[Federal Register Volume 73, Number 117 (Tuesday, June 17, 2008)]
[Proposed Rules]
[Pages 34560-34597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-12898]



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Part IV





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1, 20, 25, et al.



Tax Return Preparer Penalties Under Sections 6694 and 6695; Proposed 
Rule

  Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / 
Proposed Rules  

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, 25, 26, 31, 40, 41, 44, 53, 54, 55, 56, 156, 
157, and 301

[REG-129243-07]
RIN 1545-BG83


Tax Return Preparer Penalties Under Sections 6694 and 6695

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations implementing 
amendments to the tax return preparer penalties under sections 6694 and 
6695 of the Internal Revenue Code (Code) and related provisions under 
sections 6060, 6107, 6109, 6696, and 7701(a)(36) reflecting amendments 
to the Code made by section 8246 of the Small Business and Work 
Opportunity Tax Act of 2007. The proposed regulations affect tax return 
preparers and provide guidance regarding the amended provisions. This 
document also provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by August 18, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for Monday, August 18, 2008, must be received by Monday, 
August 4, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-129243-07), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
129243-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov/Regs (IRS REG-129243-
07). The public hearing will be held in the IRS Auditorium, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Michael E. Hara, (202) 622-4910, and Matthew S. Cooper, (202) 622-4940; 
concerning submissions of comments, the hearing, and/or to be placed on 
the building access list to attend the hearing, Regina Johnson, (202) 
622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by August 18, 2008. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec. Sec.  1.6060-1(a)(1), 1.6107-1, 1.6694-2(c)(3), 20.6060-1(a)(1), 
20.6107-1, 25.6060-1(a)(1), 25.6107-1, 26.6060-1(a)(1), 26.6107-1, 
31.6060-1(a)(1), 31.6107-1, 40.6060-1(a)(1), 40.6107-1, 41.6060-
1(a)(1), 41.6107-1, 44.6060-1(a)(1), 44.6107-1, 53.6060-1(a)(1), 
53.6107-1, 54.6060-1(a)(1), 54.6107-1, 55.6060-1(a)(1), 55.6107-1, 
56.6060-1(a)(1), 56.6107-1, 156.6060-1(a)(1), 156.6107-1, 157.6060-
1(a)(1), and 157.6107-1. This information is necessary to make the 
record of the name, taxpayer identification number, and principal place 
of work of each tax return preparer, make each return or claim for 
refund prepared available for inspection by the Commissioner of 
Internal Revenue, and to document that the tax return preparer advised 
the taxpayer of the penalty standards applicable to the taxpayer in 
order for the tax return preparer to avoid penalties under section 
6694. The collection of information is required to comply with the 
provisions of section 8246 of the Small Business and Work Opportunity 
Tax Act of 2007. The likely respondents are tax return preparers and 
their employers.
    Estimated total annual reporting burden: 10,679,320 hours.
    Estimated average annual burden per respondent: 15.6 hours.
    Estimated number of respondents: 684,268.
    Estimated frequency of responses: 127,801,426.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1), the Estate Tax Regulations (26 CFR part 
20), the Gift Tax Regulations (26 CFR part 25), the Generation-Skipping 
Transfer Tax Regulations (26 CFR part 26), the Employment Tax and 
Collection of Income Tax at Source Regulations (26 CFR part 31), the 
Excise Tax Procedural Regulations (26 CFR part 40), the Highway Use Tax 
Regulations, (26 CFR part 41), the Wagering Tax Regulations (26 CFR 
part 44), the Foundation and Similar Excise Tax Regulations (26 CFR 
part 53), the Pension Excise Tax Regulations (26 CFR part 54), the 
Excise Tax on Real Estate Investment Trusts and Regulated Investment 
Companies Regulations (26 CFR part 55), the Public Charity Excise Tax 
Regulations (26 CFR part 56), the Excise Tax on Greenmail Regulations 
(26 CFR part 156), the Excise Tax on Structured Settlement Factoring 
Transactions Regulations (26 CFR part 157), and the Regulations on 
Procedure and Administration (26 CFR part 301) implementing the 
amendments to tax return preparer penalties under sections 6694 and 
6695 (and the related provisions under sections 6060, 6107, 6109, 6696, 
and 7701(a)(36)) made by section 8246 of the Small Business and Work 
Opportunity Tax Act of 2007, Public Law 110-28 (121 Stat. 190) (May 25, 
2007) (the 2007 Act).
    In accordance with the 2007 Act, these proposed regulations amend 
existing regulations defining income tax return preparers to broaden 
the scope of that definition to include preparers of estate, gift, and 
generation-skipping transfer tax returns, employment tax returns, 
excise tax returns, and returns of exempt organizations. These proposed 
regulations also revise current

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regulations to amend the standards of conduct that must be met to avoid 
imposition of the tax return preparer penalty under section 6694. In 
addition, these proposed regulations reflect changes to the computation 
of the section 6694 tax return preparer penalty made by the 2007 Act. 
These regulations also amend current regulations under the penalty 
provisions of section 6695 to conform them with changes made by the 
2007 Act expanding the scope of that statute beyond income tax returns. 
The Treasury Department and the IRS intend to finalize these proposed 
regulations by the end of 2008, with the expectation that the final 
regulations will be applicable to returns and claims for refund filed 
(and advice given) after the date that final regulations are published 
in the Federal Register, but in no event sooner than December 31, 2008.

