[Title 26 CFR 1.6694-1]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.6694-1 - Section 6694 penalties applicable to income tax return preparer.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE122002-04-012002-04-01false1.6694-1Sec. 1.6694-1INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.6694-1  Section 6694 penalties applicable to income tax return preparer.

    (a) Overview. Section 6694(a) and section 6694(b) impose penalties 
on income tax return preparers for certain understatements of liability 
on a return or claim for refund. The section 6694(a) penalty is imposed 
for an understatement of liability with respect to tax imposed by 
subtitle A of the Internal Revenue Code that is due to a position for 
which there was not a realistic possibility of being sustained on its 
merits. The section 6694(b) penalty is imposed for an understatement of 
liability with respect to tax imposed by subtitle A of the Internal 
Revenue Code that is due to a willful attempt to understate tax 
liability or that is due to reckless or intentional disregard of rules 
or regulations. See Sec. 1.6694-2 for rules relating to the penalty 
under section 6694(a). See Sec. 1.6694-3 for rules relating to the 
penalty under section 6694(b).
    (b) Income tax return preparer--(1) In general. Solely for purposes 
of the regulations under section 6694, the term ``income tax return 
preparer'' (``preparer'') means any person who is an income tax return 
preparer within the meaning of section 7701(a)(36) and Sec. 301.7701-15 
of this chapter, except that no more than one individual associated with 
a firm (for example, as a partner or employee) is treated as a preparer 
with respect to the same return or claim for refund. If a signing 
preparer is associated with a firm, that individual, and no other 
individual associated with the firm, is a preparer with respect to the 
return or claim for purposes of section 6694. If two or more individuals 
associated with a firm are income tax return preparers with respect to a 
return or claim for refund, within the meaning of section 7701(a)(36) 
and Sec. 301.7701-15 of this chapter, and none of them is the signing 
preparer, only one of the individuals is a preparer (i.e., nonsigning 
preparer) with respect to that return or claim for purposes of section 
6694. In such a case, ordinarily, the individual who is a preparer for 
purposes of section 6694 is the individual with overall supervisory 
responsibility for the advice given by the firm with respect to the 
return or claim. To

[[Page 1069]]

the extent provided in Sec. 1.6694-2(a)(2) and Sec. 1.6694-3(a)(2), an 
individual and the firm with which the individual is associated may both 
be subject to penalty under section 6694 with respect to the same return 
or claim for refund. If an individual (other than the sole proprietor) 
who is associated with a sole proprietorship is subject to penalty under 
section 6694, the sole proprietorship is considered a ``firm'' for 
purposes of this paragraph.
    (2) Signing and nonsigning preparers. A ``signing preparer'' is any 
preparer who signs a return of tax or claim for refund as a preparer. A 
``nonsigning preparer'' is any preparer who is not a signing preparer. 
Examples of nonsigning preparers are preparers who provide advice 
(written or oral) to a taxpayer or to a preparer who is not associated 
with the same firm as the preparer who provides the advice.
    (3) Example. The provisions of paragraph (b) of this section are 
illustrated by the following example:

    Example. Attorney A provides advice to Client C concerning the 
proper treatment of a significant item on C's income tax return. The 
advice constitutes preparation of a substantial portion of the return. 
In preparation for providing that advice, A discusses the matter with 
Attorney B, who is associated with the same firm as A, but A is the 
attorney with overall supervisory responsibility for the advice. Neither 
Attorney A nor any other attorney associated with A's firm signs C's 
return as a preparer. For purposes of the regulations under section 
6694, A is a preparer with respect to C's return and is subject to 
penalty under section 6694 with respect to C's return. B is not a 
preparer with respect to C's return and, therefore, is not subject to 
penalty under section 6694 with respect to a position taken on C's 
return. This would be true even if B recommends that A advise C to take 
an undisclosed position that did not satisfy the realistic possibility 
standard. In addition, since B is not a preparer for purposes of the 
regulations under section 6694, A may not avoid a penalty under section 
6694 with respect to C's return by claiming he relied on the advice of 
B. See Sec. 1.6694-2(d)(5).

