to the form.

(11) Completing the Referral

1. Follow procedures in IRM 4.11.55.5.2.2, Referral to the OPR—Procedures, when a referral is warranted.

2. OPR requires management approval for misconduct reports. Management approval ensures the misconduct reports are based on objective, generally understood standards of practitioner service and professionalism. RPCs are a valuable resource and may assist with OPR referrals. In SB/SE Examination, area RPCs have been established. SB/SE Employment, Estate and Gift, and Excise each have an RPC. SB/SE Collection can contact SB/SE Examination area RPCs for OPR referral questions. LB&I and TE/GE also have an RPC.

(1) Under no circumstances should an examiner start a promoter investigation without documented approval from the LDC for SB/SE and TE/GE or Technical Tax Shelter Promoter Committee (TTSPC) for LB&I.

(2) IRM 4.32.2.2, Overview of Abusive Transactions (AT) Program, contains an overview of the IRC 6700, IRC 6701, IRC 6707, and IRC 6708 penalty program concerning the promoters of abusive tax avoidance transactions and the examination of taxpayer participants.

(3) IRM 4.32.2, The Abusive Transactions (AT) Process, contains the administrative procedures.

(4) IRM 4.32.3, Coordination and Roles of Cross-Functional Units, contains the cross-functional guidance.

(5) Knowledge Management’s Virtual Library contents functional procedures and guidance for SB/SE and LB&I.

(6) The SB/SE LDC processes referrals concerning promoters of abusive tax avoidance transactions. The LDC evaluates referrals based on established criteria and authorizes IRC 6700 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP for assignment to the field.

(7) OTSA collects and analyzes information about abusive tax shelters and transactions, and coordinates LB&I's tax shelter planning and operation.

(1) The penalty under section 6700 is in addition to all other penalties that may be imposed under the Code. However, under IRC 6701(f)(3), Coordination With Section 6700, no penalty may be assessed under IRC 6700 on any person with respect to any document for which a penalty is assessed on such person under IRC 6701. This provision allows the IRS to choose which penalty to assert if both apply to a set of facts, but prohibits the IRS from assessing penalties under both sections for the same document.

(2) IRC 6694(b) imposes a penalty if a tax return preparer understates a taxpayer’s liability as a result of willful or reckless conduct. In some instances, a person who is subject to the penalty under IRC 6700 may also be subject to the penalty under IRC 6694(b).

(3) IRC 7206(2), Aid or Assistance, imposes a criminal penalty on any person who willfully aids or assists in making fraudulent or false statements. In some cases, promoters might be criminally prosecuted under IRC 7206(2), for assisting, procuring, or advising the preparation or presentation of a return or other document which is fraudulent or false.

(4) IRC 7408 authorizes the United States to commence a civil action at the request of the Secretary to enjoin any person from further engaging in conduct subject to the penalty under IRC 6700, Promoting Abusive Tax Shelters, etc. The promoter penalty under IRC 6700 and the injunction actions under IRC 7408 are more effective when applied prior to the time investors file their returns. Therefore, abusive tax avoidance transactions should be identified and IRC 6700 penalty investigations authorized by the LDC should be initiated promptly. Also refer to IRM 4.32.2.6, Case Control/Case Assignment Procedures.

(1) Key words in the penalty are "document," "knows," and "understatement." For the penalty to be imposed, the person penalized must be implicated in the preparation or presentation of a document some portion of which the person knows or has reason to know, will be used in connection with a material matter arising under the tax laws and knows such position would result in an understatement of tax liability if so used.

1. In general, tax counselors who advise clients to take unsupported filing positions or to file false or fraudulent returns are subject to the penalty.

2. The authors of legal opinions made available to promoters of tax shelters may also be liable for the penalty. The penalty may be imposed even if the opinion does not contain any false advice if the writer knows that the opinion is based on inaccurate assumptions and/or knows of other facts which render the legal advice false.

3. The penalty can be imposed for gratuitous advice or assistance in preparing any document.

4. In order to aid in the understatement of another’s tax, it is not necessary to actually prepare the tax return or document that leads to the understatement. A person who controls the activities of subordinates and either orders the subordinates to act, or does not prevent their participation in actions that person knows will produce an understatement, is subject to the penalty under IRC 6701.

(2) The definition of procures, subordinate, and advises are as follows:

1. The term "procures" includes ordering (or otherwise causing) a subordinate to do an act subject to the penalty. It also includes knowing of, and not attempting to prevent, participation by a subordinate in such an act.

