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20.1.6.3
(02-08-2008)
Preparer Conduct Penalties:IRC Section 6694
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Note: IRC 6694 was amended by The Small Business and Work Opportunity
Act of 2007 (SBWOA) which was enacted into law on May 25, 2007, for tax returns
prepared after May 25, 2007. SBWOA extended the application of the income
tax return preparer penalties to all tax return preparers, altered the standards
of conduct, and increased applicable penalties. This IRM was written prior
to the release of the related Regulations; therefore, this IRM does not include
information on IRC section 6694 pertaining to returns filed after May 25,
2007.
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Criteria for imposition of the IRC section 6694(a) penalty
:
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The individual was an income tax return preparer.
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There must be an understatement of income tax liability.
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The understatement must be due to a position that has no realistic possibility
of being sustained on the merits and the income tax return preparer knew or
reasonably should have known of such position.
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There was no adequate disclosure on the return or it was a frivolous position.
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There was no reasonable cause and good faith.
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Criteria for imposition of the IRC section 6694(b) penalty:
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The individual was an income tax return preparer.
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There must be an understatement of income tax liability, and
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The understatement must be due to a willful attempt to understate the
income tax liability or due to any reckless or intentional disregard of rules
or regulations.
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When Both IRC section 6694(a) and IRC section 6694(b)
Penalties Apply. If both penalties apply to a preparer, the IRC section
6694(b) penalty amount must be reduced by the IRC section 6694(a) penalty
amount. Therefore, examiners should ensure that the combined assessment of
IRC section 6694(a) and (b) penalties against a preparer do not exceed $1,000
with respect to one return or claim for refund.
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Burden of Proof for IRC Section 6694(a) Penalty
The preparer bears the burden of proof on issues such as:
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Whether the preparer knew or reasonably should have known that the questioned
position was taken on the return or claim for refund.
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Whether there is reasonable cause and good faith with respect to the position.
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Whether the position was adequately disclosed. (Treas. Reg.1.66942(e).
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Burden of Proof for IRC Section 6694(b) Penalty:
The IRS bears the burden of proof on the issue of whether the preparer willfully
attempted to understate the income tax liability. The preparer bears the burden
of proof on issues such as:
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Whether the preparer recklessly or intentionally disregarded a rule or
regulation.
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Whether a position contrary to a regulation represents a good faith challenge
to the validity of the regulation.
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Whether disclosure was adequately made. (Treas. Reg. 1.66943(h)
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