History of the Tax Return Preparer Penalty Provisions

    The 2007 Act amended section 6694 to expand the definition of tax 
return preparer, broaden the scope of the tax return preparer penalties 
to include preparers of returns other than income tax returns, revise 
the standards of conduct that tax return preparers must meet to avoid 
imposition of penalties, and change the computation of the tax return 
preparer penalties. The 2007 Act did not amend a number of other Code 
sections related to tax return preparer conduct, nor did it directly 
address the tax regulations, published guidance, and case law that have 
developed since enactment of the preparer penalty regime as part of the 
Tax Reform Act of 1976, Public Law 94-455 (90 Stat. 1688) (October 4, 
1976) (the 1976 Act).
    The Treasury Department and the IRS believe that the recent 
amendments to the tax return preparer penalty provisions necessitate a 
comprehensive review and overhaul of all the tax return preparer 
penalties and related regulatory provisions. These proposed regulations 
are the first significant step in this process. Because the proposed 
regulations were drafted with consideration of the existing regulations 
and the legislative history of the statutory provisions that were 
amended by the 2007 Act, a brief review of the legislative and 
regulatory history leading up to the recent amendments is appropriate 
in order to place the proposed regulatory changes reflecting the 2007 
Act amendments in context.

The Tax Reform Act Of 1976

    The provisions in section 7701(a)(36) defining income tax return 
preparers, and the provisions in sections 6694, and 6695, imposing 
various penalties on income tax return preparers, were first enacted by 
the 1976 Act. Sections 6107 and 6109, imposing an obligation on return 
preparers to furnish and maintain copies of returns and include an 
identifying number on those returns, were also enacted by the 1976 Act.
    As originally enacted, section 7701(a)(36)(A) defined the term 
income tax return preparer to mean any person who prepared for 
compensation, or who employed one or more persons to prepare for 
compensation, any income tax return or income tax claim for refund, or 
a ``substantial portion'' of such return or claim. Section 
7701(a)(36)(B) excluded from the definition of income tax return 
preparer persons who merely provided mechanical assistance in the 
preparation of a return or claim for refund, or who prepared returns 
and claims as an employee of the taxpayer or in a fiduciary capacity. 
The legislative history to the 1976 Act explained that whether or not a 
portion of a return constituted a substantial portion of a tax return 
was to be determined by examining both the length and complexity of 
that particular portion of the return and the amount of tax liability 
involved. The legislative history noted, however, that the filling out 
of a single schedule would generally not be considered a substantial 
portion of that return unless that particular schedule was the dominant 
portion of the entire tax return. The legislative history also provided 
that a person who prepared a return for compensation may be an income 
tax return preparer even though that person did not actually place 
figures on a taxpayer's return. See S. Rep. No. 94-938, 94th Cong., 2d 
Sess. 349-359 (1976).
    As originally enacted, section 6694(a) imposed a ``first tier'' 
penalty of $100 if any part of an understatement was due to the 
negligent or intentional disregard of rules or regulations by an income 
tax return preparer. Section 6694(b) imposed a ``second tier'' penalty 
of $500 if any part of an understatement was due to a willful attempt 
in any manner to understate tax liability by an income tax return 
preparer. Section 6695(b) imposed a penalty of $25 if an income tax 
return preparer failed to sign a return or claim for refund in the 
manner prescribed by regulations. Sections 6695(a), (c), (d), and (e) 
also imposed penalties of $25 if an income tax return preparer failed 
to comply with the various identification rules in sections 6107(a), 
6109(a)(4), 6107(b) and 6060.
    The House and Senate Reports to the 1976 Act, H. Rep. No. 94-658, 
94th Cong., 1st Sess. at 274 (1975) and S. Rep. No. 94-938 at 349-50, 
and the Joint Committee on Taxation's General Explanation of the Tax 
Reform Act of 1976, 94th Cong., 2d Sess. at 346 (1976), explained the 
need for the new tax return preparer penalty regime by noting the 
significant number of fraudulent returns and tax return preparers 
engaged in abusive practices. The legislative history further explained 
that, under prior law, it was often difficult for the IRS to detect any 
individual case of improper return preparation. This was because the 
IRS generally had no way of knowing whether the return was prepared by 
the taxpayer or by a tax return preparer who may have engaged in 
abusive practices involving a number of returns. Further, even when the 
IRS could trace the improper preparation of tax returns to an 
individual tax return preparer, the only sanctions available were 
criminal penalties, which were often considered inappropriate, 
cumbersome, and ineffective deterrents because of the cost and length 
of time involved in prosecuting those cases. The legislative history 
makes clear that Congress intended the tax return preparer penalties to 
aid the IRS in detecting returns that were incorrectly prepared and to 
deter tax return preparers from engaging in improper conduct. See S. 
Rep. No. 94-938, at 350-51 (1976).
    Regulations implementing certain of the amendments made by the 1976 
Act were published on December 29, 1976, as TD 7451, 41 FR 56631, and 
later amended on March 31, 1977, by TD 7473, 42 FR 17124. Additional 
regulations were published on April 1, 1977, as TD 7475, 42 FR 17452, 
and November 23, 1977, as TD 7519, 42 FR 17452 (the November 1977 final 
regulations).
    The November 1977 final regulations applied the tax return preparer 
penalty provisions to persons who did not sign the return or claim for 
refund, or make or control the entries on the return or claim for 
refund, including tax professionals who rendered advice that was 
directly related to the determination of the existence, 
characterization, or amount, of an entry on a return or claim for 
refund. By including a broad definition of tax return preparer, the 
Treasury Department and the IRS intended the regulations to increase 
advisor care and to monitor careless or deceptive members of the 
profession. The November 1977 final regulations reflected the 
considered view that excluding nonsigning tax professionals from the 
reach of section 6694 could result in a lack of accountability for 
positions taken on a return, as taxpayers could escape penalty 
liability because