2. The term "subordinate" means any other person (whether or not a director, officer, employee, or agent of the taxpayer involved) over whose activities the person has direction, supervision or control. Such direction must be direct and immediate. Where a subordinate is directed or expected, as a condition of retaining his position, to participate in the prohibited activity by a person who directs, supervises, or controls such subordinate, the latter person is the one potentially subject to the penalty.

3. The term "advises" includes actions of independent contractors such as lawyers and accountants who counsel a particular course of action.

   Note: A person furnishing typing, reproduction, or other mechanical assistance with respect to a document is not to be considered as having aided or assisted in the preparation of the document for purposes of the statute solely by reason of such assistance.

(3) Congressional intent in enacting the provision.

1. A tax advisor would not be subject to this penalty for suggesting to a client an aggressive but supportable filing position even though that position was later rejected by the courts and even though the client was subjected to the substantial understatement penalty. However, if the advisor suggested a position which the advisor knew could not be supported on any reasonable basis under the law, the penalty would apply.

2. No person will be subject to the penalty unless they are "directly involved in aiding or assisting in the preparation of a false or fraudulent document under the tax laws." Thus, the preparation of a correct schedule by a tax return preparer to be incorporated in a return will not expose the tax return preparer of the schedule to a penalty even though the tax return preparer is aware other portions of the return may be fraudulent.

(4) Single penalty per taxpayer per period.

1. If a penalty is imposed on a person with respect to a federal tax document, no penalty shall be imposed under IRC 6701 on such person with respect to any other federal tax document relating solely to the same taxpayer and the same taxable period, or, if there is no taxable period, the same taxable event. If, however, such other federal tax document is also related to another taxpayer or another taxable period or taxable event, a second penalty may be imposed under IRC 6701 with respect to such other federal tax document.

2. A husband and wife who make a joint return of income tax are considered to be the same taxpayer for the taxable year.

Note: Someone who assists two taxpayers in preparing false documents would be liable for a $2,000 penalty whereas the penalty would be only $1,000 if he had advised in the preparation of two false documents for the same taxpayer. Similarly, an advisor who prepares a false partnership return and then false Schedules K-1 for 10 individual partners would be subject to a $10,000 penalty.

(5) Example 1: A tax advisor would not be subject to the penalty for suggesting an aggressive but supportable filing position to a client even though that position was later rejected by the courts and even though the client was subjected to the substantial understatement penalty.

(6) Example 2: However, if the tax advisor suggested a position which the advisor knew could not be reasonably supported by statute or regulation, and the advisor prepared (or assisted in the preparation of) a document for the underlying tax return reflecting that insupportable position, the penalty could apply.

1. Thus, if a person prepares a return (or a schedule or other portion of a return) for a client reflecting a deduction of an amount the preparer knows is not deductible, the tax return preparer could be subject to the penalty.

2. However, if a person prepares a schedule or other portion of a return reflecting positions which are reasonably supported by rules or regulations, the person will not be subject to an IRC 6701 penalty even if other portions of the return are erroneous or fraudulent.

(7) Example 3: Mr. C, an accountant, prepared a 2015 return for Taxpayer D, a client. Mr. C knowingly overstated D's expenses on the return, thereby creating a net operating loss (NOL) for the year. Mr. C prepared amended returns for Taxpayer D for 2013 and 2014, claiming refunds for those years based on the 2015 NOL carryback. The carryback was not exhausted in 2014. Mr. E, another accountant, prepared Taxpayer D's 2016 return using the information presented to Mr. E by Taxpayer D, including copies of the document prepared by Mr. C. Mr. E is unaware of the overstatement of expenses by Mr. C and deducted the remaining unused NOL on Taxpayer D's 2016 return.

1. Mr. C is liable for three separate IRC 6701 penalties for his role in preparing Taxpayer D's 2013, 2014, and 2015 returns, which Mr. C knew, or had reason to know would result in understatements of Taxpayer's D's 2013, 2014, and 2015 federal income tax liabilities.

2. Mr. E, however, was unaware of the overstatement of expenses on the 2015 return and is unaware of the understatement of tax liability on the 2016 return. Thus, Mr. E is not liable for an IRC 6701 penalty.

