[Federal Register Volume 68, Number 79 (Thursday, April 24, 2003)]
[Rules and Regulations]
[Pages 20069-20070]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10192]



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 Rules and Regulations
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  Federal Register / Vol. 68, No. 79 / Thursday, April 24, 2003 / Rules 
and Regulations  

[[Page 20069]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9053]
RIN 1545-BC12


Tax Return Preparers--Electronic Filing

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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

SUMMARY: This document contains temporary regulations to facilitate 
electronic filing by tax return preparers. The existing regulations, 
which contain references to manually signed returns, have resulted in 
uncertainty over whether preparers must produce manually signed, paper 
copies of returns for taxpayers and for the preparers' records. The 
temporary regulations clarify that preparers may avoid paper copies by 
retaining and furnishing to taxpayers copies of returns in electronic 
or digital format prescribed by the Commissioner.

DATES: Effective Date: These regulations are effective by April 24, 
2003.
    Applicability Date: For dates of applicability, see Sec.  1.6107-
2T(b) and Sec.  1.6695-1T(b)(5).

FOR FURTHER INFORMATION CONTACT: Richard Charles Grosenick, (202) 622-
7940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains temporary regulations that amend the Income 
Tax Regulations (26 CFR part 1) under sections 6107 and 6695 of the 
Internal Revenue Code (Code) to facilitate electronic filing and record 
keeping by tax return preparers. Section 6695 of the Code imposes 
various penalties on tax return preparers, including a penalty for 
failure to sign the returns that they prepare. Originally, the 
regulations under section 6695 contemplated only manually signed (i.e., 
paper) returns. Although the regulations under section 6695 were 
amended in 1996 to permit tax return preparers to sign and file returns 
electronically in the manner prescribed by the Secretary (see TD 8689 
(61 FR 65319, Dec. 12, 1996)), Sec.  1.6695-1(b) of the regulations 
continues to refer to manually signed returns and copies. Those 
references have resulted in uncertainty over whether preparers must 
produce manually signed, paper copies of returns to satisfy their 
obligations under section 6107 to provide copies of returns to 
taxpayers and keep copies of returns in their records.
    These temporary regulations eliminate the references to manually 
signed returns in Sec.  1.6695-1(b). In addition, they provide that the 
Commissioner may prescribe, in forms, instructions, or other 
appropriate guidance, the manner in which preparers may satisfy their 
obligations under section 6107 to furnish returns to taxpayers and to 
retain copies of returns. These changes and the applicable forms, 
instructions, and guidance clarify that preparers may maintain 
electronic (paperless) filing systems.

Special Analyses

    It has been determined that this temporary regulation is not a 
significant regulatory action as defined in Executive Order 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) does not apply to this regulation and, because the 
regulation does not impose a collection of information on small 
entities, that the Regulatory Flexibility Act (5 U.S.C. chapter 6) does 
not apply. Pursuant to section 7805(f) of the Code, this temporary 
regulation will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal author of this regulation is Richard Charles 
Grosenick, Office of Assistant Chief Counsel (Administrative Provisions 
& Judicial Practice). However, other personnel from the IRS and the 
Treasury Department participated in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendment to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

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

    Section 1.6695-1T also issued under 26 U.S.C. 6695(b). * * *
0
Par. 2. Section 1.6107-2T is added to read as follows:


Sec.  1.6107-2T  Form and manner of furnishing copy of return and 
retaining copy or record.

    (a) In general. The Commissioner may prescribe the form and manner 
of satisfying the requirements imposed by section 6107(a) and (b) and 
Sec.  1.6107-1(a) and (b) in forms, instructions, or other appropriate 
guidance.
    (b) Effective date. To the extent this section relates to section 
6107(a) and Sec.  1.6107-1(a), it applies to income tax returns and 
claims for refund presented to a taxpayer for signature after December 
31, 2002. To the extent this section relates to section 6107(b) and 
Sec.  1.6107-1(b), it applies after December 31, 2002, to returns and 
claims for refund for which the 3-year period described in section 
6107(b) expires after December 31, 2002.
0
Par. 3. Section 1.6695-1 is amended by revising paragraph (b) to read 
as follows:


Sec.  1.6695-1  Other assessable penalties with respect to the 
preparation of income tax returns for other persons.

* * * * *
    (b) [Reserved]. For further guidance, see Sec.  1.6695-1T(b).
* * * * *
0
Par. 4. Section 1.6695-1T is added to read as follows:


Sec.  1.6695-1T  Other assessable penalties with respect to the 
preparation of income tax returns for other persons.

    (a) [Reserved]. For further guidance, see Sec.  1.6695-1(a).

