[Federal Register Volume 59, Number 52 (Thursday, March 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6236]


[[Page Unknown]]

[Federal Register: March 17, 1994]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[T.D. 8533]
RIN 1545-AS58

 

Accuracy-Related Penalty

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains temporary regulations relating to the 
accuracy-related penalty under chapter 1 of the Internal Revenue Code. 
These regulations affect all persons that file returns of income tax 
and provide guidance necessary to comply with these changes. These 
regulations are necessary to effect changes to the accuracy-related 
penalty made by the Omnibus Budget Reconciliation Act of 1993.

EFFECTIVE DATE: March 14, 1994.

FOR FURTHER INFORMATION CONTACT: David L. Meyer, 202-622-6232 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    These temporary regulations set forth certain changes made to the 
accuracy-related penalty in section 6662 of the Internal Revenue Code 
(Code) by section 13251 of the Omnibus Budget Reconciliation Act of 
1993 (OBRA 1993). These changes eliminated the disclosure exception for 
the negligence penalty (section 6662(b)(1) of the Code) and raised the 
disclosure standard for purposes of the penalties for disregarding 
rules or regulations (section 6662(b)(1) of the Code) and a substantial 
understatement of income tax (section 6662(b)(2) of the Code) from 
``not frivolous'' to ``reasonable basis.'' See section 13251 of OBRA 
1993 and H. Rep. No. 213, 103rd Cong., 1st Sess. 669 (1993) (the 
Conference Report).
    The legislative history to OBRA 1993 indicates that this 
``reasonable basis'' standard is a relatively high standard of tax 
reporting that is significantly higher than the ``not frivolous'' 
disclosure standard previously applicable to taxpayers under section 
6662 of the Code and currently applicable to preparers under section 
6694 of the Code. See Conference Report, at p.669. A position is not 
frivolous if it is not ``patently improper.'' See Sec. 1.6694-2(c)(2) 
of the Income Tax Regulations and current Sec. 1.6662-3(b)(3). The 
legislative history to OBRA 1993 also provides that the reasonable 
basis standard is not satisfied by a position that is merely arguable 
or merely a colorable claim. See Conference Report, at p.669.
    In addition to adopting the new reasonable basis standard as the 
standard that a disclosed return position must satisfy to avoid the 
disregard and substantial understatement penalties, Congress adopted 
the new reasonable basis standard as the standard that a return 
position must satisfy to avoid the negligence penalty. See Conference 
Report at p.669.
    Treasury requests comments on how the new reasonable basis standard 
should be defined for purposes of the negligence, disregard, and 
substantial understatement penalties.

Explanation of Changes

    Section 1.6662-3(a) of the regulations generally provides that if 
any portion of an underpayment, as defined in section 6664(a) of the 
Code and Sec. 1.6664-2, of any income tax imposed under subtitle A of 
the Code that is required to be shown on a return is attributable to 
negligence or disregard of rules or regulations, there is added to the 
tax an amount equal to 20 percent of such portion. Section 1.6662-
3(b)(1) defines ``negligence'' to include any failure to make a 
reasonable attempt to comply with the provisions of the internal 
revenue laws or to exercise ordinary and reasonable care in the 
preparation of a tax return. Currently, Sec. 1.6662-3(c) generally 
provides that no penalty under section 6662(b)(1) may be imposed on any 
portion of any underpayment that is attributable to negligence or a 
position contrary to a rule or regulation if the position is adequately 
disclosed and is not frivolous, if the requirements of that section are 
met.
    Section 1.6662-4(a) of the regulations generally provides that if 
any portion of an underpayment of any income tax imposed under subtitle 
A of the Code that is required to be shown on a return is attributable 
to a substantial understatement of such income tax, there is added to 
the tax an amount equal to 20 percent of such portion. Section 1.6662-
4(a) further provides that, except in the case of any item attributable 
to a tax shelter, an understatement is reduced by the portion of the 
understatement that is attributable to positions for which there was 
substantial authority or adequate disclosure. Currently, under 
Sec. 1.6662-4(e)(2), this adequate disclosure exception will not apply 
if the position on the return is frivolous.
    As a result of OBRA 1993, the minimum standard that a disclosed 
return position must satisfy to avoid either the penalty for 
disregarding rules or regulations or for a substantial understatement 
of income tax has been raised from ``not frivolous'' to ``reasonable 
basis.'' In addition, there is no longer a disclosure exception for the 
negligence penalty and, to avoid that penalty, the return position 
generally must satisfy the new reasonable basis standard.
    These rules generally apply to returns that are due (without regard 
to extensions for filing) after December 31, 1993. However, the rules 
relating to changes to the penalties for negligence or disregard of 
rules or regulations will not apply to returns, including qualified 
amended returns, filed on or before March 14, 1994.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
these temporary regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business.

Drafting Information

    The principal author of these regulations is David L. Meyer, Office 
of Assistant Chief Counsel, Income Tax and Accounting, Internal Revenue 
Service. However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.6662-0 is amended by revising the introductory 
language and adding an entry for Sec. 1.6662-7T to read as follows:


Sec. 1.6662-0  Table of contents.

    This section lists the captions that appear in Secs. 1.6662-1 
through 1.6662-7T.
* * * * *
    Sec. 1.6662-7T  Omnibus Budget Reconciliation Act of 1993 
changes to the accuracy-related penalty (temporary).

(a) In general.
    (1) Scope.
    (2) Effective date.
(b) No disclosure exception for negligence penalty.
(c) Disclosure standard for other penalties is reasonable basis.
(d) Definition of reasonable basis.
    (1) In general. [Reserved].
    (2) Relationship to other standards.

    Par. 3. Section 1.6662-7T is added to read as follows:


Sec. 1.6662-7T  Omnibus Budget Reconciliation Act of 1993 changes to 
the accuracy-related penalty (temporary).

    (a) In general--(1) Scope. The Omnibus Budget Reconciliation Act of 
1993 made certain changes to the accuracy-related penalty in section 
6662. This section provides rules reflecting those changes.
    (2) Effective date. This section applies to returns that are due 
(without regard to extensions of time for filing) after December 31, 
1993. However, the provisions of these regulations relating to the 
penalties for negligence or disregard of rules or regulations will not 
apply to returns (including qualified amended returns) that are filed 
on or before March 14, 1994.
    (b) No disclosure exception for negligence penalty. The penalty for 
negligence in section 6662(b)(1) may not be avoided by disclosure of a 
return position.
    (c) Disclosure standard for other penalties is reasonable basis. 
The penalties for disregarding rules or regulations in section 
6662(b)(1) and for a substantial understatement of income tax in 
section 6662(b)(2) may be avoided by adequate disclosure of a return 
position only if the position has at least a reasonable basis. See 
Secs. 1.6662-3(c) and 1.6662-4(e) and (f) for other applicable 
disclosure rules.
    (d) Definition of reasonable basis--(1) In general. [Reserved].
    (2) Relationship to other standards. The reasonable basis standard 
is significantly higher than the not frivolous standard applicable to 
preparers under section 6694 and defined in Sec. 1.6694-2(c)(2).
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved:
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-6236 Filed 3-14-94; 12:20 pm]
BILLING CODE 4830-01-U