(8) Example 4: On January 15, 2016, Mr. A, an individual, offers to donate a painting to museum X. Mr. B, the curator of the museum, agrees to accept the painting. Mr. B offers to backdate a receipt for the donation to December 30, 2015. Mr. B knows the receipt will be used to substantiate Mr. A's charitable deduction. Mr. A uses the backdated receipt to claim a charitable deduction for 2015.

1. Mr. B has aided in the preparation of a federal tax document knowing the document will be used in connection with a material tax matter and it will result in an understatement of tax.

2. Thus, Mr. B is liable for the IRC 6701 penalty.

(9) Example 5: Taxpayer F retains Mr. G., an appraiser, to appraise rare books she wishes to donate to a university. Mrs. F tells Mr. G. she needs the appraisal to substantiate a charitable contribution deduction for federal income tax purposes. Mr. G. knows the fair market value of the books may be any amount between $50,000 and $75,000. Mr. G. offers to provide Mrs. F an appraisal, for a fee, indicating the books are worth $100,000. Mr. G. indicates to Mrs. F that if the IRS challenges the valuation, the appraisal of $100,000 can be used to negotiate a fair market value of $75,000.

1. Mrs. F agrees to pay the fee for the appraisal indicating the books are worth $100,000, and Mr. G. prepares the appraisal.

2. Mr. G. has aided in the preparation of a document knowing the document will be used in connection with a material tax matter and it will result in the understatement of tax liability. Thus, Mr. G. is liable for the IRC 6701 penalty.

(10) Example 6: Mrs. H, an accountant, overstates the value of depreciable property on an estate tax return. Mrs. H knows there is no reasonable basis for the valuation. Mrs. H also knows the valuation claimed on the estate tax return will not understate the tax liability of the estate because of the application of the unified credit. Mrs. H, however, intends that the value claimed on the return will be used by the beneficiary of the estate in computing depreciation deductions. Mrs. H has aided in the preparation of a tax document and knows the estate tax return will result in an understatement of the tax liability of the beneficiary. The IRC 6701 penalty therefore applies.

(11) Example 7: Mr. A, an attorney, knowingly understates an item of partnership income in preparing a partnership return for calendar year 2015. Mr. A prepares and transmits to the partners Schedules K-1 for the 10 individual partners for the same calendar year reflecting the understated income. Mr. A is subject to 10 separate $1,000 IRC 6701 penalties for his preparation of ten Schedules K-1 which Mr. A knew would, if used, result in understatements of the federal tax liabilities of the 10 partners on their federal income tax returns. Mr. A will not be subject to an eleventh penalty in connection with the partnership return itself, since the partnership itself is not liable for income tax and the only understatements of tax liability are the understatements of tax liability on the 10 partners' individual returns.

(12) Example 8: Mrs. B, an officer of an S corporation under IRC 1361(a)(1), S Corporation Defined, prepares the corporation's tax return for calendar year 2015. Mrs. B intentionally understates the corporation's net capital gain for the taxable year, resulting in an understatement of the corporation's tax liability under IRC 1374, Tax Imposed on Certain Built-in Gains. Mrs. B also prepares Schedules K-1 for the individual shareholders for the same calendar year reflecting the understated capital gain. Mrs. B is subject to a $10,000 penalty for her aid in the preparation of the small business corporation return and a $1,000 penalty for each Schedule K-1 prepared.

(13) Example 9: Mrs. C, an accountant, prepares false income and gift tax returns for client Mr. D. Each of the returns is prepared for calendar year 2015. The calendar year 2015, however, relates to a period for which different taxes are imposed. Thus, there are two taxable periods for purposes of application of the penalty under IRC 6701: the calendar year 2015 which is the period for which the income tax is imposed, and the calendar year 2015 which is the period for which the gift tax is imposed. Mrs. C is subject to a penalty of $2,000.

(1) Under no circumstances should an IRC 6701 investigation be started without documented approval from one of the following:

1. LDC for SB/SE (unless the IRC 6701 penalty is being asserted in conjunction with findings from an income tax examination),

2. TTSPC for LB&I reportable transactions,

3. RPC for LB&I non-reportable transactions involving tax return preparers, or

4. LDC for TE/GE (unless the IRC 6701 penalty is being asserted in conjunction with findings from an examination).

(2) IRM 4.32.2, The Abusive Transactions (AT) Process, contains the administrative procedures.

(3) IRM 4.32.3, Coordination and Roles of Cross-Functional Units, contains the cross-functional guidance.

