Internal Revenue Code and Regulations Related to Tax Return Preparers Flashcards
Requirements for tax preparer
Requirements—People are TRPs if they:
Are paid
To prepare, or retain employees to prepare,
A substantial portion
Of any federal tax return or refund claim.
substantial portion
Substantial Portion—The signing TRP is always responsible for a substantial portion of the return. But what about nonsigning TRPs? If Kahn (to return to our example) evaluates a corporate taxpayer’s just-completed transaction and concludes that it entitles the taxpayer to take a large deduction, he has prepared a “substantial portion” unless the deduction involves either:
Less than $10,000, or
Less than $400,000, which is also less than 20% of the gross income indicated on the return.
Non-TRP
Furnish typing, reproducing, or other mechanical assistance
Prepare as a fiduciary a return or claim for refund for any person
Prepare taxes as part of a Volunteer Income Tax Assistance (VITA) or a Low Income Tax Clinic (LITC) program, but only for returns prepared as part of that program
Prepare a return with no explicit or implicit agreement for compensation, even if the person receives an insubstantial gift, return service, or favor
Prepare a return or claim for refund of the employer (or of an officer or employee of the employer) by whom he or she is regularly and continuously employed
Understatement of Taxpayer’s Liability
Section 6694 of the IRC imposes civil penalties on TRPs for understatement of their clients’ taxes.
Subsection (a) punishes understatement due to unreasonable positions.
An undisclosed position is “unreasonable” if there is no substantial authority (<40% chance of being sustained) for the position.
“Substantial authority” is an objective standard requiring that the weight of authorities supporting the claimed position is substantial in relation to the weight of authorities opposing it.
Tax practitioners tend to think of “no substantial authority” as there being <40% chance of the position being sustained if challenged before the IRS.
If a position is disclosed, then it is “unreasonable” if there is no reasonable basis for the position
Because disclosure calls the IRS’s attention to the position and makes it clear that the taxpayer is not trying to “sneak” it by, a more lenient standard is applied in determining “unreasonableness.”
Tax practitioners tend to think of a position as having “no reasonable basis” if there is <20% chance of it being sustained if challenged.
If the position relates to a tax shelter, it is “unreasonable” unless it is more likely than not (MLTN) (>50% chance) that the position will be sustained.
The maximum civil fine per violation under Subsection (a) is the greater of $1,000 or 50% of the income derived by the TRP with respect to the return.
Reasonable cause defense
No penalty applies if the TRP had “reasonable cause” (an objective standard) for the position and acted in “good faith” (a subjective standard)
6694 subsection b
imposes harsher punishments for willful or reckless understatements.
The penalty for a willful or reckless understatement is the greater of $5,000 or 75% of the income derived by the TRP with respect to the claim (per violation).
Example—TRP fabricates deductions or ignores information provided by taxpayer.
Section 6695
Failure to furnish copy of return to taxpayer
Failure to sign return and show own identity
Failure to furnish identifying number to the IRS
Failure to keep a copy of the return
Failure to file correct information returns
Negotiation of check made out to the taxpayer (other than to deposit the full amount into the taxpayer’s bank account)
Failure to be diligent in determining eligibility for the earned income tax credit and the child tax credit
Aiding and Abetting the Understatement of Tax Liabilities
In order to be liable, the TRP must:
Aid, assist, procure, or advise in preparation or presentation of any portion of any return or other document;
Know or have reason to know that it will be used in matters arising under tax law; and
Know that if the return or document is so used, an understatement of the tax liability of another person will result.
Liability can be imposed even if the taxpayer does not have knowledge of or consent to the understatement.
Merely furnishing typing, reproducing, or other mechanical assistance with respect to a document does not constitute having aided and abetted the preparation of that document.
A TRP may be liable for the understatement activities of a subordinate by (a) ordering the subordinate to do the act, or (b) knowing of, and not attempting to prevent, participation by a subordinate in the act.
In order to be liable, the TRP must:
Aid, assist, procure, or advise in preparation or presentation of any portion of any return or other document;
Know or have reason to know that it will be used in matters arising under tax law; and
Know that if the return or document is so used, an understatement of the tax liability of another person will result.
Liability can be imposed even if the taxpayer does not have knowledge of or consent to the understatement.
Merely furnishing typing, reproducing, or other mechanical assistance with respect to a document does not constitute having aided and abetted the preparation of that document.
A TRP may be liable for the understatement activities of a subordinate by (a) ordering the subordinate to do the act, or (b) knowing of, and not attempting to prevent, participation by a subordinate in the act.
Subject to obvious exceptions for court orders, peer reviews, and the like, 26 U.S.C. 6713 penalizes TRPs if they:
Disclose any information furnished to them in connection with preparation of a return, or
Use any such information for any purpose other than to prepare the return.
Injunctions
In addition to civil fines, Section 7407 authorizes the IRS to enjoin TRPs from violating the Internal Revenue Code.
TRPs may be enjoined from:
Violating Section 6694 (understatement of tax liability) and 6695 (disclosure requirements);
Misrepresenting education or experience as a TRP, or eligibility to practice before the IRS;
Guaranteeing payment of any tax refund or allowance of any tax credit; or
Engaging in any other fraudulent or deceptive conduct that substantially interferes with the proper administration of tax laws.
These narrow injunctions for specific violations can pave the way for a broad injunction that bars people from serving as TRPs at all if they have continually or repeatedly violated these rules.
Section 7408 provides similar injunctive authority relating to wrongdoing in connection with tax shelters and reportable transactions.
Tax evasion
26 U.S.C. Section 7201 punishes tax evasion and is applied very broadly.
This provision has been used to prosecute, among other wrongs:
Failure to file a return
Falsifying income
Falsifying amounts that reduce taxable income
To secure a conviction, the government must prove:
An affirmative act constituting an attempt to evade or defeat payment of a tax;
Willfulness; and
Existence of a tax deficiency.
Tax fraud
26 U.S.C. 7206 punishes fraud and false statements by TRPs and others, criminalizing (among other wrongs):
Willfully making and subscribing to any document made under penalty of perjury that the CPA does not believe to be true as to every material matter
Willfully aiding the preparation of any tax-related matter that is fraudulent as to any material matter
Removing or concealing a client’s property with intent to defeat taxes
criminal prosecutions under sect 7201 or 7206
- Willful failure to file a return, supply information, or pay a tax (Section 7203)
- Willful failure to collect or pay over a tax (Section 7202)
- Fraudulent returns, statements, or other documents (Section 7207)
- Attempts to interfere with the administration of Internal Revenue laws, such as by threatening or misleading IRS agents (Section 7212)
- Unauthorized disclosure of taxpayer information (with obvious exceptions for court orders, peer reviews, etc.) (Section 7213)
- Willful disclosure or use of confidential information learned while preparing a tax return (Section 7216)
- Conspiracy to commit any offense or fraud against the United States, including tax offenses (18 U.S.C. Section 371)
- Aiding and abetting tax fraud (18 U.S.C. Section 2)
