For returns and claims for refunds prepared after May 2007, a tax return preparer who prepares a return or claim for refund may be liable for a penalty in the amount of $1,000 if a position is taken on the return or claim for refund and the preparer knew, or reasonably should have known, of the position, there was not substantial authority for the position, or the position was not disclosed or there was no reasonable basis for the position. Now, for 6694(a) penalties, substantial authority has the same meaning as in the accuracy-related penalty regulations.
Proving IRS Penalties
the government has the burden to produce sufficient evidence to establish the penalty applies to him. But the preparer has the burden of proving that the position taken on the return or in a claim for refund of income taxes would, number one, have a realistic possibility of being sustained on its merits, or that there was reasonable cause for the position and that such position was maintained in good faith, or that the position was adequately disclosed. The preparer also has the burden of proving the absence of negligence
IRS Code Section 6694(a)
Solely for purposes of 6694(a), the return preparer will still be considered to have met the standard concerning an unreasonable position if he relies in good faith and without verification on the advice of another advisor, another return preparer, or another party. Factors used for that good faith reliance on the advice of another are found in the regulations.
Recovering IRS Penalty
But the code in the regulations provide that no penalty under 6694(a) will be imposed if there is reasonable cause for the understatement and the preparer acted in good faith. Generally, a preparer is found to have acted in good faith if the preparer relied on the advice of a third party, and the preparer had reason to believe that the third party was competent to render that advice.
IRS Penalty Code Sections
IRC 6038(b) – IRC Section 6038(a) requires information reporting with respect to certain foreign corporations (Form 5471) and describes the information required to be reported on this form. IRC Section 6038(b)(1) provides for a monetary penalty of $10,000 for each Form 5471 that is filed after the due date of the income tax return (including extensions) or does not include the complete and accurate information described in Section 6038(a).
IRC 6694(a) – This is the Internal Revenue Code section which includes the regulations regarding return preparer penalties.
IRC 6694(b) – Return preparers who prepare a client return for which any part of an understatement of tax liability is due to the return preparer’s willful, reckless or intentional disregard of rules or regulations by the tax preparer, can be assessed a minimum penalty of $5,000.