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they employed tax return preparers, tax return preparers could escape 
liability because they relied on nonsigning tax professionals' 
opinions, and nonsigning tax professionals could escape liability 
because they would not be considered tax return preparers. The November 
1977 final regulations also reflected a concern with the possible 
exemption of tax attorneys and other professionals involved in 
preparing more complex returns while at the same time subjecting to 
penalties preparers of less sophisticated returns who did not rely on 
the work of others.
    The November 1977 final regulations also adopted the safe harbor 
provisions of Sec.  301.7701-15(b)(2), which excluded from the 
definition of a tax return preparer persons providing tax advice (other 
than those signing the return) if the amounts of gross income, 
deductions, or credits giving rise to the understatement were less than 
$2,000; or less than $100,000 and also less than 20 percent of the 
gross income (or, for an individual, the individual's adjusted gross 
income) shown on the return or claim for refund.

Omnibus Budget Reconciliation Act of 1989

    Sections 6694 and 6695 were amended by the Improved Penalty 
Administration and Compliance Tax Act of 1989, enacted as title G of 
the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Public Law 
101-239 (103 Stat. 2106) (December 19, 1989). The OBRA 1989 amended 
section 6694(a) to remove the prior link to negligence or intentional 
disregard of rules or regulations and instead impose a $250 penalty on 
an income tax return preparer who understated a taxpayer's tax 
liability on an income tax return or claim for refund if the 
understatement was due to a position for which there was not a 
``realistic possibility'' of being sustained on its merits, and the tax 
return preparer knew or reasonably should have known of such position. 
The revised section 6694(a) penalty did not apply, however, if the 
position was ``not frivolous'' and was adequately disclosed, or if 
there was reasonable cause for the position taken and the tax return 
preparer acted in good faith. The OBRA 1989 also amended section 
6694(b) to impose a $1,000 penalty on a tax return preparer who 
understated a taxpayer's tax liability on an income tax return or claim 
for refund if the understatement was due to the tax return preparer's 
willful attempt to understate tax liability or the tax return 
preparer's reckless or intentional disregard of rules or regulations.
    The OBRA 1989 also made uniform the tax return preparer penalties 
that apply for each failure by a tax return preparer to: (1) Furnish a 
copy of a return or claim for refund to the taxpayer under section 
6695(a); (2) sign the return or claim for refund under section 6695(b); 
(3) furnish his or her identification number under section 6695(c); or 
(4) file a correct information return under section 6695(e). The 
unified penalty amount was $50 for each failure, with a limit of 
$25,000 for the total amount of penalties that could be imposed for any 
single type of failure.
    The OBRA 1989 also consolidated the negligence, substantial 
understatement and valuation misstatement penalties applicable to 
taxpayers. These penalties were consolidated into a single accuracy-
related penalty regime under section 6662. The new accuracy-related 
penalty for a substantial understatement of income tax generally would 
not be imposed, however, if (1) there was ``substantial authority'' for 
the taxpayer's treatment of the item giving rise to the understatement, 
or (2) relevant facts affecting the tax treatment of the item were 
adequately disclosed in the return or in a statement attached to the 
return and there was a ``reasonable basis'' for the tax treatment of 
the item.
    By adopting the ``realistic possibility'' standard for tax return 
preparers, and the higher ``substantial authority'' standard for 
taxpayers with respect to undisclosed positions, OBRA 1989 created a 
disparity between the penalty treatment of tax return preparers and 
most taxpayers subject to income tax.
    Regulations were published on December 31, 1991, as TD 8382, 56 FR 
67509, which amended the regulations under section 6694 to conform the 
income tax return preparer regulations with the statutory changes made 
by OBRA 1989 and to make other changes.

