[Federal Register Volume 69, Number 58 (Thursday, March 25, 2004)]
[Rules and Regulations]
[Pages 15248-15250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6621]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9119]
RIN 1545-BC12


Tax Return Preparers--Electronic Filing

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document provides final regulations to facilitate 
electronic filing of returns prepared by tax return preparers. They 
provide that preparers may avoid paper copies by retaining and 
furnishing to taxpayers copies of returns in an electronic or digital 
format prescribed by the Commissioner.

DATES: Effective Date: These regulations are effective March 25, 2004.
    Applicability Dates: For dates of applicability, see Sec.  1.6107-
2(b) and Sec.  1.6695-1(b)(5).

FOR FURTHER INFORMATION CONTACT: Richard Charles Grosenick, (202) 622-
7950 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends 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 imposes various 
penalties on tax return preparers, including a penalty for failure to 
sign the returns they prepare. Originally, the regulations under 
section 6695 contemplated only manually signed (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 continue to refer to 
manually signed returns and copies. Those references 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.
    On April 24, 2003, temporary regulations (TD 9053) relating to the 
signing of returns and retention of copies by tax return preparers were 
published in the Federal Register (68 FR 20069). A notice of proposed 
rulemaking (REG-141659-02) cross-referencing the temporary regulations 
was published in the Federal Register for the same day (68 FR 20089).
    The temporary regulations eliminated the references to manually 
signed returns in Sec.  1.6695-1(b). In addition, they provided 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 clarified that preparers may maintain 
electronic (paperless) filing systems. These final regulations adopt 
the temporary regulations without change.

Summary of Comments

    The IRS and the Department of the Treasury received four comments 
pertaining to the regulations. One commentator had concerns about 
identity theft. The commentator requested a change to the regulation 
that would allow taxpayers to decide whether the paid return preparer 
should keep a copy of the tax return.
    One commentator requested that the copy the preparer is required to 
retain be in a specific electronic format. Another commentator 
requested that the preparer be permitted to use any electronic format, 
so long as the preparer's computer can print a copy of the return.
    One commentator endorsed upgrading current record-keeping 
requirements under section 6107(b) to allow electronic storage. The 
commentator requested that published guidance clarify whether certain 
forms must continue to be maintained on paper due to signature 
requirements. With the exception of these forms, the commentator 
requested that preparers be allowed to choose to maintain taxpayer data 
on electronic media, with the ability to recreate the tax return.
    After consideration of the comments, the temporary regulations 
under sections 6107 and 6695 are adopted without change by this 
Treasury decision, and the corresponding temporary regulations are 
removed. The final regulations give the IRS the authority to prescribe 
in forms, instructions, or other appropriate guidance acceptable 
methods of signing. Issues raised in the comments are more 
appropriately addressed in those other forms of guidance.

Special Analyses

    It has been determined that this regulation is not a significant 
regulatory action as defined in Executive Order

[[Page 15249]]

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 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

0
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 removing 
the entry for ``Section 1.6695-1T'' and continues to read, in part, as 
follows:

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


0
Par. 2. Section 1.6107-2 is added to read as follows:


Sec.  1.6107-2  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 (see Sec.  601.601(d)(2) of this chapter).
    (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.


Sec.  1.6107-2T  [Removed].

0
Par. 3. Section 1.6107-2T is removed.

0
Par. 4. 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) 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 (b).
    (3) The application of this paragraph (b) 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 C reviews the information obtained by A relative to 
the taxpayer, and 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

[[Page 15250]]

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 of this 
paragraph (b), reasonable cause is a cause which arises despite 
ordinary care 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.
* * * * *


Sec.  1.6695-1T  [Removed].

0
Par. 5.
    Section 1.6695-1T is removed.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: March 15, 2004.
Gregory Jenner,
Assistant Secretary of the Treasury.
[FR Doc. 04-6621 Filed 3-24-04; 8:45 am]
BILLING CODE 4830-01-P