    (c) Understatement of liability. For purposes of the regulations 
under section 6694, an ``understatement of liability'' exists if, 
viewing the return or claim for refund as a whole, there is an 
understatement of the net amount payable with respect to any tax imposed 
by subtitle A of the Internal Revenue Code, or an overstatement of the 
net amount creditable or refundable with respect to any tax imposed by 
subtitle A of the Internal Revenue Code. The net amount payable in a 
taxable year with respect to the return for which the preparer engaged 
in conduct proscribed by section 6694 is not reduced by any carryback. 
Tax imposed by subtitle A of the Internal Revenue Code does not include 
additions to the tax provided by section 6654 and section 6655 (relating 
to underpayments of estimated tax). Except as provided in paragraph (d) 
of this section, the determination of whether an understatement of 
liability exists may be made in a proceeding involving the preparer 
apart from any proceeding involving the taxpayer.
    (d) Abatement of penalty where taxpayer's liability not understated. 
If a penalty under section 6694(a) or section 6694(b) concerning a 
return or claim for refund has been assessed against one or more 
preparers, and if it is established at any time in a final 
administrative determination or a final judicial decision that there was 
no understatement of liability relating to the return or claim for 
refund, then--
    (1) The assessment must be abated; and
    (2) If any amount of the penalty was paid, that amount must be 
refunded to the person or persons who so paid, as if the payment were an 
overpayment of tax, without consideration of any period of limitations.
    (e) Verification of information furnished by taxpayer--(1) In 
general. For purposes of section 6694(a) and section 6694(b), the 
preparer generally may rely in good faith without verification upon 
information furnished by the taxpayer. Thus, the preparer is not 
required to audit, examine or review books and records, business 
operations, or documents or other evidence in order to verify 
independently the taxpayer's information. However, the preparer may not 
ignore the implications of information furnished to the preparer or 
actually known by the preparer. The preparer must make reasonable 
inquiries if the information as furnished appears to be incorrect or 
incomplete. Additionally, some provisions of the Code

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or regulations require that specific facts and circumstances exist-- for 
example, that the taxpayer maintain specific documents, before a 
deduction may be claimed. The preparer must make appropriate inquiries 
to determine the existence of facts and circumstances required by a Code 
section or regulation as a condition to the claiming of a deduction.
    (2) Example. The provisions of paragraph (e) of this section are 
illustrated by the following example:

    Example. A taxpayer, during an interview conducted by the preparer, 
stated that he had paid $6,500 in doctor bills and $5,000 in deductible 
travel and entertainment expenses during the tax year, when in fact he 
had paid smaller amounts. On the basis of this information, the preparer 
properly calculated deductions for medical expenses and for travel and 
entertainment expenses which resulted in an understatement of liability 
for tax. The preparer had no reason to believe that the medical expense 
and travel and entertainment expense information presented was incorrect 
or incomplete. The preparer did not ask for underlying documentation of 
the medical expenses but inquired about the existence of travel and 
entertainment expense records. The preparer was reasonably satisfied by 
the taxpayer's representations that the taxpayer had adequate records 
(or other sufficient corroborative evidence) for the deduction of $5,000 
for travel and entertainment expenses. The preparer is not subject to a 
penalty under section 6694.

    (f) Effective date. Sections 1.6694-1 through 1.6694-3 are generally 
effective for documents prepared and advice given after December 31, 
1991. However, Sec. 1.6694-3(c)(3) (which provides that a preparer is 
not considered to have recklessly or intentionally disregarded a revenue 
ruling or notice if the position contrary to the ruling or notice has a 
realistic possibility of being sustained on its merits) is effective for 
documents prepared and advice given after December 31, 1989. Except as 
provided in the preceding sentence, section 6694 and the existing rules 
and regulations thereunder (to the extent not inconsistent with the 
statute as amended by the Omnibus Budget Reconciliation Act of 1989), 
and Notice 90-20, 1990-1 C.B. 328, apply to documents prepared and 
advice given on or before December 31, 1991. For the effective date of 
Sec. 1.6694-4, see Sec. 1.6694-4(d).

[T.D. 8382, 56 FR 67514, Dec. 31, 1991; T.D. 8382, 57 FR 6061, Feb. 19, 
1992]