The Small Business and Work Opportunity Tax Act of 2007

    Section 8246 of the 2007 Act amended sections 6694 and 7701(a)(36) 
and made conforming changes to other Code provisions to make tax return 
preparer penalties applicable to a broader range of tax returns. The 
2007 Act's amendments to section 6694 also changed the standards of 
conduct that tax return preparers must meet in order to avoid 
imposition of penalties in the event that a return prepared results in 
an understatement of tax. For undisclosed positions, the 2007 Act 
replaced the ``realistic possibility'' standard with a standard 
requiring the tax return preparer to ``reasonably believe that the tax 
treatment of the position is more likely than not'' the proper 
treatment. For disclosed positions, the 2007 Act replaced the ``not-
frivolous'' standard with a standard requiring the tax return preparer 
to have a ``reasonable basis'' for the tax treatment of the position.
    The 2007 Act also increased the first-tier penalty under section 
6694(a) from $250 to the greater of $1,000 or 50 percent of the income 
derived (or to be derived) by the tax return preparer from the 
preparation of a return or claim for refund with respect to which the 
penalty was imposed. In addition, the 2007 Act increased the second-
tier penalty under section 6694(b) from $1,000 to the greater of $5,000 
or 50 percent of the income derived (or to be derived) by the tax 
return preparer. The amendments made by the 2007 Act are effective for 
tax returns prepared after the date of enactment, May 25, 2007.

Notice 2008-13

    Notice 2008-13 (2008-3 IRB 282) was released on December 31, 2007 
and provided interim guidance under the 2007 Act regarding: (1) The 
relevant categories of tax returns or claims for refund for purposes of 
applying the penalty under section 6694(a); (2) the definition of ``tax 
return preparer'' under sections 6694 and 7701(a)(36); (3) the date a 
return is deemed prepared; (4) the standards of conduct applicable to 
tax return preparers for disclosed and undisclosed positions taken on 
tax returns; and (5) the penalty compliance obligations applicable to 
tax return preparers. Additional guidance was provided in Notice 2008-
12 (2008-3 IRB 280) with respect to the implementation of the tax 
return preparer signature requirement of section 6695(b), and in Notice 
2008-11 (2008-3 IRB 279), which clarified the earlier transition relief 
provided in Notice 2007-54 (2007-27 IRB 12 (July 2, 2007)). Notice 
2008-46 (2008-18 IRB 868) was released on April 16, 2008 and added 
certain returns and documents to Exhibits 1, 2, and 3 of Notice 2008-
13.

Explanation of Provisions

    In developing these proposed regulations, the Treasury Department 
and the IRS recognize that the majority of tax return preparers serve 
the interests of their clients and the tax system by preparing complete 
and accurate returns. Tax return preparers are critical to ensuring 
compliance with the Federal tax laws and are an important component in 
the IRS's administration of those laws. The proposed regulations intend 
to balance the interests of the IRS in curtailing the activities of 
noncompliant tax return

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preparers against the burden imposed on all tax return preparers in 
complying with the requirements imposed by the 2007 Act and these 
proposed regulations.
    The Treasury Department and the IRS also recognize that the 
government has a number of tools to monitor and sanction tax return 
preparers, and will continue to coordinate the application of penalties 
under sections 6694, 6695, 6695A, 6700, 6701, 6702, and Circular 230, 
as well as other applicable penalties and criminal sanctions.
    The IRS will assess penalties under section 6694 in appropriate 
cases. In keeping with a balanced enforcement program for tax return 
preparers, the IRS intends to modify its internal guidance so that a 
referral by revenue agents to the IRS Office of Professional 
Responsibility (OPR) will not be per se mandatory when the IRS assesses 
a tax return preparer penalty under section 6694(a) against a tax 
return preparer who is also a practitioner within the meaning of 
Circular 230. This change is consistent with the general administrative 
recommendations made in the legislative history of the amendments made 
by OBRA 1989 to the section 6694 penalty. See H.R. Conf. Rep. 101-386, 
101st Cong., 1st Sess. at 662 (1989). In matters involving non-willful 
conduct, the IRS will generally look for a pattern of failing to meet 
the required penalty standards under section 6694(a) before making a 
referral to OPR, although any egregious conduct subjecting a tax return 
preparer to penalty may also form a basis for a referral to OPR.

Proposed Changes

    The following is a summary of the proposed changes to the existing 
regulations affecting tax return preparers. The changes included in 
these proposed regulations are discussed in order of the Code sections 
to which they relate. When appropriate, cross-references to 
definitional sections are included. Significantly, the definition of 
tax return preparer, which maintains the concepts in the existing 
regulations of signing and nonsigning tax return preparers, is located 
at the end of these proposed regulations in Sec.  301.7701-15, and that 
section is cross-referenced in the relevant sections of the regulations 
under sections 6694 and 6695.

Furnishing of Copy of the Tax Return

    Section 1.6107-1(a), which requires signing tax return preparers to 
furnish the taxpayer a copy of the prepared return, is proposed to be 
amended to provide that for electronically filed Forms 1040EZ, ``Income 
Tax Return for Single Filers and Joint Filers With No Dependents,'' and 
Forms 1040A, ``U.S. Individual Income Tax Return,'' filed for the 2009, 
2010 and 2011 taxable years, the return information may be provided on 
a replica of a Form 1040, ``U.S. Individual Income Tax Return,'' that 
provides all of the return information. For other electronically filed 
returns, the information may be provided on a replica of an official 
form that provides all of the information. This amendment addresses the 
IRS' transitional issues in implementing the Modernized e-File platform 
for the Form 1040 series of returns.

