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15 06-18 Top 10 Tax Preparer And Other Tax Penalties - Not Going To Jail But It Still Hurts

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What is the definition of a tax return preparer? What is the accuracy-related penalty? What are the primary other penalties? What is IRC Section 6694 (the preparer penalty)? How is it coordinated with the accuracy-related penalty? What are the easiest crimes to commit, e.g. obstruction of justice. What good can an opinion by a tax lawyer do for you?

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15 06-18 Top 10 Tax Preparer And Other Tax Penalties - Not Going To Jail But It Still Hurts

  1. 1. 1 The Top 10 Preparer And Other Penalties: Not Going To Jail, But It Still Hurts Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com
  2. 2. 2 Preparer And Other Tax Penalties Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com What We Will Cover: 1. Section 7701(a)(36) Tax Return Preparer Defined. P. 3 2. Section 6694: Understatement Of Taxpayer’s Liability. P. 7 3. Section 6695: Other Assessable Penalties. P. 18 4. Section 6696: Rules Applicable To Other Sections. P. 23 5. Section 6662: Accuracy‐Related Penalty. P. 27 6. Section 6663: Imposition Of Fraud Penalty. P. 39 7. Section 6664: Definitions And Special Rules. P. 43 8, What Good Can A Tax Opinion Do? P. 49 9. Section 6700: Promoting Abusive Tax Shelters, Etc. P. 55 10. Section 6701: Aiding And Abetting Understatement. P. 60 11. Section 6702: Frivolous Tax Submissions. P. 65 12. Section 6703: Rules Applicable To 6700, 6701 and 6702. P. 72 13. Section 6707A: Reportable Transaction Information. P. 74 14. Section 6713: Disclosure Or Use Of Information By TRPs. P. 78 15. Section 7201: Attempt To Evade Or Defeat Tax. P. 80 16. Section 7206: False And Fraudulent Statements. P. 82 17. Section 7212: Attempts To Interfere With Administration Of Code. P. 85 18. Section 7216: Disclosure Or Use Of Information By TRPs. P. 88 19. Section 7407: Action To Enjoin Tax Return Preparers. P. 90 20. Section 7408: Actions To Enjoin Conduct Related To Tax Shelters, Etc. P. 93 2
  3. 3. 3 Section 7701(a)(36) – Tax Return Preparer [“TRP”] (A) In General. The term “TRP” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax…. ….[T]he preparation of a substantial portion of a return or refund claim shall be treated as if it were the preparation of such return or claim for refund. (B) Exceptions. A person shall not be a “TRP” merely because such person – (i) furnishes typing, reproducing, or other mechanical assistance, (ii) prepares a return or refund claim of the employer (or of an officer or employee of the employer) by whom he is regularly and continuously employed), (iii) prepares as a fiduciary a return or claim for refund for any person, or (iv) prepares a refund claim for a taxpayer in response to any deficiency notice issued to such taxpayer or in response to any waiver of restriction after the beginning of an audit of such taxpayer or another taxpayer if a determination in that audit directly or indirectly affects the tax liability of such taxpayer. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 3
  4. 4. 4 Section 7701(a)(36) – Tax Return Preparer [“TRP”] (cont’d) Before May 25, 2007, the penalty only applied to income tax return preparers. This penalty does not apply to preparers of FinCen 114, which is required not under the Internal Revenue Code but under the Bank Secrecy Act. TAM 8731004: A corporation was considered to be a preparer even though, under its franchise agreement, it was prohibited from physically preparing returns. A person who reviews a return for substantive correctness is considered a preparer, whether or not the review results in any changes to the return. Rev. Rul. 84-3. A person who renders tax advice on a position that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund will be regarded as having prepared that entry. Reg. Section 301.7701-15(b)(3). An advisor who conducted a study of the taxpayer's allowable research credits for prior years is a preparer where the results of the study, including the improper election and computation, formed the basis of the taxpayer's reporting on his tax return. FAA 20032601F. A company that furnishes computerized tax return preparation services (and the computer programmer) is treated as preparing the tax returns that utilized the program where the program goes beyond mere mechanical and clerical assistance and makes substantive determinations concerning the application of the tax law to the information provided. Rev. Ruls. 85-187; 85-188; and 85-189. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 4
  5. 5. 5 Section 7701(a)(36) – Tax Return Preparer [“TRP”] (cont’d) A tax return preparer as to one return is not considered a tax return preparer of another return merely because one or more entries reported on the first return may affect an entry reported on the other return. If, however, the entries reported on the first return are directly reflected on the other return and constitute a “substantial portion” of the other return, the preparer is also considered a preparer of the other return. Reg. Section 301.7701-15(b)(3)(iii). The sole preparer of a partnership or S corporation income tax return is considered a preparer of the returns of a partner or shareholder, if the entries on the partnership or S corporation return that are reportable on the partner's or shareholder's return constitute a substantial portion of such returns. Reg. Section 301.7701-15(b)(3)(iii). Goulding v. U.S., 957 F.2d 1420 (7th Cir. 1992). The tax return preparer of a return showing an NOL is also a preparer of each return that reflects a carryback or carryover of that loss as a substantial portion of such return. Rev. Rul. 81-171. A single tax entry may constitute a substantial portion of the tax required to be shown on the return. Reg. Section 301.7701-15(b)(3)(i). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 5
  6. 6. 6 Section 7701(a)(36) – Tax Return Preparer [“TRP”] (cont’d) After December 31, 2008, the regulations distinguish between a “signing” and “nonsigning” tax return preparer. Reg. Section 301.7701-15(b)(1), as amended by T.D. 9436. A “nonsigning tax return preparer” is any TRP who is not a signing TRP but who prepares all or a substantial portion of a return or claim for refund as to events that have occurred when the advice is rendered. Reg. Section 301.7701-15(b)(2). In determining whether an individual is a nonsigning TRP, any time spent on advice that is given as to events that have occurred that represents less than 5% of the total time spent by the individual as to the positions giving rise to the understatement is not considered. Reg. Section 301.7701-15(b)(2). The less-than-5% test is intended to encourage tax professionals who principally rendered advice regarding events that have not yet occurred to provide follow-up advice requested by the taxpayer without the concern that, by providing such advice, the professional would become a TRP. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 6
  7. 7. 7 Section 6694 Understatement of taxpayer’s liability by tax return preparer (a) Understatement due to unreasonable positions. (1) In General. If a tax return preparer – (A) prepares any return or claim of refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2), and (B) knew (or reasonably should have known) of the position, such tax return preparer shall pay a penalty with respect to each such return or claim in an amount equal to the greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 7
  8. 8. 8 Section 6694 [continued] (2) Unreasonable position. (A) In General. Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position. (B) Disclosed positions. If the position was disclosed as provided in Section 6662(d)(2)(B)(ii)(I) and is not a position to which subparagraph (C) applies, the position is described in this paragraph unless there is a reasonable basis for the position. (C) Tax shelters and reportable transactions. If the position is with respect to a tax shelter (as defined in Section 6662(d)(2)(C)(ii) or a reportable transaction to which Section 6662A applies, the position is described in this paragraph unless it is reasonable to believe that the position would more likely than not be sustained on its merits. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 8
  9. 9. 9 Section 6694 [continued] (3) Reasonable cause exception. No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the TRP acted in good faith. (b) Understatement due to willful or reckless conduct. (1) In general. Any TRP who prepares any return or refund claim as to which any part of an understatement is due to a conduct described in paragraph (2) shall pay a penalty as to such return or claim in an amount equal to the greater of – (A) $5,000, or (B) 50% of the income derived (or to be derived) by the TRP as to the return or claim. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 9
  10. 10. 10 Section 6694 [continued] (2) Willful or reckless conduct. Conduct described in this paragraph is conduct by the TRP which is – (A) a willful attempt in any manner to understate the liability for tax on the return or claim, or (B) a reckless or intentional disregard of rules or regulations. (3) Reduction in penalty. The amount of any penalty payable by any person by reason of this subsection for any return or claim for refund shall be reduced by the amount of the penalty paid by such person by reason of subsection (a). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 10
  11. 11. 11 Section 6694 [continued] (c) Extension of period of collection where preparer pays 15% of penalty. (1) In general. If, within 30 days after the day on which notice and demand for any penalty under subsection (a) or (b) is made against any person who is a tax return preparer, such person pays an amount which is not less than 15% of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421(a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by proceeding in the proper court. Nothing in this paragraph shall be constructed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 11