[[Page 20070]]

    (b) Failure to sign return. (1) An individual who is an income tax 
return preparer with respect to a return of tax under subtitle A of the 
Internal Revenue Code or claim for refund of tax under subtitle A of 
the Internal Revenue Code shall sign the return or claim for refund 
after it is completed and before it is presented to the taxpayer (or 
nontaxable entity) for signature. If the preparer is unavailable for 
signature, another preparer shall review the entire preparation of the 
return or claim for refund, and then shall sign the return or claim for 
refund. The preparer shall sign the return in the manner prescribed by 
the Commissioner in forms, instructions, or other appropriate guidance.
    (2) If more than one income tax return preparer is involved in the 
preparation of the return or claim for refund, the individual preparer 
who has the primary responsibility as between or among the preparers 
for the overall substantive accuracy of the preparation of such return 
or claim for refund shall be considered to be the income tax return 
preparer for purposes of this paragraph.
    (3) The application of this paragraph is illustrated by the 
following examples:

    Example 1. X law firm employs Y, a lawyer, to prepare for 
compensation returns and claims for refund of taxes. X is employed 
by T, a taxpayer, to prepare his Federal tax return. X assigns Y to 
prepare T's return. Y obtains the information necessary for 
completing the return from T and makes determinations with respect 
to the proper application of the tax laws to such information in 
order to determine T's tax liability. Y then forwards such 
information to C, a computer tax service which performs the 
mathematical computations and prints the return by means of 
computers. C then sends the completed return to Y who reviews the 
accuracy of the return. Y is the individual preparer who is 
primarily responsible for the overall accuracy of T's return. Y must 
sign the return as preparer.
    Example 2. X partnership is a national accounting firm which 
prepares for compensation returns and claims for refund of taxes. A 
and B, employees of X, are involved in preparing the tax return of T 
Corporation. After they complete the return, including the gathering 
of the necessary information, the proper application of the tax laws 
to such information, and the performance of the necessary 
mathematical computations, C, a supervisory employee of X, reviews 
the return. As part of this review, C reviews the information 
provided and the application of the tax laws to this information. 
The mathematical computations and carried-forward amounts are proved 
by D, an employee of X's comparing and proving department. The 
policies and practices of X require that P, a partner, finally 
review the return. The scope of P's review includes reviewing the 
information provided by applying to this information his knowledge 
of T's affairs, observing that X's policies and practices have been 
followed, and making the final determination with respect to the 
proper application of the tax laws to determine T's tax liability. P 
may or may not exercise these responsibilities, or may exercise them 
to a greater or lesser extent, depending on the degree of complexity 
of the return, his confidence in C (or A and B), and other factors. 
P is the individual preparer who is primarily responsible for the 
overall accuracy of T's return. P must sign the return as preparer.
    Example 3.  C corporation maintains an office in Seattle, 
Washington, for the purpose of preparing for compensation returns 
and claims for refund of taxes. C makes compensatory arrangements 
with individuals (but provides no working facilities) in several 
States to collect information from taxpayers and to make 
determinations with respect to the proper application of the tax 
laws to the information in order to determine the tax liabilities of 
such taxpayers. E, an individual, who has such an arrangement in Los 
Angeles with C, collects information from T, a taxpayer, and 
completes a worksheet kit supplied by C which is stamped with E's 
name and an identification number assigned to E by C. In this 
process, E classifies this information in appropriate income and 
deduction categories for the tax determination. The completed 
worksheet kit signed by E is then mailed to C. D, an employee in C's 
office, reviews the worksheet kit to make sure it was properly 
completed. D does not review the information obtained from T for its 
validity or accuracy. D may, but did not, make the final 
determination with respect to the proper application of tax laws to 
the information. The data from the worksheet is entered into a 
computer and the return form is completed. The return is prepared 
for submission to T with filing instructions. E is the individual 
preparer primarily responsible for the overall accuracy of T's 
return. E must sign the return as preparer.
    Example 4.  X employs A, B, and C to prepare income tax returns 
for taxpayers. After A and B have collected the information from the 
taxpayer and applied the tax laws to the information, the return 
form is completed by computer service. On the day the returns 
prepared by A and B are ready for their signatures, A is away from 
the city for 1 week on another assignment and B is on detail to 
another office for the day. C may sign the returns prepared by A, 
provided that (i) C reviews the information obtained by A relative 
to the taxpayer, and (ii) C reviews the preparation of each return 
prepared by A. C may not sign the returns prepared by B because B is 
available.

    (4) An individual required by this paragraph (b) to sign a return 
or claim for refund shall be subject to a penalty of $50 for each 
failure to sign, with a maximum of $25,000 per person imposed with 
respect to each calendar year, unless it is shown that the failure is 
due to reasonable cause and not due to willful neglect. If the preparer 
asserts reasonable cause for failure to sign, the Internal Revenue 
Service will require a written statement in substantiation of the 
preparer's claim of reasonable cause. For purposes and prudence 
exercised by the individual preparer. Thus, no penalty may be imposed 
under section 6695(b) and this paragraph (b) upon a person who is an 
income tax return preparer solely by reason of--
    (i) Section 301.7701-15(a)(2) and (b) of this chapter on account of 
having given advice on specific issues of law; or
    (ii) Section 301.7701-15(b)(3) of this chapter on account of having 
prepared the return solely because of having prepared another return 
which affects amounts reported on the return.
    (5) Effective date. This paragraph (b) applies to income tax 
returns and claims for refund presented to a taxpayer for signature 
after December 31, 2002.
    (c) through (f) [Reserved]. For further guidance, see Sec.  1.6695-
1(c) through (f).

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.

    Approved: April 7, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-10192 Filed 4-23-03; 8:45 am]
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