Date Return Is Prepared

    Proposed Sec.  1.6694-1(a)(2) defines the date a return or claim 
for refund is prepared as the date it is signed by the tax return 
preparer, and also provides that if the tax return preparer fails to 
sign the return when otherwise required to do so, the date the return 
is deemed prepared is the date the return is filed. In the case of a 
nonsigning tax return preparer, the relevant date is the date the 
person provides the advice on the position that results in the 
understatement. This date will be determined based on all the facts and 
circumstances.

Defining the Preparer Within a Firm

    Current Sec.  1.6694-1(b)(1) provides a ``one preparer per firm'' 
rule. Specifically, if a signing tax return preparer is associated with 
a firm, that individual, and no other individual in the firm, is 
treated as a tax return preparer with respect to the return or claim 
for purposes of section 6694. Under the current regulations, if two or 
more individuals associated with a firm are tax return preparers with 
respect to a return or claim for refund, and none of them is the 
signing tax return preparer, only one of the individuals is a 
nonsigning tax return preparer with respect to that return or claim for 
purposes of section 6694. In such a case, ordinarily, the individual 
who is a tax return 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. The ``one preparer per 
firm'' rule and the corollary rule included in Sec.  1.6694-2(d)(5) of 
the current regulations precluding a tax return preparer from relying 
on the advice of an individual associated with the tax return 
preparer's same firm for purposes of penalty protection were intended 
to eliminate the administrative difficulty of attempting to apply the 
section 6694 penalty on an intra-firm basis.
    The Treasury Department and the IRS believe that the amendments to 
section 6694 made by the 2007 Act, together with the evolution in 
existing business practices and the increased complexity of the Federal 
tax law that has created an increased need for specialization, require 
reconsideration of the ``one preparer per firm'' rule. Specifically, 
the Treasury Department and the IRS believe this evolution requires the 
adoption of a framework that centers on the return or claim for refund 
on a position-by-position basis, with the focus of any penalty on the 
position(s) giving rise to the understatement on the return or claim 
for refund and any responsible parties with respect to such 
position(s). Thus the Treasury Department and the IRS believe that the 
``one preparer per firm'' rule is no longer appropriate and have 
proposed to adopt a framework defining a preparer-per-position within a 
firm.
    Under both the current and the proposed regulations, an individual 
is a tax return preparer subject to section 6694 if the individual is 
primarily responsible for the position on the return or claim for 
refund giving rise to the understatement.
    Under proposed Sec.  6694-1(b)(1), only one person within a firm 
will be considered primarily responsible for each position giving rise 
to an understatement and, accordingly, be subject to the penalty. In 
the course of identifying the individual who is primarily responsible 
for the position, the IRS may advise multiple individuals within the 
firm that it may be concluded that they are the individual within the 
firm who is primarily responsible. In some circumstances, there may be 
more than one tax return preparer who is primarily responsible for the 
position(s) giving rise to an understatement if multiple tax return 
preparers are employed by, or associated with, different firms.
    Proposed Sec.  1.6694-1(b)(2) provides that the individual who 
signs the return or claim for refund as the tax return preparer will 
generally be considered the person that is primarily responsible for 
all of the positions on the return or claim for refund giving rise to 
an understatement. The ``one preparer per firm'' rule, however, is 
revised by these proposed regulations if it is concluded based upon 
information received from the signing tax return preparer (or other 
relevant information from a source other than the signing tax return 
preparer) that another person within the signing tax return preparer's 
same firm was primarily responsible for the position(s)

[[Page 34564]]

