TIGTA report studies assessment and enforcement of sec. 6694 paid preparer penalties.

• Author: VanDeveer, Mark A.
• Position: Treasury Inspector General for Tax Administration

At the request of the IRS Oversight Board, the Treasury Inspector General for Tax Administration (TIGTA) studied how effective the IRS is in using the requirements and penalty regime that apply to tax preparers. The TIGTA study attempted to determine whether controls are in place to ensure that the IRS effectively enforces and applies penalties to paid preparers as required by Sec. 6694 (see Improvements Are Needed in Assessing and Enforcing Internal Revenue Code Section 6.694 Paid Preparer Penalties, TIGTA Rep't No. 2013-30-075).

Paid Preparer Penalty Regime

Sec. 6694 provides penalty standards for paid preparers who take unreasonable positions or intentionally prepare inaccurate tax returns. Specifically, an understatement penalty may be imposed on a tax preparer who prepares a tax return or a claim for refund that shows an understatement of tax liability. The penalty is imposed where any part of an understatement is due to an unreasonable position taken on the return or refund claim and the preparer knew (or reasonably should have known) of the position. The penalty is the greater of $1,000 or 50% of the income earned by the tax return preparer with respect to the return or claim (Sec. 6694(a)(1)). The penalty may also be imposed on the employer of the tax return preparer (Regs. Sec. 1.6694-2(a)(2)).

A position is generally unreasonable if it does not have substantial authority in the tax law. Sec. 6662(d)(2)(B)(ii)(I) requires disclosure of the relevant facts affecting the item's tax treatment in the return or in a statement attached to the return. However, a position taken with respect to a tax shelter or a reportable transaction must meet the "more likely than not" standard to avoid being classified as unreasonable. This higher standard is met if it is reasonable to believe that the position is more likely than not (greater than 50% chance) to be sustained on its merits if challenged by the IRS. A tax shelter is defined in Sec. 6662(d).(2)(C)(ii). A reportable transaction is one to which Sec. 6662A applies. The possibility that a return will not be audited or, if audited, that an item will not be raised on audit is not relevant in determining whether there is adequate support for a position (Regs. Sec. 1.6694-2(b)).

The understatement penalty is not imposed if there is reasonable cause for the understatement and the tax return preparer acted in good faith (Sec. 6694(a)(3)).

The minimum penalty is increased when a tax return preparer...