(4) The SB/SE LDC processes referrals for IRC 6701 penalty investigation. Therefore, if during an income tax audit or by other means, it is determined there may a recurrence of tax return preparer behavior violating IRC 6701, a referral must be made to the LDC. The LDC evaluates referrals based on established criteria and authorizes IRC 6701 investigations when warranted. After investigations are authorized, case files are forwarded to the appropriate area's PSP unit for assignment to the field.

(5) The LB&I OTSA reviews referrals based on established criteria and presents the referral to the TTSPC. The TTSPC authorizes IRC 6701 investigations when warranted for reportable transactions. For tax return preparer investigations in LB&I which do not involve a reportable transaction, approval from the RPC is required and assistance of local counsel should be requested.

(1) A person subject to penalty under IRC 6701 may be identified by one of the following:

• Area field examiner

• Campus correspondence examiner

• IRS appraiser and/or engineer

• Any other IRS employee who determines the penalty might apply

  Note: Many of these cases will be discovered during LB&I examinations. However, the referral should be based on the taxpayer under penalty investigation, in most cases, an SB/SE taxpayer.

(1) The penalty under IRC 6701 is not imposed on a person with respect to a federal tax document if a penalty with respect to such document has been assessed on such person under IRC 6694. The IRC 6701 penalty may be imposed, however, with respect to any other federal tax document for which the penalty under IRC 6694 has not been assessed, even though the document relates to the same taxpayer and taxable year as a document with respect to which the penalty under IRC 6694 has been assessed.

(2) A penalty under IRC 6701 may not be applied to the same activities that result in the application of a penalty under IRC 6700. Therefore, if a promoter develops promotional materials such as a prospectus and other documents which explain the promotion and those documents are used as the evidence supporting a penalty under IRC 6700 for organizing and promoting an abusive tax shelter, a penalty under IRC 6701 will not be assessed for those same documents. However, if the same promoter prepares a partnership tax return relating to the same tax plan or arrangement, a penalty can be assessed under IRC 6701 for each Schedule K-1 if an understatement of tax liability is reported on the investor’s federal tax returns.

(1) Any examiner conducting an investigation under IRC 6700, IRC 6707, or IRC 6708 will consider whether an injunction should be sought under IRC 7408.

(2) An injunction may be sought by an examiner to whom an investigation is assigned for activities specified in IRC 7407.

(1) 26 CFR 1.6694-4(a)(2) allows for pre-assessment appeals rights of IRC 6694 penalties. Although the regulation only relates to IRC 6694 penalties, examiners will follow the same guidelines for IRC 6695 penalties. IRC 6694, IRC 6695, and IRC 6713 penalties will have pre-assessment appeal rights.

(2) The tax return preparer is sent a 30-day letter, Letter 1125, Transmittal of Preparer Penalty Report, with an examination report and Pub 5, Your Appeal Rights and How To Prepare a Protest If You Disagree, for appeal procedures. If there is no timely response to the letter, the penalty is assessed. Pre-assessment appeals consideration will be granted if requested for IRC 6694, IRC 6695, and IRC 6713 penalties.

(3) Short statute cases

1. If the statutory period for assessment is about to expire and the tax return preparer will not agree to an extension, the penalty will be assessed. If the tax return preparer has not previously had the opportunity to request a hearing with Appeals, the tax return preparer, upon request, will be provided post-assessment appeal rights in the same way pre-assessment appeal rights would have been provided. Examiners will advise tax return preparer the period for filing a claim for refund under IRC 6694(c), Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty, is not extended by a post-assessment appeal.

2. Examiners will not submit tax return preparer penalty cases to Appeals if less than 365 days remain on the statute of limitations when received by Appeals. In these instances, examiners will first solicit an extension of the statutory period for assessment.

3. See IRM 20.1.6.18, Statute of Limitations.

(1) In cases where there has not been a prior hearing with Appeals, the tax return preparer may request, and will be granted, an appeals hearing after assessment. Advise tax return preparers the period for filing a claim for refund under IRC 6694(c) is not extended by a post-assessment appeal.

(1) If a tax return preparer or promoter has not had a hearing with Appeals and files a claim for refund of assessed penalties, the tax return preparer or promoter may request, and will be granted, an appeals hearing after the proposed denial of the claim.

(1) Tax return preparers for IRC 6694, IRC 6695, and IRC 6713 penalties are currently permitted to request an appeals hearing if they file a claim and the claim is disallowed, even if the case was previously considered by Appeals in pre-assessment status.