giving rise to the understatement. In this situation, the ``one 
preparer per firm'' rule in the current regulations could unduly limit 
the IRS to assessing the penalty against a person who may have overall 
responsibility in terms of signing the return, but who may lack 
detailed knowledge of, or responsibility for, a problematic return 
position, and who reasonably relied on another professional at the same 
firm with greater knowledge of, and responsibility for, the accuracy of 
a position giving rise to the understatement.
    The Treasury Department and the IRS believe that amending the 
regulations to better target the person or persons responsible for the 
position(s) giving rise to the understatement will further compliance 
and result in more equitable administration of the tax return preparer 
penalty regime.
    Proposed Sec.  1.6694-1(b)(3) establishes a similar rule for 
situations when there are one or more nonsigning tax return preparers 
at the same firm. If there are one or more nonsigning tax return 
preparers at the firm and no signing tax return preparer within the 
firm, the individual within the firm with overall supervisory 
responsibility for the position(s) giving rise to the understatement is 
the tax return preparer who is primarily responsible for the position 
for purposes of section 6694. Additionally, if after the application of 
proposed Sec.  1.6694-1(b)(2) it is concluded that the signer is not 
primarily responsible for the position or the IRS cannot conclude which 
individual (as between the signing tax return preparer and other 
persons within the firm) is primarily responsible for the position, the 
individual nonsigning tax return preparer within the firm with overall 
supervisory responsibility for the position(s) is the tax return 
preparer who is primarily responsible for the position(s) giving rise 
to the understatement.
    This rule in proposed Sec.  1.6694-1(b)(3) is intended to address 
the potential for uncertainty regarding the identification of the 
primarily responsible tax return preparer prior to the time of the 
expiration of the period of limitations on making an assessment under 
section 6694(a). The proposed rule is distinguished from the current 
``one preparer per firm'' rule in the current regulations because under 
the proposed rule the IRS may assess the penalty against either the 
signing tax return preparer or the nonsigning tax return preparer with 
overall supervisory responsibility for the position(s) giving rise to 
an understatement depending on the facts and circumstances. 
Specifically, when the facts indicate that the signing tax return 
preparer is the primarily responsible tax return preparer under 
proposed Sec.  1.6694-1(b)(1) and (b)(2), the IRS may assess the 
section 6694 penalty against that individual when appropriate under the 
statute and regulations. In situations when the facts indicate that the 
nonsigning tax return preparer with overall supervisory responsibility 
is the primarily responsible tax return preparer under proposed Sec.  
1.6694-1(b)(1) and (b)(3), the IRS may assess the section 6694 penalty 
against that individual when appropriate. In situations when it is 
unclear which individual, as between the signer and other nonsigning 
tax return preparers at the firm, the IRS may assess the section 6694 
penalty against the nonsigning tax return preparer with overall 
supervisory responsibility with respect to the position giving rise to 
the understatement when appropriate. The Treasury Department and the 
IRS specifically request comments regarding the approach taken in these 
proposed regulations and any recommendations to improve this rule.
    As described in this preamble, conforming rules are included in 
Sec.  1.6694-1(f) of the proposed regulations regarding computation of 
the ``income derived (or to be derived)'' from the firm and the 
individual(s) associated with the firm, in order to ensure that the 
same income is not counted twice in determining the amount of income 
subject to the section 6694 penalty.

Reliance on Information Provided

    Section 1.6694-1(e) of the current regulations allows a tax return 
preparer generally to rely in good faith without verification upon 
information furnished by the taxpayer. Proposed Sec.  1.6694-1(e) 
allows similar reliance, but provides that a tax return preparer may 
not rely on information provided by taxpayers with respect to legal 
conclusions on Federal tax issues.
    The proposed regulations expand on the current regulations to 
provide that a tax return preparer may rely in good faith and without 
verification on information furnished by another advisor, another tax 
return preparer, or other party (even when the advisor or tax return 
preparer is within the tax return preparer's same firm). Similarly, a 
tax return preparer may rely in good faith without verification upon a 
tax return that has been previously prepared by a taxpayer or another 
tax return preparer and filed with the IRS. The tax return preparer, 
however, may not ignore the implications of information furnished to 
the tax return preparer or actually known by the tax return preparer, 
and must make reasonable inquiries if the information as furnished 
appears to be incorrect or incomplete. The Treasury Department and the 
IRS believe that this expansion of the current rules regarding reliance 
is necessary given the heightened standards imposed on tax return 
preparers by the 2007 Act and the increased complexity of the tax law, 
which often requires signing and nonsigning tax return preparers to 
rely on the work of others in ensuring compliance.

Income Derived Determination in Computing Penalty Amount

    Proposed Sec.  1.6694-1(f) defines ``income derived (or to be 
derived)'' with respect to a return or claim for refund as all 
compensation the tax return preparer receives or expects to receive 
with respect to the engagement of preparing the return or claim for 
refund or providing tax advice (including research and consultation) 
with respect to the position(s) taken on the return or claim for refund 
that gave rise to the understatement. In the situation of a tax return 
preparer who is not compensated directly by the taxpayer, but rather by 
a firm that employs the tax return preparer or with whom the tax return 
preparer is associated, income derived (or to be derived) means all 
compensation the tax return preparer receives from the firm that can be 
reasonably allocated to the engagement of preparing the return or claim 
for refund or providing tax advice (including research and 
consultation) with respect to the position(s) taken on the return or 
claim for refund that gave rise to the understatement. In the situation 
where a firm that employs the individual tax return preparer (or the 
firm with which the individual tax return preparer is associated) is 
subject to a penalty under section 6694(a) or (b), income derived (or 
to be derived) means all compensation the firm receives or expects to 
receive with respect to the engagement of preparing the return or claim 
for refund or providing tax advice (including research and 
consultation) with respect to the position(s) taken on the return or 
claim for refund that gave rise to the understatement.
    If the tax return preparer or the tax return preparer's firm has 
multiple engagements related to the same return or claim for refund, 
only those engagements relating to the position(s) taken on the return 
or claim for refund that gave rise to the understatement are considered 
for purposes of computing the income derived (or to be derived). In the 
situation of a tax return preparer

