Academic journal article Journal of Accountancy

IRS Embarks on Penalty Regime Overhaul

Academic journal article Journal of Accountancy

IRS Embarks on Penalty Regime Overhaul

Article excerpt

The Service has issued long-awaited proposed regulations that implement changes made by the Small Business and Work Opportunity Tax Act of 2007 to the return preparer penalties in IRC [section][section] 6694 and 6695 and related provisions (REG-129243-07). The Service describes the proposed regulations as "the first significant step" in a "comprehensive review and overhaul of all the tax return preparer penalties and related regulatory provisions." The provisions of the proposed regulations would generally be effective for returns and claims for refund filed after the final regulations are published.

Addressing one concern of tax practitioners, the proposed regulations clarify that the IRS will not mandate a referral to the Office of Professional Responsibility (OPR) when penalties are assessed against a preparer under section 6694. In cases of conduct that is not willful, the Service says it will look for a pattern of failure to meet the section 6694 standards before making a referral to the OPR. They caution that "egregious" conduct may form the basis for an OPR referral.

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One preparer per firm. In the past, the Service has employed a "one preparer per firm" rule when determining penalties. With these proposed regulations, the IRS is abandoning that rule and moving to a structure in which each position taken on a return can have a different preparer. One person in a firm will be considered primarily responsible for each position taken (Prop. Treas. Reg. [section] 1.6694-1(b)). The person who signs the return will generally be considered primarily responsible for all the positions on the return, but that presumption can be overcome by evidence that another preparer is primarily responsible for a particular position.

Income derived. Section 6694 subjects preparers to penalties of up to 50% of the income derived (or to be derived) "with respect to the return or claim. …

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