  12. 12. 12 Section 6694 [continued] (2) Preparer must bring suit in district court to determine his liability for penalty. If within 30 days after the day on which his claim for refund of any partial payment of any penalty under subsection (a) or (b0 is denied (or, if earlier, within 30 days after the expiration of 6 months after the day on which he filed the claim for refund), the tax return preparer fails to being a proceeding in the appropriate U.S. district court for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the applicable 30- day period referred to in this paragraph. (3) Suspension of running of period of limitations on collection. The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 12
  13. 13. 13 Section 6694 [continued] (d) Abatement of penalty where taxpayer’s liability not understated. If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under subsection (a) or (b) has been assessed, such assessment shall be abated, and if any portion of such penalty has been paid the amount so paid shall be refunded to the person who made such payment as an overpayment of tax without regard to any period of limitations which, but for the subsection, would apply to the making of such refund. (e) Understatement of liability defined. For purposes of this section, “understatement of liability” means any understatement of the net amount payable with respect to any tax imposed by this title or any overstatement of the net amount creditable or refundable with respect to any such tax. Except as otherwise provided in subsection (d), the determination of whether or not there is an understatement of liability shall be made without regard to any administrative or judicial action involving the taxpayer. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 13
  14. 14. 14 Section 6694 - Updates U.S. v. Hand-Bostick, (2011, DC TX) 108 AFTR 2d 2011-6235. TRPs were granted in part and denied in part summary judgment on govt.'s complaint for injunctive relief under §§7408, 7407 and 7402 from their promotion of fraudulent nonconventional fuel source tax credit scheme: TRPs were entitled to summary judgment as to their alleged conduct subject to §6701 penalty because they lacked actual knowledge of fraudulent scheme, material fact issues remained as to whether they engaged in conduct subject to §6700 penalty due to complex issues and govt.'s evidence suggested they furnished gross valuation overstatements for scheme and later loss deductions to customers via assignment agreements and production reports. Evidence showed TRPs didn't engage in fraudulent or deceptive conduct under §7407(b)(1)(D), questions existed as to whether they had reasonable cause for understatements on returns within meaning of §6694(a) and as to whether their conduct was reasonable under §6694(b). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 14
  15. 15. 15 Section 6694 - Updates U.S. v. Aparicio, (2011, DC CA) 108 AFTR 2d 2011-5502. Stipulated order of permanent injunction was entered against TRP barring him and his employees from acting as preparers, instructing or advising others to violate tax laws, engaging in conduct subject to penalty under §§6694. 6700 and 6701 and representing others before IRS. TRP was also ordered to send injunction copy to clients. While prohibited from owning, controlling or managing any tax preparation business, he wasn't precluded from working in non-professional capacity in any such business. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 15
  16. 16. 16 Section 6694 - Updates U.S. v. Littrice, (2011, DC IL) 108 AFTR 2d 2011-5710. Govt.'s complaint for broad injunction, permanently barring TRP and her solely owned accounting business from preparing returns for others and from violating tax laws, was granted on summary judgment: injunction was warranted under §7407 when considering her prior §7206(2) conviction and other evidence that she had engaged in conduct subject to penalty under §6694 and 6695, by recklessly or willfully understating client liabilities and by using someone else's PTIN; that she kept doing so even after learning of IRS investigation; and that she was likely to continue absent injunction. Alternately, evidence supported injunction under either §7408 or 7402. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 16
  17. 17. 17 Section 6694 - Updates U.S. v. Giroud, (2011, DC CA) 108 AFTR 2d 2011-6372. Permanent injunction was entered against TRP, barring him and those acting with him from acting as preparers, engaging in conduct subject to penalty under §6694 and 6701, preparing his own returns with false tax withholding and refunds based on amounts shown in Forms 1099-OID, filing or abetting filing of frivolous returns, and engaging in conduct subject to penalty under IRC or that otherwise interfered with tax law administration and enforcement. TRP was ordered to inform clients of injunction order and provide govt. with client list. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 17
  18. 18. 18 Section 6695 Other Assessable penalties with respect to the preparation of tax returns for other persons (a) Failure to furnish copy to taxpayer. Any person who is a TRP as to any return or claim for refund who fails to comply with section 6107(a) as to such return or claim shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $25,000. (b) Failure to sign return. Any person who is a TRP with respect to any return or claim for refund, who is required by regulations prescribed by the Secretary to sign such return or claim, and who fails to comply with such regulations with respect to such return or claim shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $25,000. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 18
  19. 19. 19 Section 6695 [continued] (c) Failure to furnish identifying number. Any person who is a TRP as to any return or claim for refund and who fails to comply with section 6109(a)(4) with respect to such return or claim shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $25,000. (d) Failure to retain copy or list. Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with section 6107(b) with respect to such return or claim shall pay a penalty of $50 for each such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to any return period shall not exceed $25,000. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 19
  20. 20. 20 Section 6695 [continued] (e) Failure to file correct information returns. Any person required to make a return under section 6060 who fails to comply with the requirements of such section shall pay a penalty of $50 for (1) each failure to9 file a return as required under such section, and (2) each failure to set forth an item in the return as required under such section, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to any return period shall not exceed $25,000. (f) Negotiation of check. Any person who is a tax return preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect of the taxes imposed by this title which is issued to a taxpayer (other than the tax return preparer) shall pay a penalty of $500 with respect to each such check. The preceding sentence shall not apply with respect to the deposit by a bank…of the full amount of the check in the taxpayer’s account in such bank for the taxpayer’s benefit. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 20
  21. 21. 21 Section 6695 [continued] (g) Failure to be diligent in determining eligibility for earned income credit. Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining eligibility for, or the amount of, the credit allowable by section 32 shall pay a penalty of $500 for each such failure. $500 for returns required to filed after 12/31/2011 due to H.R. 3080, the U.S.-Korea Free Trade Agreement Implementation Act just signed by the president. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 21
  22. 22. 22 U.S. v. Penny Lea Jones July 7, 2011 Dist. Ct. Idaho Ms. Jones submitted phony IRS Forms 1099-OID which purport to have been issued to or received by the taxpayer from a creditor that withholds nearly all of the interest income reported on the returns in the amount of the debt, usually a mortgage, car loan, or credit card balance owed by the taxpayer. Based on what is commonly referred to as “redemption theories,” which claim taxpayers are entitled to access a secret treasury account to satisfy their tax liabilities by using IRS forms. Under this theory there exists an “unrestricted right for collections and return of funds/securities” issued to every child born in the U.S. The birth certificates issued to the children become a registered security representing that child’s life-long labor on a general average basis. The security is held in trust by the U.S. government, in whom the children are its stockholders, as a redeemable bond. Etc. She filed 437 returns claiming $168 million in refunds. So she violated §6694 by understating her customers’ liabilities and §6695 by failing to remit a list of customers or copies of returns to the IRS when requested (IRC §6107(b)). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 22
  23. 23. 23 Section 6696 Rules applicable as to sections 6694, 6695 and 6695A (a) Penalties to be additional to any other penalties. The penalties provided by §6694, 6695 and 6695A shall be in addition to any other penalties provided by law. (b) Deficiency procedures not to apply. Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply as to the assessment or collection of the penalties provided by §§6694, 6695 and 6695A. (c) Procedure for claiming refund. Any claim for credit or refund of any penalty…shall be filed in accordance with regulations prescribed by the Secretary. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 23
  24. 24. 24 Section 6696 Rules applicable to sections 6694, 6695 and 6695A [continued] (d) (1) Assessment. The amount of any penalty under §6694(a), 6695 or 6695A shall be assessed within 3 years after the return or claim for refund as to which the penalty is assessed was filed, and no proceeding in court without assessment for the collection of such tax shall be begun after the end of such period. In the case of any 6694(b) penalty, it may be assessed or a court proceeding for the collection may be begun without assessment at any time. (2) Claim for refund. Except as provided in section 6694(d), any refund claim for an overpayment of any penalty…shall be filed within 3 years from the time the penalty was paid. (e) Definitions. [not the same as 7701(a)(36)] Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 24
