IRS Clarifies Limitations Period for Assessing Preparer Penalties for Amended Returns.

(Parker Tax Publishing April 20, 2015)

The IRS's Office of Chief Counsel clarified that the IRS has three years from the time a return with an understatement is filed to assess a penalty against the return preparer, and the preparer has three years from when the penalty is paid to contest that penalty. CCA 201514008.

Background

An IRS examination group requested clarification of the limitation period for making an assessment of the Code Sec. 6694 return preparer penalty for preparing a return or claim for refund with an understatement of tax liability, and for the limitation period for when a preparer can request a refund for an overpayment of that penalty. The group noted that they often confronted situations where a return preparer had filed amended income tax returns that included an understatement of tax liability attributable to an unreasonable filing position.

For purposes of its memorandum, the IRS used a representative fact pattern wherein a tax return preparer prepared an amended return (Form 1040X) for 2011 and claimed a refund that was based on a meritless position. The 1040X was timely filed on April 15, 2015 (3 years following the filing of the original return).

Analysis

Code Sec. 6694(a) imposes a penalty on a tax return preparer for any return or claim for refund resulting in an understatement of liability due to an unreasonable position, about which the preparer knew or reasonably should have known. The penalty is the greater of $1,000 or 50 percent of the income derived by the preparer from the return or claim.

Reg. Sec. 1.6694-1(a)(1) divides the standards against which the return preparer's conduct is measured into two categories:

(1) for positions other than those relating to tax shelters and reportable transactions, the penalty applies when the understatement is due to an undisclosed position for which the return preparer did not have substantial authority on which to rely, or is due to a disclosed position for which there is no reasonable basis; and

(2) for positions with respect to tax shelters or reportable transactions, the preparer penalty applies if the return or claim includes an understatement of liability for which it is not reasonable to believe that the position has merit.

The IRS advised that the limitation periods under Code Sec. 6696(d) were controlling. As such, the penalty in Code Sec. 6694(a) must be assessed within three years after the refund claim was filed, and return preparers liable for the penalty have three years after the time the penalty was paid to file a claim for a refund of an overpayment of the penalty, if they believe the penalty was incorrectly assessed.

The IRS concluded that because the claim for refund in its representative fact pattern was based on a meritless position, the return preparer was subject to penalty under Code Sec. 6694(a). Because the amended 2011 return claiming a refund was filed April 15, 2015, the IRS advised its examination group that it would have until April 15, 2018 to assess the preparer penalty.

Assuming the penalty is paid, the IRS stated that the preparer would have 3 years from the date of payment to file a claim for refund for an overpayment of a penalty (Code Sec. 6696(b)). The IRS noted that the preparer's entitlement to a refund assumes that he can show the penalty was incorrectly determined or that he had reasonable cause and acted in good faith.

For a discussion of civil penalties against practitioners for understatements, see Parker ¶276,300. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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