[[Page 34565]]

who is not compensated directly by the taxpayer, but rather by a firm 
that employs the tax return preparer or with whom the tax return 
preparer is associated, income derived (or to be derived) means all 
compensation the tax return preparer receives from the firm that can be 
reasonably allocated to the relevant firm engagements.
    The proposed regulations also provide that only compensation for 
time spent on tax advice that is given with respect to events that have 
occurred at the time the advice is rendered and that relates to the 
position(s) giving rise to the understatement will be taken into 
account for purposes of calculating the section 6694 penalty. This rule 
is intended to be consistent with the definition of tax return preparer 
in Sec.  301.7701-15(b)(2)(i).
    The proposed regulations provide that it may be concluded, based 
upon information received from the tax return preparer, that an 
appropriate allocation of compensation attributable to the position(s) 
giving rise to the understatement on the return or claim for refund is 
less than the total amount of compensation associated with the 
engagement. For example, it may be concluded that the number of hours 
of the engagement spent on the position(s) giving rise to the 
understatement may be less than the total hours associated with the 
engagement. If this is concluded, the amount of the penalty will be 
calculated based upon the compensation attributable to the position(s) 
giving rise to the understatement. Otherwise, the total amount of 
compensation from the engagement will be the amount of income derived 
for purposes of calculating the penalty under section 6694.
    The proposed regulations also clarify that the amount of penalties 
assessed against the individual and the firm shall not exceed 50 
percent of the income derived (or to be derived) by the firm from the 
relevant engagement(s) relating to the position(s) giving rise to an 
understatement. The portion of the total amount of penalty assessed 
against the individual tax return preparer shall not exceed 50 percent 
of the individual's compensation attributable to the engagement that 
relates to the position(s) giving rise to an understatement. In other 
words, the same income will not be taken into consideration more than 
once in calculating the penalty against an individual tax return 
preparer and the individual tax return preparer's firm. The Treasury 
Department and the IRS also anticipate that Circular 230 will be 
revised to state that the IRS generally will not stack the section 6694 
penalty and monetary penalties under 31 U.S.C. section 330 with respect 
to the same conduct.

Firm Liability

    Proposed Sec. Sec.  1.6694-2(a)(2) and 1.6694-3(a)(2) are the same 
as Sec. Sec.  1.6694-2(a)(2) and 1.6694-3(a)(2) of the current 
regulations regarding when a firm is liable for the section 6694(a) or 
(b) penalty with one exception. Proposed Sec. Sec.  1.6694-2(a)(2)(iii) 
and 1.6694-3(a)(2)(iii) provide that a firm is also subject to the 
penalty when the firm's review procedures were disregarded by the firm 
through willfulness, recklessness, or gross indifference (including 
ignoring facts that would lead a person of reasonable prudence and 
competence to investigate or ascertain) in the formulation of the 
advice, or the preparation of the return or claim for refund, that 
included the position for which the penalty is imposed.

Reasonable Belief of More Likely Than Not

    Proposed Sec.  1.6694-2(b)(1) provides that the ``reasonable belief 
that the position would more likely than not be sustained on its 
merits'' standard will be satisfied if the tax return preparer analyzes 
the pertinent facts and authorities and, in reliance upon that 
analysis, reasonably concludes in good faith that the position has a 
greater than 50 percent likelihood of being sustained on its merits. 
Whether a tax return preparer meets this standard will be determined 
based upon all facts and circumstances, including the tax return 
preparer's due diligence. In determining the level of diligence in a 
particular case, the IRS will take into account the tax return 
preparer's experience with the area of tax law and familiarity with the 
taxpayer's affairs, as well as the complexity of the issues and facts 
in the case. The proposed regulations also provide that a tax return 
preparer may meet the ``reasonable belief that the position would more 
likely than not be sustained on its merits'' standard if a position is 
supported by a well-reasoned construction of the applicable statutory 
provision despite the absence of other types of authority, or if the 
tax return preparer relies on information or advice furnished by a 
taxpayer, advisor, another tax return preparer, or other party (even 
when the advisor or tax return preparer is within the tax return 
preparer's same firm), as provided in proposed Sec.  1.6694-1(e).
    Proposed Sec.  1.6694-2(b)(2) provides that a tax return preparer 
may not rely on unreasonable assumptions, while proposed Sec.  1.6694-
2(b)(3) states that the authorities contained in Sec.  1.6662-
4(d)(3)(iii) (or any successor provision) are to be considered in 
determining whether a position satisfies the ``more likely than not'' 
standard. Proposed Sec.  1.6694-2(b)(4) also provides examples that 
illustrate positions meeting the ``reasonable belief that the position 
would more likely than not be sustained on its merits'' standard.

Reasonable Basis

    Proposed Sec. Sec.  1.6694-2(c)(1) and (2) establish that the 
``reasonable basis'' standard that must be met for disclosed positions 
is the same standard as defined in Sec.  1.6662-3(b)(3) (or any 
successor provision). The proposed regulations also provide that, to 
meet the ``reasonable basis'' standard, a tax return preparer may rely 
in good faith, without verification, upon information furnished by a 
taxpayer, advisor, another tax return preparer, or other party (even 
when the advisor or tax return preparer is within the tax return 
preparer's same firm), as provided in proposed Sec.  1.6694-1(e).