  25. 25. 25 Section 6696 Rules applicable to sections 6694, 6695 and 6695A [Regulations] The IRS may, within the applicable period of limitations, credit any amount of an overpayment by a TRP or appraiser of a penalty (or penalties) paid under §6694 and Reg. §1.6694-1, under §6695 and Reg. §1.6695-1, or under §6695A (and any later issued regulations) against any outstanding liability for any tax (or for any interest, additional amount, addition to the tax, or assessable penalty) owed by the TRP or appraiser making the overpayment. If a portion of an overpayment was so credited, only the balance will be refunded to the TRP or appraiser. Reg. §1.6696-1(h). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 25
  26. 26. 26 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 26
  27. 27. 27 § 6662 Imposition of accuracy-related penalty on underpayments. (a) Imposition of penalty. If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20% of the portion of the underpayment to which this section applies. (b) Portion of underpayment to which section applies. This section shall apply to the portion of any underpayment which is attributable to 1 or more of the following: (1) Negligence or disregard of rules or regulations. (2) Any substantial understatement of income tax. (3) Any substantial valuation misstatement under chapter 1. (4) Any substantial overstatement of pension liabilities. (5) Any substantial estate or gift tax valuation understatement. (6) Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of §7701(o)) or failing to meet the requirements of any similar rule of law. (7) Any undisclosed foreign financial asset understatement. This section shall not apply to any portion of an underpayment on which a penalty is imposed under section 6663. Except as provided in paragraph (1) or (2)(B) of section 6662A(e), this section shall not apply to the portion of any underpayment which is attributable to a reportable transaction understatement on which a penalty is imposed under §6662A. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 27
  28. 28. 28 § 6662 [continued]. (c) Negligence. For purposes of this section, “negligence” includes any failure to make a reasonable attempt to comply with the provisions of this title, and “disregard” includes any careless, reckless, or intentional disregard. (d) Substantial understatement of income tax. (1) Substantial understatement.— (A) In general. For purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of— (i) 10 percent of the tax required to be shown on the return for the taxable year, or (ii) $5,000. (B) Special rule for corporations. In the case of a corporation other than an S corporation or a personal holding company (as defined in section 542), there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the lesser of— (i) 10% of the tax required to be shown on the return for the taxable year (or, if greater, $10,000), or (ii) $10,000,000. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 28
  29. 29. 29 § 6662 [continued]. (2) Understatement. (A) In general. For purposes of paragraph (1), “understatement” means the excess of— (i) the amount of the tax required to be shown on the return for the taxable year, over (ii) the amount of the tax imposed which is shown on the return, reduced by any rebate (within the meaning of §6211(b)(2)). The excess under the preceding sentence shall be determined without regard to items to which §6662A applies. (B) Reduction for understatement due to position of taxpayer or disclosed item. The amount of the understatement under subparagraph (A) shall be reduced by that portion of the understatement which is attributable to— (i) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or (ii) any item if— (I) the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and (II) there is a reasonable basis for the tax treatment of such item by the taxpayer. For purposes of clause (ii)(II), in no event shall a corporation be treated as having a reasonable basis for its tax treatment of an item attributable to a multiple-party financing transaction if such treatment does not clearly reflect the income of the corporation. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 29
  30. 30. 30 § 6662 [continued]. (e) Substantial valuation misstatement under chapter 1. (1) In general. [T]here is a substantial valuation misstatement under chapter 1 if— (A) the value of any property (or the adjusted basis of any property) claimed on any return of tax imposed by chapter l is 150% or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be), or (B) (i) the price for any property or services (or for the use of property) claimed on any such return in connection with any transaction between persons described in §482 is 200% or more (or 50% or less) of the amount determined under §482 to be the correct amount of such price, or (ii) the net §482 transfer price adjustment for the taxable year exceeds the lesser of $5,000,000 or 10% of the taxpayer's gross receipts. (2) Limitation. No penalty shall be imposed due to subsection (b)(3) unless the portion of the underpayment for the taxable year attributable to substantial valuation misstatements under chapter 1 exceeds $5,000 ($10,000 in the case of a corporation other than an S corporation or a PHC (as defined in §542)). (3) Net §482 transfer price adjustment. [omitted] Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 30
  31. 31. 31 § 6662 [continued]. (f) Substantial overstatement of pension liabilities. [omitted] (g) Substantial estate or gift tax valuation understatement. (1) In general. For purposes of this section, there is a substantial estate or gift tax valuation understatement if the value of any property claimed on any return of tax imposed by subtitle B is 65 percent or less of the amount determined to be the correct amount of such valuation. (2) Limitation. No penalty shall be imposed due to subsection (b)(5) unless the portion of the underpayment attributable to substantial estate or gift tax valuation understatements for the taxable period (or, in the case of the tax imposed by chapter 11, as to the decedent’s estate) exceeds $5,000. (h) Increase in penalty in case of gross valuation misstatements. (1) In general. To the extent that a portion of the underpayment to which this section applies is attributable to one or more gross valuation misstatements, subsection (a) shall be applied to such portion by substituting “40%” for “20%”. (2) Gross valuation misstatements. [omitted] Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 31
  32. 32. 32 § 6662 [continued]. (i) Increase in penalty in case of nondisclosed noneconomic substance transactions. (1) In general. In the case of any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied as to such portion by substituting “40%” for “20%”. (2) Nondisclosed noneconomic substance transactions. …“nondisclosed noneconomic substance transaction” means any portion of a transaction described in subsection (b)(6) as to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return. (3) Special rule for amended returns. In no event shall any amendment or supplement to a return of tax be taken into account for purposes of this subsection if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary. (j) Undisclosed foreign financial asset understatement. [omitted] Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 32
  33. 33. 33 William P. Crouse, Jr., Et Ux., (2011) TC Memo 2011-97. Accuracy-related substantial understatement penalty was upheld against 50% owner of multiple LLCs/partnerships and W, albeit subject to §6015 relief determinations as to W: IRS met its burden of production with proof that taxpayers had significant income omissions and misstated losses resulting in understatement that was substantial within meaning of §6662(d) for year at issue; and only argument they raised in response was meritless claim that they were owed credit for subject year. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 33
  34. 34. 34 Donald T. Robinson, Et Ux., (2011) TC Memo 2011-99. Accuracy-related substantial understatement penalties were upheld against married couple/professor and marketing co. manager for years for which they claimed multiple unsubstantiated deductions: IRS met its burden of production on penalties' applicability with proof that taxpayers had understatements that were substantial within meaning of §6662(d)(1) for each year at issue; and they didn't offer any substantial authority or other grounds for reducing understatements. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 34
  35. 35. 35 Wadsworth v. Comm., (10/25/10, CA9) 106 AFTR 2d 2010-6879. Tax Court properly upheld accuracy-related substantial understatement penalties against partner and spouse for years for which they filed amended returns claiming refunds to which they weren't entitled: taxpayers' argument that IRS failed to present any evidence of underpayments failed in face of facts that their refund claims led to underpayments, which in turn were due to substantial understatements on which §6662 penalties were based. And alternative arguments that §6662 penalties couldn't apply because understatements arose from refunds rather than returns or that §6676 vs. §6662 was proper statute for imposing penalties were misguided. Also, taxpayers didn't explain why they disregarded longtime preparer's advice to not amend returns, didn't show reasonable basis for their position, and didn't support or made insupportable claims about TEFRA issues and deficiency notice invalidity. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 35
  36. 36. 36 Khatchatour Akopian, Et Ux., (2011) TC Memo 2011-237. Accuracy-related substantial understatement and negligence penalties were upheld against movie producer/investor and TRP who had unreported income from personal use of movie production/investment corps.' funds: IRS met its burden of production as to both substantial understatement and negligence; and taxpayers didn't address §6662(a) at trial or show reasonable cause for negligence or underpayment. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 36
