IRS Addresses Application of Preparer Penalties in Scenarios Involving Amended Returns.

(Parker Tax Publishing May 22, 2015)

The IRS Office of Chief Counsel issued advice on assessing penalties against return preparers in four different scenarios involving the preparation of amended returns. CCA 201519029.

Background

In response to an inquiry from a Senior Technician Reviewer, the IRS Office of Chief Counsel (IRS) provided advice on the application of return preparer penalties in four different scenarios involving the preparation of amended returns.

Scenario 1: A return preparer made amended returns for three consecutive years which contained an understatement of liability due to willful or reckless conduct. The taxpayer had filed the prepared amended return for the first year, but not the subsequent years' amended returns, waiting to see if the first amended return was accepted. The refund claimed on the first amended return was not allowed. Each amended return for all three years had the return preparer's signature on them. The IRS also had copies of the amended returns for all three years obtained during the investigation which did not have the preparer's signature on them, but did have a watermark stating "Preparer Copy."

Scenario 2: A return preparer made an amended return that contained an understatement of liability due to willful or reckless conduct. The refund claimed on the amended return was disallowed, but the IRS only secured a copy of the amended return that had not been signed by the preparer.

Scenario 3: A return preparer made an amended return that contained an understatement of liability due to willful or reckless conduct. The amended return was not filed, and the IRS only secured copies of an unsigned copy from the return preparer.

Scenario 4: A return preparer made an amended return after the period of limitations for refunds had expired and the amended return was filed.

Analysis

A tax return preparer is liable for an understatement penalty if he or she prepares a return or claim for refund which results in an understatement of tax liability due to the preparer's willful attempt to understate the liability on the return or claim for refund, or due to a reckless or intentional disregard of rules or regulations (Code Sec. 6694(b)).

A tax return preparer is liable for an understatement penalty if he prepares a return or claim for refund which results in an understatement of tax liability due to a position that the tax return preparer knew or should have known to be unreasonable (Code Sec. 6694(a)).

A tax return preparer may have to pay a penalty if he or she aids, assists, or advises another person in preparing any portion of a return or claim and knows that this would result in an understatement of that other person's tax liability (Code Sec. 6701(a)).

The IRS noted that Code Sec. 6694(b) does not require that a return be filed for the penalty to apply, only that a return has been prepared, and that under Reg. Sec. 1.6694-1(a)(2) a return is prepared when it is signed. The IRS advised that if an amended return made by a preparer contained an understatement of liability due to willful or reckless conduct, the Code Sec. 6694(b) penalty could apply if the amended return is either signed by the preparer, or if it not signed by the preparer, if the amended return is filed.

Accordingly, the IRS advised that in Scenario 1, the Code Sec. 6694(b) penalty may be assessed for all three years because the preparer made and signed an amended return that contained an understatement due to willful or reckless conduct.

The IRS advised that in Scenario 2, the Code Sec. 6694(b) penalty may be assessed because the preparer made and filed an amended return that contained an understatement of liability due to willful or reckless conduct.

However, the IRS advised that in Scenario 3, the Code Sec. 6694(b) penalty should not be assessed because although the preparer made and signed an amended return that contained an understatement due to willful or reckless conduct, the amended return was not filed and there was no evidence the preparer signed the amended return.

The IRS also advised that the Code Sec. 6694(b) penalty could be assessed if amended returns were filed but the IRS disallowed the refund, noting that there is no requirement that the IRS allow the amounts claimed on an amended return before the penalty may be assessed.

With respect to Scenario 4, the IRS advised that the penalties under Code Sec. 6694(a)(2), 6694(b), or 6701 should not be assessed merely because the preparer made and filed a claim for refund after the period of limitations had expired. The IRS stated that this is because a time barred claim is denied for being made too late, not because there is an understatement of liability under the definition in Code Sec. 6694(e), noting the claim for refund may in fact reflect the correct tax liability. In addition, the IRS noted there may be extenuating circumstances that weigh against asserting the penalty when an amended return appears to be filed out of time; for example, the amended return may be perfecting an earlier timely informal claim for refund and informal refund claims have been held to toll the statute of limitations.

For a discussion of civil penalties against practitioners for understatements, see Parker Tax ¶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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