Preparer penalties assessed on employer.

• Author: O'Driscoll, David

S is an S corporation in the business of tax return preparation. S has one shareholder, A, and at least one employee (N), who is A's niece. Although A and N have signed returns as the preparer for S, they have not received wages from S. A has prepared the majority of the returns that S prepared for clients. Approximately one-half of the returns A signed included S's name and employer identification number (EIN). A signed the other returns using only her name and Social Security number.

On audit, the Service requested from A a list of returns, and/or copies of returns, required to be maintained under Sec. 6107(b). A did not cooperate; the IRS assessed a penalty under Sec. 6695(d) for approximately 1,100 returns, against both A and S separately.

Law

Sec. 6107(b) requires an income tax return preparer, for a period of three years after the close of the return period, to (1) retain a completed copy of the return or claim, or a list of the names and taxpayer identification numbers of the taxpayers for whom the return or claim was prepared; and (2) make the copy or list available for inspection on request by the Service.

Any income tax return preparer who fails to comply with Sec. 6107(b) must pay a penalty of $50 for each such failure, unless it is shown that it is due to reasonable cause and not willful neglect (Sec. 6695(d)). The maximum penalty is $25,000.

"Preparer" Defined

An "income tax return preparer" is any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return or refund claim; see Sec. 7701(a)(36)(A) and Regs. Sec. 301.7701-15(a). As a general rule, when there is an employment arrangement between two or more income tax return preparers, the employer is deemed to be the sole income tax return preparer; see Regs. Sec. 1.6107-1(c).

S employed N (and possibly others) to prepare tax returns. Because S employs agents or employees to prepare income tax returns for compensation, S is an income tax return preparer as to those returns or refund claims for purposes of Secs. 6107(b) and 6695(d).

As to the returns A prepared, the question of who is subject to the Sec. 6695(d) penalty depends on whether S employed A. This is determined under common law rules...