  37. 37. 37 Frederick D. Todd, Ii, Et Ux., (2011) TC Memo 2011-123. Accuracy-related penalty was upheld against neurosurgeon and W as to underpayment from H’s unreported welfare benefit fund distribution, which he improperly treated as nontaxable loan: IRS met its burden of production by showing both that taxpayers' understatement was substantial within meaning of §6662(d) and that they negligently disregarded rules and regs, by failing to make reasonable attempt to ascertain correctness of distribution's treatment; and they had no reasonable cause for same. Although they claimed reliance on CPA/return preparer, such was unavailing absent evidence that CPA has some expertise in benefit plans, was given all relevant information, and actually advised taxpayers on subject transaction. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 37
  38. 38. 38 Weekend Warriors Trailers, Inc., Et Al., (2011) TC Memo 2011-105. Accuracy-related negligence or substantial understatement penalties were largely upheld against solely owned travel trailer manufacturing S corp. and owner for years for which they misreported income and deductions; IRS met its burden of production as to substantial understatement component of penalties as to both corp. and owner for all years save one, for which owner's understatement didn't qualify as substantial under §6662(d); and, foregoing understatement aside, no reasonable cause or good faith excusing penalties was shown. Although taxpayers did claim reliance on return preparers and other business/tax advisors, such wasn't sufficient to show reasonable cause or good faith absent proof that advisors gave specific advice about pertinent transactions or that preparers had background and justifying taxpayers' reliance. Also, preparers weren't given all relevant information. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 38
  39. 39. 39 § 6663 Imposition of fraud penalty. (a) Imposition of penalty. If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75% of the portion of the underpayment which is attributable to fraud. (b) Determination of portion attributable to fraud. If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud. (c) Special rule for joint returns. In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 39
  40. 40. 40 Rick Fishman, (2011) TC Memo 2011-102. A criminal investigation was began but dropped. Fraud penalties weren't upheld against ins. sales division leader for years for which he worked as independent contractor for sales assn. doing business through his sole proprietorship: IRS failed to prove that taxpayer even had any underpayments for stated years on which to base penalties. Rather, IRS based its determination on unsupported gross income recharacterization of reimbursements which taxpayer received for certain expense payments he made on behalf of other salespersons/independent contractors and which evidence showed to be nothing more than nontaxable loan repayments. Evidence included taxpayer's and other contractors' contractor status and manner in which expenses were treated. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 40
  41. 41. 41 William Norris, Et Ux., (2011) TC Memo 2011-161. Fraud penalties were upheld against husband/welder for 1 of 2 years for which he and wife/bookkeeper operated gas station/convenience store and out of which he ran illegal poker machine: IRS proved there was underpayment and husband was estopped by his guilty plea to §7201 offense for that year from denying fraud. IRS didn't clearly prove fraud for 2d year. IRS showed some fraud factors, including that H understated income and engaged in illegal activities as to poker machines, countervailing factors that he wasn't uncooperative, didn't try to conceal income, gave consistently credible testimony, and regularly dealt in cash as part of normal business rather than in effort to avoid reporting requirements, outweighed fraud indicators. IRS failed to prove fraudulent intent on W’s part for either year. IRS largely rested penalties against her on assumptions that she must have known of H’s illegal poker machines and underreporting of gas station receipts, but even if she were aware of machines, that knowledge in itself didn't prove fraudulent intent; moreover, she gave plausible explanation for underreporting mistake; and IRS failed to counter with any proof of intentionality. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 41
  42. 42. 42 Charles L. Garavaglia, Et Ux., (2011) TC Memo 2011-228. Fraud penalties were upheld against owner of consulting S corp. and other related businesses who used same in connection with scheme to defraud worker's compensation ins. cos. and Treas. Dept.: IRS proved owner had underpayments for each year, from unreported passthrough income, that were attributable to fraud. Evidence included letters indicating owner knew payrolls were “scaled down” and worker's compensation liabilities were understated; he engaged in pattern of underreporting and instructed accountants to destroy records; he pled guilty to mail fraud and conspiracy offenses relating to subject scheme; he engaged in and gave implausible and inconsistent behavior and explanations; he tried to conceal his misdeeds from and didn't cooperate with Criminal Investigation Division; and he didn't file accurate returns. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 42
  43. 43. 43 §6664 Definitions and special rules. (a) Underpayment. For purposes of this part, “underpayment” means the amount by which any tax imposed by this title exceeds the excess of— (1) the sum of— (A) the amount shown as the tax by the taxpayer on his return, plus (B) amounts not so shown previously assessed (or collected without assessment), over (2) the amount of rebates made. For purposes of paragraph (2), “rebate” means so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax imposed was less than the excess of the amount specified in paragraph (1) over the rebates previously made. (b) Penalties applicable only where return filed. The penalties provided in this part shall apply only in cases where a return of tax is filed (other than a return prepared by the Secretary under the authority of §6020(b)). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 43
  44. 44. 44 §6664 Definitions and special rules [continued]. (c) Reasonable cause exception for underpayments. (1) In general. No penalty shall be imposed under §6662 or 6663 as to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion. (2) Exception. Paragraph (1) shall not apply to any portion of an underpayment which is attributable to one or more transactions described in §6662(b)(6). (3) Special rule for certain valuation overstatements. In the case of any underpayment attributable to a substantial or gross valuation overstatement under chapter 1 with respect to charitable deduction property, paragraph (1) shall not apply. The preceding sentence shall not apply to a substantial valuation overstatement under chapter 1 if— (A) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, and (B) in addition to obtaining such appraisal, the taxpayer made a good faith investigation of the value of the contributed property. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 44
  45. 45. 45 §6664 Definitions and special rules [continued]. (4) Definitions. For purposes of this subsection — (A) Charitable deduction property. The term “charitable deduction property” means any property contributed by the taxpayer in a contribution for which a deduction was claimed under §170. For purposes of paragraph (3), such term shall not include any securities for which (as of the date of the contribution) market quotations are readily available on an established securities market. (B) Qualified appraisal. The term “qualified appraisal” has the meaning given such term by §170(f)(11)(E)(i). (C) Qualified appraiser. The term “qualified appraiser” has the meaning given such term by §170(f)(11)(E)(ii). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 45
  46. 46. 46 §6664 Definitions and special rules [continued]. (d) Reasonable cause exception for reportable transaction understatements. (1) In general. No penalty shall be imposed under section 6662A as to any portion of a reportable transaction understatement if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion. (2) Exception. Paragraph (1) shall not apply to any portion of a reportable transaction understatement which is attributable to one or more transactions described in §6662(b)(6). (3) Special rules. Paragraph (1) shall not apply to any reportable transaction understatement unless— (A) the relevant facts affecting the tax treatment of the item are adequately disclosed in accordance with the regulations prescribed under section 6011, (B) there is or was substantial authority for such treatment, and (C) the taxpayer reasonably believed that such treatment was more likely than not the proper treatment. A taxpayer failing to adequately disclose in accordance with section 6011 shall be treated as meeting the requirements of subparagraph (A) if the penalty for such failure was rescinded under §6707A(d). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 46
  47. 47. 47 § 6664 Definitions and special rules [continued]. (4) Rules relating to reasonable belief. For purposes of paragraph (3)(C) — (A) In general. A taxpayer shall be treated as having a reasonable belief with respect to the tax treatment of an item only if such belief— (i) is based on the facts and law that exist at the time the return of tax which includes such tax treatment is filed, and (ii) relates solely to the taxpayer's chances of success on the merits of such treatment and does not take into account the possibility that a return will not be audited, such treatment will not be raised on audit, or such treatment will be resolved through settlement if it is raised. (B) Certain opinions may not be relied upon. (i) In general. An opinion of a tax advisor may not be relied upon to establish the reasonable belief of a taxpayer if— (I) the tax advisor is described in clause (ii) , or (II) the opinion is described in clause (iii) . Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 47