(1) Tax return preparers and promoters may appeal the denial of a special claim for refund. Administrative appeal rights will be granted when the basis for the claim does not conflict with Appeals procedural rules set forth in Treas. Reg. 601.106(b) of the statement of procedural rules. An appeal should not be based on moral, political, constitutional, religious, or similar arguments.

(2) See IRM 20.1.6.20.1, Special Claim—IRC 6694, IRC 6700, and IRC 6701.

(1) Within 30 days after the day notice and demand is made, tax return preparers/promoters may pay 15 percent of the penalty and file a special claim for refund for IRC 6694, IRC 6700, and IRC 6701 penalties.

1. IRC 6694(c), Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty, and IRC 6703(c), Extension of Period of Collection Where Person Pays 15 Percent of Penalty, provide special claim for refund procedures for tax return preparers/promoters assessed penalties under IRC 6694, IRC 6700, and IRC 6701. Form 6118 becomes a special claim when, within 30 days after the day notice and demand is made, tax return preparers/promoters pay 15 percent of the penalty.

2. Under IRC 6694(c) and IRC 6703(c) collection action and the running of the statute of limitation on collection are suspended until the special claim is finally resolved administratively or judicially (e.g., by Appeals or by the Federal District Court).

3. These special claims must be processed on an expedited basis, especially when Appeals consideration is warranted and will be granted.

4. The examiner receiving the claim will request a transcript to validate TC 470 CC 95 was input to stay collection activity, see IRC 6694(c) and IRC 6703(c) special claims for refund. When TC 470 CC 95 is not on the MFT 55 module for IMF or MFT 13 module for BMF for these special claims Form 3177, Notice of Action for Entry on Master File, should be completed and emailed to Collection CCP for the input of the TC 470 CC 95.

   Note: Select the email link corresponding to and including the name of the Area in which you work. The examiner will verify the TC 470 CC 95 on the MFT 55 module for IMF or MFT 13 module for BMF special claims, and document actions taken on the case activity record.

5. For agreed special claims the examiner completes and faxes Form 3177 for input by collection of TC 472 CC 95, for the reversal of TC 470 CC 95. Email Form 3177 to Collection CCP. The examiner should document the action taken on the case activity record.

6. For unagreed special claims the examiner uses Form 3198, Special Handling Notice for Examination Case Processing, to flag the special claim case for the reversal of the TC 470 CC 95. The Other Instructions item will be checked in the Special Features section. The explanation is Form 3177, Notice of Action for Entry on Master File, with TC 472 CC 95 is completed by the function concluding the special claim. Email Form 3177 to Collection CCP.

(2) The IRC 6694 special claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim.

(3) The IRC 6700 and IRC 6701 special claims for refund are sent by campus examination classification to the SB/SE LDC in Laguna Niguel, CA. The LDC will ensure the claim is reviewed by the appropriate examination personnel.

(4) Also see IRM 4.32.2.12.10.3.2.5, Claims for Refunds Procedures—SB/SE.

(1) If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under IRC 6694(a) or IRC 6694(b) has been assessed, such assessment shall be abated.

(2) If any portion of such penalty has been paid, the amount so paid shall be refunded to the person who made such payment as an overpayment of tax without regard to any period of limitations.

(3) Form 6118 is used by the tax return preparer for IRC 6694(d), Abatement of Penalty Where Taxpayer's Liability Not Understated, claims.

1. The examiner verifies the final administrative determination, or a final judicial decision cited by the tax return preparer for the client’s return the penalty was based upon and there is currently no understatement of liability the penalty was based upon.

2. There is no statute of limitations for these claims.

(1) When Form 6118 is submitted for IRC 6694, IRC 6695, IRC 6700, or IRC 6701 claims, see IRM 21.5.3 for processing of these claims for refund.

(2) The IRC 6694 and IRC 6695 claims for refunds are sent by campus examination classification to the appropriate SB/SE area RPC of the filed claim. Claims missing Form 8867 should be sent to TS.

(3) The IRC 6700 and IRC 6701 claims for refund are sent by campus examination classification to the SB/SE LDC in Laguna Niguel, CA.

(4) Two attempts by campus examination classification are made to request the administrative file before forwarding the claim to the appropriate office above.

(5) Campus examination classification coordinates with Accounts Management for the input of TC 470 to stay collection activity for IRC 6694(c) and IRC 6703(c) special claims for refund.