IRS announces procedures for tax return preparer penalties.

• Author: Elgin, Eve

The IRS recently issued internal memoranda setting forth procedures for tax return preparer penalties in taxpayer examinations. These include a memorandum by the Large and Mid-Size Business Division (LMSB) on its procedures for tax return preparer penalty cases and two memoranda by the Small Business/Self-Employed Division (SB/SE) on preparer penalty procedures for excise and employment tax examinations. See LMSB-040308-009 (4/13/08), SBSE-04-1208-068 (12/31/08) (excise taxes), and SBSE-040209-008 (2/3/09)(employment taxes).

This item summarizes the guidance and highlights some areas of concern. It then describes some steps preparers can take to reduce their penalty exposure.

Summary of Guidance

The LMSB and SB/SE memoranda address preparer penalties under Secs. 6694 and 6695 in response to 2007 legislation extending these (and other) penalties to preparers of all tax returns, not merely income tax returns. See the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA). These memoranda:

* Require examiners to consider the appropriateness of asserting preparer penalties in all taxpayer examinations involving a paid tax return preparer and to document consideration of the issue in the workpapers. The LMSB memorandum explains that "[i]nterviews of the taxpayer should serve a dual purpose: 1) to further the tax examination and 2) to identify violations by a tax return preparer."

* Emphasize that the taxpayer examination is separate from the potential preparer penalty case and require that files for these matters be maintained separately.

* Provide that a preparer penalty generally cannot be proposed until the taxpayer examination is completed at the group level.

* Permit examiners to decide not to impose preparer penalties on their own, but require a higher level of approval to impose preparer penalties. The LMSB memorandum requires team manager approval prior to initiating a preparer penalty case, and the SB/ SE memoranda for employment and excise tax examinations require manager and group approval prior to initiating such a case, respectively. Unlike the SB/SE memorandum for excise tax examinations, the LMSB memorandum and SB/SE employment tax examination memorandum also provide that a preparer penalty case should not begin until the examiner has contacted the Return Preparer Coordinator.

* Affirm the preparer's appeal rights-generally, pre-assessment if at least 180 days remain on the statute of limitation and...