  48. 48. 48 § 6664 Definitions and special rules [continued]. (ii) Disqualified tax advisors. A tax advisor is described in this clause if the tax advisor— (I) is a material advisor (within the meaning of §6111(b)(1)) and participates in the organization, management, promotion, or sale of the transaction or is related (within the meaning of §267(b) or 707(b)(1)) to any person who so participates, (II) is compensated directly or indirectly by a material advisor as to the transaction, (III) has a fee arrangement as to the transaction which is contingent on all or part of the intended tax benefits from the transaction being sustained, or (IV) as determined under regulations prescribed by the Secretary, has a disqualifying financial interest with respect to the transaction. (iii) Disqualified opinions. For purposes of clause (i) , an opinion is disqualified if the opinion— (I) is based on unreasonable factual or legal assumptions (including assumptions as to future events), (II) unreasonably relies on representations, statements, findings, or agreements of the taxpayer or any other person, (III) does not identify and consider all relevant facts, or (IV) fails to meet any other requirement as the Secretary may prescribe. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 48
  49. 49. 49 What Good Can A Tax Opinion Do? The IRS effective recognizes five levels of (i) Frivolous. (ii) Colorable. (iii) Reasonable Basis. (iv) Substantial Authority. (v) More Likely Than Not. If the taxpayer’s position on the return is either Frivolous or Colorable, the taxpayer should be prepared to be hit with an accuracy-related penalty. Similarly, the tax return preparer who signs the return should assume that he or she will be hit with the IRC Section 6694 preparer penalty. By contrast, if the taxpayer’s position has a Reasonable Basis – generally viewed as having a 20% to 1/3rd chance of prevailing on the merits – then the position should not be penalized as long as the position is disclosed on an IRS Form 8275 or 8275-R attached to the return. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 49
  50. 50. 50 What Good Can A Tax Opinion Do? If the taxpayer’s position has Substantial Authority – generally viewed as having a 40% or greater chance of prevailing on the merits – then the taxpayer should not be subject to the accuracy- related penalty even in the absence of disclosure. Of course Nirvana is to have a position that is More Likely Than Not going to prevail on the merits. One problem is: how do you know what the chances are that a taxpayer’s position will prevail on the merits? One answer is to have an opinion written by a tax lawyer (some CPAs will also prepare opinion letters). Of course, the fact that the taxpayer possesses such a letter does not insulate the taxpayer from a penalty since there is no guaranty that the IRS (and the FTB) will agree. However, depending upon the dollars involved in a potential penalty and the cost of the opinion letter, this is often an attractive expenditure. There are many concerns about the creation of an opinion letter, e.g., that it must be firmly based on the taxpayer’s actual facts, not suppositions about intent; that is must be grounded in the Internal Revenue Code; regulations; rulings; case law; and other independent authority. And, of course, the opinion letter writer must not have a contingent interest in the outcome. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 50
  51. 51. 51 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 51
  52. 52. 52 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 52
  53. 53. 53 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 53
  54. 54. 54 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 54
  55. 55. 55 § 6700 Promoting abusive tax shelters, etc. (a) Imposition of penalty. Any person who – (1) (A) organizes (or assists in the organization of – (i) a partnership or other entity, (ii) any investment plan or arrangement, or (iii) any other plan or arrangement, or (B) participates (directly or indirectly) in the same of any interest in an entity or plan or arrangement referred to in subparagraph (A), and (2) makes or furnishes or causes another person to make or furnish (in connection with such organization or sale - (A) a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter, or Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 55
  56. 56. 56 § 6700 Promoting abusive tax shelters, etc. [continued] (B) gross valuation overstatement as to any material matter, shall pay, as to each activity described in paragraph (1), a penalty equal to $1,000 or, if the person establishes that it is lesser, 100% of the gross income derived (or to be derived) by such person from such activity. …activities described in paragraph (1)(A) as to each entity or arrangement shall be treated as a separate activity and participation in each sale described in paragraph (1)(B) shall be so treated. Despite the first sentence, if an activity as to which a penalty imposed under this subsection involves a statement described in paragraph (2)(A), the amount of the penalty shall be equal to 50% of the gross income derived (or to be derived) from such activity by the person on which the penalty is imposed. (b) Rules relating to penalty for gross valuation overstatements. … (c) Penalty in addition to other penalties. The penalty imposed by this section shall be in addition to any other penalty imposed by law. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 56
  57. 57. 57 In Re: Settles, Sr., (2011, Bktcy Ct TN) 107 AFTR 2d 2011-2552. Taxpayer/attorney-CPA/tax scheme promoter's liabilities for back taxes, penalties and interest: he was collaterally estopped by prior disbarment proceedings from seeking abatement of §6700 and 6662 penalties. Taxpayer had been given opportunity to litigate penalties issues during disbarment proceedings; those issues were central to disbarment; and decision and its affirmance on appeal comprised final judgment on merits. Argument that taxpayer was denied due process in those proceedings because he couldn't afford to hire counsel to represent him was meritless. To extent he was seeking abatement of §6662 penalties on grounds of substantial authority for his tax shelter, his position was meritless since there was no such authority. No valid claim for abatement of additional §6651(a) failure to pay penalties when considering that he had substantial income at his disposal and used same for discretionary items at time he was obligated, but failed, to pay taxes. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 57
  58. 58. 58 U.S. v. Sommerstedt, (2011, CA6) 107 AFTR 2d 2011-2422. District court summary judgment decision to permanently enjoin pro se TRP from promoting, organizing and selling abusive tax evasion and shelter products was affirmed in part and vacated and remanded in part. Court was correct insofar as finding that TRP failed to raise material fact issue as to whether tax avoidance plans that he promoted constituted conduct subject to penalty under §6700. TRP improperly invoked his 5th Amendment privilege against self-incrimination as to requirement that he notify clients of injunction. However, court erred in compelling TRP to provide govt. with client list as such could lead to incriminating evidence in later investigation. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 58
  59. 59. 59 U.S. v. Boone, (2011, DC FL) 107 AFTR 2d 2011-2385. Abusive tax scheme promoter/TRP and those acting with him were permanently enjoined from preparing or giving advice about Form 1099-OID or other tax forms, owning or operating any website that participates in preparing false documents, promoting tax shelters or abusive arrangements including abusive Form 1099-OID scheme, posting any scheme-related material on any website, and engaging in other activity that was subject to penalty under §6700, et seq. or that otherwise interfered with tax law administration. TRP was also barred from making any false Form 1099-OID claims on his own returns and was ordered to provide clients with injunction copy. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 59
  60. 60. 60 § 6701 Penalties for aiding and abetting understatement of tax liability. (a) Imposition of penalty. Any person – (1) who aids or assists in, procures, or advises as to, the preparation or presentation of any portion of a return, affidavit, claim or other document, (2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and (3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person, shall pay a penalty as to each document in the amount determined under subsection (b). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 60
  61. 61. 61 § 6701 Penalties for aiding and abetting understatement of tax liability. [continued] (b) Amount of penalty. (1) In general. Except as provided in paragraph (2), the amount of the penalty imposed by subsection (a) shall be $1,000. (2) Corporations. If the return, affidavit, claim or other document relates to the tax liability of a corporation, the amount of the penalty imposed by (a) shall be $10,000. (3) Only 1 penalty per person per period. If any person is subject to a penalty under (a) with respect to any document relating to any taxpayer for any taxable period (or where there is no taxable period, any taxable event), such person shall not be subject to a penalty under subsection (a) with respect to any other document relating to such taxpayer for such taxable period (or event). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 61
  62. 62. 62 § 6701 Penalties for aiding and abetting understatement of tax liability. [continued] (c) Activities of subordinates. (1) In general. For purposes of (a), the term “procures” includes – (A) ordering (or otherwise causing) a subordinate to do an act, and (B) knowing of, and not trying to prevent, participation by a subordinate in an act. (2) Subordinates. For purposes of paragraph (1), “subordinate” means any other person (whether or not a director, officer, employee, or agent of the taxpayer involved) over whose activities the person has direction, supervision or control. (d) Taxpayer not required to have knowledge. Subsection (a) shall apply whether or not the understatement is with the knowledge or consent of the persons authorized or required to present the return, affidavit, claim, or other document. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 62
  63. 63. 63 § 6701 Penalties for aiding and abetting understatement of tax liability. [continued] (e) Certain actions not treated as aid or assistance. For purposes of (a)(1), a person furnishing typing, reproducing, or other mechanical assistance as to a document shall not be treated as having aided or assisted in the preparation of the document due to such assistance. (f) Penalty in addition to other penalties. (1) In General. Except as provided in (2) and (3), the penalty imposed by this section shall be in addition to any other penalty provided by law. (2) Coordination with return preparer penalties. No penalty shall be assessed under 6694(a) or (b) on any person as to any document for which a penalty is assessed on such person under subsection (a). (3) Coordination with section 6700. No penalty shall be assessed under §6700 on any person as to any document for which a penalty is assessed on such person under subsection (a). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 63
  64. 64. 64 U.S. v. William Alexander, (2011, DC CA) 107 AFTR 2d 2011-1793. Final judgment of permanent injunction was entered against tax scheme promoter and those acting with him from selling or promoting abusive schemes such as described welfare benefit scheme, making false statements about deductions, providing tax advice about pension or welfare benefit plans, engaging in other conduct subject to penalty under §6700 or 6701, preparing returns for fee, and representing others before IRS. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 64
  65. 65. 65 § 6702 Frivolous tax submissions. (a) Civil penalty for frivolous tax returns. A person shall pay a penalty of $5,000 if – (1) such person files what purports to be a return of a tax imposed by this title but which (A) does not contain information on which the substantial correctness of the self- assessment may be judged, or (B) contains information that on its face indicates that the self-assessment is substantially incorrect, and, (2) the conduct referred to in paragraph (1) – (A) is based on a position which the Secretary has identified as frivolous under subsection (c), or (B) reflects a desire to delay or impede the administration of Federal tax laws. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 65
  66. 66. 66 § 6702 Frivolous tax submissions [continued]. (b) Civil penalty for specified frivolous submissions. (1) Imposition of penalty. Except as provided in paragraph (3), any person who submits a specified frivolous submission shall pay a penalty of $5,000. (2) Specified frivolous submission. For purposes of this section – (A) Specified Frivolous Submission. The term “specified frivolous submission” means a specified submission if any portion of such submission – (i) is based on a position which the Secretary has identified as frivolous under subsection (c), or (ii) reflects a desire to delay or impede the administration of Federal tax laws. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 66
  67. 67. 67 § 6702 Frivolous tax submissions [continued]. (B) Specified submission. The term “specified submission” means – (i) a request for a hearing under – (I) §6320 (relating to notice and opportunity for hearing upon filing of notice of lien), or (II) §6330 (relating to notice and opportunity for hearing before levy), and (ii) an application under – (I) §6159 (relating to agreements for payment of tax liability in installments), (II) §7122 (relating to compromises), or (III) §7811 (relating to taxpayer assistance orders). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 67
  68. 68. 68 § 6702 Frivolous tax submissions [continued]. (3) Opportunity to withdraw submission. If the Secretary provides a person with notice that a submission is a specified frivolous submission and such person withdraws such submission within 30 days after such notice, the penalty imposed under paragraph (1) shall not apply with respect to such submission. (c) Listing of frivolous positions. The Secretary shall prescribe (and periodically revise) a list of positions which the Secretary has identified as being frivolous for purposes of this subsection. The Secretary shall not include in such list any position that the Secretary determines meets the requirement of §6662(d)(2)(B)(ii)(II). (d) Reduction of penalty. The Secretary may reduce the amount of any penalty imposed under this section if the Secretary determines that such reduction would promote compliance with and administration of the Federal tax laws. (e) Penalties in addition to other penalties. The penalties imposed by this section shall be in addition to any other penalty provided by law. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 68
  69. 69. 69 Notice 2010-33, 2010-17 (4/07/2010) Identifies 46 frivolous positions, with 21 subparts, including: (6) A taxpayer has been untaxed, detaxed, or removed or redeemed from the Federal tax system though the taxpayer remains a United States citizen or resident, or similar arguments described as frivolous in Rev. Rul. 2004-31, 2004-1 C.B. 617. (10) A taxpayer is not a “person” within the meaning of Section 7701(a)(14) or other provisions of the Internal Revenue Code, or similar arguments described as frivolous in Rev. Rul. 2007-22, 2007-1 C.B. 866. (12) Federal Reserve Notes are not taxable income when paid to a taxpayer because they are not gold or silver and may not be redeemed for gold or silver. (33) A Notice of Federal Tax Lien is invalid because it is not signed by a particular official (such as by the Secretary of the Treasury), or because it was filed by someone without delegated authority. (45) The Service is not an agency of the United States government but rather a private-sector corporation or an agency of a State or Territory without authority to administer the internal revenue laws. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 69
  70. 70. 70 California Revenue and Taxation Code Section 19179 (a) A penalty shall be imposed for filing a frivolous return and shall be determined in accordance with §6702 of the Internal Revenue Code, except as otherwise provided. (b) §6702 of the Internal Revenue Code shall be applied to returns required to be filed under this part. (c) §6702 of the Internal Revenue Code is modified as follows: … Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 70
  71. 71. 71 Minor L. McNeil, (2011) TC Memo 2011-150. IRS's administrative determination to proceed with collection of §6702 penalties for years for which nurse filed zero returns was upheld. Penalties liability was shown by evidence that taxpayer's purported returns were based on frivolous protester-type arguments that he had been warned against making and that returns lacked sufficient information for IRS to be able to judge substantial correctness of self-assessments thereon. And collection determination was supported by evidence that appeals officer complied with all §6330 CDP requirements, including requirement to verify that all applicable legal and administrative requirements were met and that levy balanced IRS's efficient collection needs against taxpayer's intrusiveness concerns. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 71
  72. 72. 72 § 6703 Rules applicable to penalties under §§6700, 6701, and 6702. (a) Burden of proof. In any proceeding involving the issue of whether or not any person is liable for a penalty under §6700, 6701 or 6702, the burden of proof with respect to such issue shall be on the Secretary. (b) Deficiency procedures not to apply. Subchapter B of chapter 63 (relating to deficiency procedures) shall not apply with respect to the assessment or collection of the penalties provided by sections 6700, 6701 and 6702. (c) Extension of period of collection where person pays 15% of penalty. (1) In general. If, within 30 days after the day on which notice and demand of any penalty under section 6700 or 6701 is made against any person, such person pays an amount which is not less than 15% of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of §7421(a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 72
  73. 73. 73 § 6703 Rules applicable to penalties under §§6700, 6701, and 6702. [continued] (2) Person must bring suit in district court to determine his liability for penalty. If, within 30 days after the day on which his claim for refund of any partial payment of any penalty under §6700 or 6701 is denied (or, if earlier, within 30 days after the end of 6 months after the day on which he filed the claim for refund), the person fails to begin a proceeding in the appropriate U.S. district court for the determination of his liability for such penalty, paragraph (1) shall cease to apply as to the penalty, effective on the day after the close of the applicable 30-day period referred to in this paragraph. (3) Suspension of running of period of limitations on collection. The running of the period of limitations provided in §6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 73
  74. 74. 74 § 6707A Penalty for failure to include reportable transaction information with return. (a) Imposition of penalty. Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b). (b) Amount of penalty. (1) In general. Except as otherwise provided in this subsection, the amount of the penalty under subsection (a) as to any reportable transaction shall be 75% of the decrease in tax shown on the return due to the transaction (or which would have resulted from the transaction if it was respected for Federal tax purposes). (2) Maximum penalty. The amount of the penalty under subsection (a) as to any reportable transaction shall not exceed— (A) in the case of a listed transaction, $200,000 ($100,000 in the case of a natural person), or (B) in the case of any other reportable transaction, $50,000 ($10,000 in the case of a natural person). (3) Minimum penalty. The amount of the penalty under subsection (a) as to any transaction shall not be less than $10,000 ($5,000 in the case of a natural person). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 74
  75. 75. 75 § 6707A [continued] (c) Definitions. For purposes of this section — (1) Reportable transaction. The term “reportable transaction” means any transaction as to which information is required to be included with a return or statement because, as determined under regulations prescribed under §6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion. (2) Listed transaction. The term “listed transaction” means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of §6011. (d) Authority to rescind penalty. (1) In general. The Commissioner…may rescind all or any portion of any penalty imposed by this section as to any violation if— (A) the violation is as to a reportable transaction other than a listed transaction, and (B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration. (2) No judicial appeal. Despite any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 75
  76. 76. 76 § 6707A [continued] (3) Records. If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including— (A) a statement of the facts and circumstances relating to the violation, (B) the reasons for the rescission, and (C) the amount of the penalty rescinded. (e) Penalty reported to SEC. In the case of a person— … (f) Coordination with other penalties. The penalty imposed by this section shall be in addition to any other penalty imposed by this title. [Final Regulations issued September 7, 2011, T.D. 9550.] Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 76
  77. 77. 77 Mcgehee Family Clinic, P.A., Et Al., (2010) TC Memo 2010-202. §6662A penalties were upheld against family clinic and shareholder and spouse in respect to understatements arising from their engagement in multiemployer welfare benefit trust transaction that promised virtually unlimited deductions: IRS met its burden of production on penalties' general applicability with proof that transaction was factually similar to that identified in Notice 95-34, and thus listed transaction under §6707A(c)(2), and that clinic and shareholder both claimed improper tax treatment of items/deductions and income omissions attributable thereto; IRS further showed applicability of enhanced 30% penalty as against clinic with proof that it didn't attach to return disclosure statement described in Reg § 1.6011-4T(c); and taxpayers didn't provide credible evidence to support their claims to contrary. Also, constitutional arguments that penalties were effectively being imposed retroactively without fair warning and in violation of taxpayers' due process rights were belied by facts that penalties were imposed for tax years ending after §6662A’s effective date; and contrary to their claims, IRS wasn't obligated to give taxpayers warning or “personalized notice” of same. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 77
  78. 78. 78 § 6713 Disclosure or use of information by preparers of returns. (a) Imposition of penalty. If any person who is engaged in the business of preparing or providing services in connection with the preparation of, returns of tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who— (1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or (2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return, shall pay a penalty of $250 for each such disclosure or use, but the total amount imposed under this subsection on such a person for any calendar year shall not exceed $10,000. (b) Exceptions. The rules of §7216(b) shall apply for purposes of this section. (c) Deficiency procedures not to apply. Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by this section. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 78
  79. 79. 79 Rev. Rul. 2010-4. Use of return information by TRPs to contact taxpayers to inform them of tax law change or issuance of new temporary regs that might affect liability on previously filed returns or future reasonably anticipated accounting services won't subject preparers to penalties under §6713 or 7216. Nor will penalties apply to situations where preparer discloses return information (as limited to information listed in Reg. §301.7216-2(n)) to 3rd party service provider who provides educational information on general business and economic matters to public for purposes of soliciting more work for tax preparers. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 79
  80. 80. 80 §7201 Attempt to evade or defeat tax. Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 80
  81. 81. 81 U.S. v. Ganias, (2011, DC CT) 108 AFTR 2d 2011-5851. Taxpayer-former IRS agent/return preparation business owner was denied motion for judgment of acquittal on charges he willfully tried to evade his personal income tax liabilities for certain years by filing false returns: conviction was sufficiently supported by evidence that taxpayer's failure to report significant income on subject returns wasn't simple mistake resulting from innocent reliance on profit and loss statement that he didn't realize was incorrect, but rather part of larger pattern of willful evasion. Evidence included facts that taxpayer was experienced in tax matters and recordkeeping, yet underreported his income both in stated years and before. There was also evidence that he had previously used accounting records/accounting entries in manner that allowed payments to not show up as income. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 81
  82. 82. 82 §7206 Fraud and false statements. Any person who— (1) Declaration under penalties of perjury. Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or (2) Aid or assistance. Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or (3) Fraudulent bonds, permits, and entries. Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 82
  83. 83. 83 §7206 Fraud and false statements [continued]. (4) Removal or concealment with intent to defraud. Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by §6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or (5) Compromises and closing agreements. In connection with any compromise under §7122, or offer of such compromise, or in connection with any closing agreement under §7121, or offer to enter into any such agreement, willfully— (A) Concealment of property. Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or (B) Withholding, falsifying, and destroying records. Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax; shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 83
  84. 84. 84 Hal D. Hicks, (2011) TC Memo 2011-180. [In the criminal case On September 21, 2006, the District Court entered a judgment of conviction (judgment) pursuant to which petitioner was sentenced to 18 months in prison and ordered to pay the U.S. Postal Service $36.20 in restitution, the IRS $228,258 in restitution, and the District Court a $200 assessment and a $3,000 criminal fine.] Fraud penalty was upheld against taxpayer/mail transport S corp. sole owner for year for which he underreported income received through rebate checks issued to his corp. which he used for personal purposes and claimed improper flowthrough loss relating to corp.'s depreciation deduction for airplane: argument that he wasn't liable as to portion of underpayment relating to flowthough loss failed where airplane wasn't delivered to taxpayer until year after year at issue and wasn't used for any business purpose; his substantial understatement and concealment of income and filing of false documents showed that he intended to evade tax. District court's judgment in his prior §7206(1) case and 2 release certificates didn't collaterally estop IRS from assessing civil penalties where his tax liability wasn't essential element of govt.'s case and wasn't actually litigated and where court made no ultimate fact findings as to same; court didn't bar IRS from assessing civil tax liability amount exceeding restitution payments; plea agreement explicitly provided that govt. wasn't barred from prosecuting any civil proceedings involving taxpayer; and stipulation of facts didn't preclude finding that return was false as to more than one item/rebate checks. Incredible testimony didn't support claim that he relied on professional advice of his employees, accountant, and those who helped him form corp. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 84
  85. 85. 85 §7212 Attempts to interfere with administration of Internal Revenue laws. (a) Corrupt or forcible interference. Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both. The term “threats of force”, as used in in this subsection, means threats of bodily harm to the officer or employee of the United States or to a member of his family. (b) Forcible rescue of seized property. Any person who forcibly rescues or causes to be rescued any property after it shall have been seized under this title, or shall attempt or endeavor so to do, shall, excepting in cases otherwise provided for, for every such offense, be fined not more than $500, or not more than double the value of the property so rescued, whichever is the greater, or be imprisoned not more than 2 years. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 85
  86. 86. 86 U.S. v. Mubayyid, (2011, CA1) 108 AFTR 2d 2011-6034. District court judgment acquitting ostensible charitable org./suspected terrorist vehicle's founder, pres. and treas. of charge that they conspired to defraud U.S., by trying to obstruct IRS in its determination of whether org. should be given exempt status, was reversed and jury verdict was reinstated: although govt. didn't prove indictment theory for conspiracy, narrower conspiracy that govt. presented at trial, that defendants intentionally concealed via fraudulent Forms 990 filings that org. was advancing non- charitable/terrorist-related purposes, resulted in no more than non-prejudicial variance and was sufficiently proven with such evidence as that all defendants filed at least one such form knowing it was materially false. Further, related false filings and §7212 convictions against treas. were similarly supported by evidence that he knowingly gave false “no” answer to form question of whether org. engaged in any activities not previously reported to IRS, thus concealing such things as org.'s publication of jihad-themed newsletter and that its ostensible orphan sponsorship program supported martyred terrorists' children. Arguments that foregoing question was ambiguous or that it was only asking about changed activities were meritless. So, convictions on those, plus additional/remaining counts were affirmed and case was remanded for resentencing. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 86
  87. 87. 87 U.S. v. Arceneaux, (2011, CA5) 108 AFTR 2d 2011-5191. Taxpayer's §7203 and 7212 convictions for willfully failing to file returns and corruptly interfering with tax law administration were affirmed: convictions were sufficiently supported by evidence. Notably, evidence that taxpayer had filed returns for decades, before deciding in instant years that taxes were voluntary and that he wouldn't file, showed he acted willfully under §7203; and evidence that he filed liens against IRS agent and otherwise continued to prevent tax collection, even after being advised that his no-tax position was frivolous, showed he acted corruptly under §7212. Also, claims that district court should have given more specific jury instructions on good faith, reasonable doubt definition, and guilt by association were belied by facts that those issues were already adequately covered by instructions given. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 87
  88. 88. 88 §7216 Disclosure or use of information by preparers of returns. (a) General rule. Any person who is engaged in the business of preparing, or providing services in connection with the preparation of, returns of the tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who knowingly or recklessly— (1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or (2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return, shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than $1,000, or imprisoned not more than 1 year, or both together with the costs of prosecution. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 88
  89. 89. 89 §7216 Disclosure or use of information by preparers of returns [continued]. (b) Exceptions. (1) Disclosure. Subsection (a) shall not apply to a disclosure of information if such disclosure is made— (A) pursuant to any other provision of this title, or (B) pursuant to an order of a court. (2) Use. Subsection (a) shall not apply to the use of information in the preparation of, or in connection with the preparation of, State and local tax returns and declarations of estimated tax of the person to whom the information relates. (3) Regulations. Subsection (a) shall not apply to a disclosure or use of information which is permitted by regulations prescribed by the Secretary under this section. Such regulations shall permit (subject to such conditions as such regulations shall provide) the disclosure or use of information for quality or peer reviews. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 89
  90. 90. 90 Section 7407 Action To Enjoin Tax Return Preparers (a) Authority to seek injunction. A civil action in the name of the U.S. to enjoin any person who is a tax return preparer from further engaging in any conduct described in subsection (b) or from further acting as a tax return preparer may be commenced at the request of the Secretary. Any action under this section shall be brought in the District Court…for the district in which the tax return preparer resides or has his principal place of business or in which the taxpayer with respect to whose tax return the action is brought resides. The court may exercise its jurisdiction over such action (as provided in §7402(a)) separate and apart from any other action brought by the U.S. against such tax return preparer or any taxpayer. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 90
  91. 91. 91 Section 7407 Action To Enjoin Tax Return Preparers [continued] (b) Adjudication and decrees. In any action under (a), if the court finds – (1) that a TRP has (A) engaged in any conduct subject to penalty under 6694 or 6695, or subject to any criminal penalty provided by the title, (B) misrepresented his eligibility to practice before the IRS, or otherwise misrepresented his experience or education as a TRP, (C) guaranteed the payment of any tax refund or the allowance of any tax credit, or (D) engaged in any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws, and (2) that injunctive relief is appropriate to prevent the recurrence of such conduct, the court may enjoin such person from further engaging in such conduct. If the court finds that a TRP has continually or repeatedly engaged in any conduct described in (A) – (D) and that an injunction prohibiting such conduct would not be sufficient, the court may enjoin such person from acting as a TRP. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 91
  92. 92. 92 U.S. v. Littrice, (2011, DC IL) 108 AFTR 2d 2011-5710. Govt.'s complaint for broad injunction, permanently barring TRP and her solely owned accounting business from preparing returns for others and from violating tax laws, was granted on summary judgment: injunction was warranted under §7407 when considering preparer's prior §7206(2) conviction and other evidence that she had engaged in conduct subject to penalty under §6694 and 6695, by recklessly or willfully understating client liabilities and by using someone else's PTIN; that she kept doing so even after learning of IRS investigation; and that she was likely to continue absent injunction. Alternately, evidence supported injunction under either §7408 or 7402. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com Preparer And Other Tax Penalties 92
  93. 93. 93 §7408 Actions to enjoin specified conduct related to tax shelters and reportable transactions. (a) Authority to seek injunction. A civil action in the name of the United States to enjoin any person from further engaging in specified conduct may be commenced at the request of the Secretary. Any action under this section shall be brought in the district court of the United States for the district in which such person resides, has his principal place of business, or has engaged in specified conduct. The court may exercise its jurisdiction over such action (as provided in §7402(a)) separate and apart from any other action brought by the U.S. against such person. (b) Adjudication and decree. In any action under subsection (a), if the court finds— (1) that the person has engaged in any specified conduct, and (2) that injunctive relief is appropriate to prevent recurrence of such conduct, the court may enjoin such person from engaging in such conduct or in any other activity subject to penalty under this title. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 93 Preparer And Other Tax Penalties
  94. 94. 94 §7408 [continued] (c) Specified conduct. For purposes of this section, the term “specified conduct” means any action, or failure to take action, which is— (1) subject to penalty under §6700, 6701, 6707 or 6708, or (2) in violation of any requirement under regulations issued under §330 of title 31, United States Code. (d) Citizens and residents outside the U.S. If any citizen or resident of the United States does not reside in, and does not have his principal place of business in, any U.S. judicial district, such citizen or resident shall be treated for purposes of this section as residing in the District of Columbia. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 94 Preparer And Other Tax Penalties
  95. 95. 95 U.S. v. Stover, Jr., (2011, CA8) 108 AFTR 2d 2011-5837. District court decision granting govt. permanent injunction under §7408 against lawyer/accountant/tax scheme promoter, barring him from promoting his “Parallel C,” “ESOP/S,” or “Roth/S” fraudulent schemes, was affirmed: govt. showed that promoter organized and knowingly made false statements in respect to subject schemes and that such pertained to material matter and caused clients to buy same. Arguments that court didn't properly track statutory language, that there was no evidence that promoter actually organized subject schemes, or that supposedly false statements weren't shown to actually be false, were meritless and belied by record, showing statutory language was followed and multiple examples of false statements. Examples included that promoter advised clients to enter arrangements to save taxes without also advising them of potential pitfalls and actions needed to avoid obvious conclusion that transactions were shams. Also, facts that schemes were costing govt. large amounts of revenue, that promoter continued to try to find ways around relevant law, and that he refused to acknowledge culpability otherwise showed injunction was necessary. And added provisions therein, requiring promoter to inform IRS in advance of new arrangements and to provide clients with injunction copy, were within scope of Section 7408 and didn't reflect any impermissible delegation of Article III authority or unconstitutional prior restraint of protected speech. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 95 Preparer And Other Tax Penalties
  96. 96. 96 IRS Announcement 2011-61 on OPR Listing of Practitioners Subject to Recent Disciplinary Actions Mark M. Matusz, C.P.A. (Livonia, Michigan) Suspended by consent for admitted violation of §10.22 (failure to exercise due diligence in preparing own Federal individual income tax returns for tax years 2003-2005); Indefinite from July 8, 2011, but at least 6 months. Hemang Shah, C.P.A. (East Meadow, N.Y.) Suspended by decision in expedited proceeding under §10.82 (conviction under 26 USC §7206, making a subscribing to a false U.S. tax return); Indefinite from July 18, 2011. Patrick Smith, C.P.A. (Columbus, Ohio). Suspended by default decision in expedited proceeding under §10.82 (revocation of CPA license); Indefinite from July 6, 2011. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 96 Preparer And Other Tax Penalties
  97. 97. 97 Questions and Answers Now – or later by phone or e-mail Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 97 Preparer And Other Tax Penalties

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