Adequate Disclosure

    Section 1.6694-2(c)(3) builds on the current regulations and the 
interim guidance provided in Notice 2008-13 and provides the rules for 
disclosure of a position for which there is a ``reasonable basis'' but 
for which the tax return preparer does not have a ``reasonable belief 
that the position would more likely than not be sustained on its 
merits.''
    For a signing tax return preparer within the meaning of Sec.  
301.7701-15(b)(1), the proposed regulations provide that a position may 
be disclosed in one of five ways. First, the position may be disclosed 
on a properly completed and filed Form 8275, Disclosure Statement, or 
Form 8275-R, Regulation Disclosure Statement, as appropriate, or on the 
tax return in accordance with the annual revenue procedure. See Revenue 
Procedure 2008-14 (2008-7 IRB 435 (February 19, 2008)). Second, for 
income tax returns, if the position does not meet the ``substantial 
authority'' standard described in Sec.  1.6662-4(d), disclosure of the 
position is adequate if the tax return preparer provides the taxpayer 
with a prepared tax return that includes the appropriate disclosure. 
Third, for income tax returns, if the position meets the ``substantial 
authority'' standard, disclosure of the position is adequate if the tax 
return preparer advises the taxpayer of all of the penalty standards 
applicable to the taxpayer under section 6662. Fourth, for income tax 
returns, if the position may be described as a tax

[[Page 34566]]

shelter under section 6662(d)(2)(C) or a reportable transaction to 
which section 6662A applies, disclosure of the position is adequate if 
the tax return preparer advises the taxpayer that there needs to be at 
a minimum ``substantial authority'' for the position, that the taxpayer 
must possess a ``reasonable belief that the tax treatment was more 
likely than not'' the proper treatment, and that disclosure will not 
protect the taxpayer from assessment of an accuracy-related penalty. 
Fifth, for tax returns or claims for refund that are subject to 
penalties other than the accuracy-related penalty for substantial 
understatements under sections 6662(b)(2) and (d), the tax return 
preparer advises the taxpayer of the penalty standards applicable to 
the taxpayer under section 6662. This fifth rule is intended to address 
the situation when the penalty standard applicable to the taxpayer is 
based on compliance with requirements other than disclosure on the 
return (for example, section 6662(e)). In order to establish that the 
tax return preparer's disclosure obligation was satisfied, the tax 
return preparer must document contemporaneously in the tax return 
preparer's files that the information or advice required by the 
proposed regulations was provided.
    In the case of a nonsigning tax return preparer within the meaning 
of Sec.  301.7701-15(b)(2), the position may be disclosed in one of 
three ways. First, the position may be disclosed on a properly 
completed and filed Form 8275, ``Disclosure Statement,'' or Form 8275-
R, ``Regulation Disclosure Statement,'' as appropriate, or on the tax 
return in accordance with the annual revenue procedure. Second, a 
nonsigning tax return preparer may meet the disclosure standards if the 
nonsigning tax return preparer advises the taxpayer of all 
opportunities to avoid penalties under section 6662 that could apply to 
the position and advises the taxpayer of the standards for disclosure 
to the extent applicable. Third, disclosure of a position is adequate 
if a nonsigning tax return preparer advises another tax return preparer 
that disclosure under section 6694(a) may be required. The nonsigning 
tax return preparer must document contemporaneously in the tax return 
preparer's files that this advice required by the proposed regulations 
was provided.
    In order to satisfy the disclosure standards when the position is 
not disclosed on or with the return, each return position for which 
there is a ``reasonable basis'' but for which the tax return preparer 
does not have a ``reasonable belief that the position would more likely 
than not be sustained on the merits'' must be addressed by the tax 
return preparer. Thus, the advice to the taxpayer with respect to each 
position must be particular to the taxpayer and tailored to the 
taxpayer's facts and circumstances. No form of a general boilerplate 
disclaimer will satisfy these standards. Proposed Sec.  1.6694-2(c)(iv) 
provides that disclosure in the case of items attributable to a pass-
through entity is adequate if made at the entity level in accordance 
with the rules in Sec.  1.6662-4(f)(5). For example, a tax return 
preparer of a partnership tax return need only advise the partnership 
in order to satisfy any of the above disclosure rules and does not need 
to advise each individual partner in the partnership of the applicable 
penalties.

Reasonable Cause

    Proposed Sec.  1.6694-2(d) maintains the rules in the current 
regulations regarding reasonable cause and good faith, except that 
Sec.  1.6694-2(d) is proposed to be revised to provide that whether a 
position is supported by a generally accepted administrative or 
industry practice is an additional factor to consider in determining 
whether the tax return preparer acted with reasonable cause and good 
faith. This provision is intended to address situations in the absence 
of published guidance when administrative or industry practice has 
developed that would not reasonably be subject to challenge by the IRS.
    The reasonable cause factor regarding reliance on advice of another 
tax return preparer is also expanded to allow a tax return preparer to 
reasonably rely on information or advice furnished by a taxpayer, 
advisor, another tax return preparer, or other party (even when the 
advisor or tax return preparer is within the tax return preparer's same 
firm), as provided in proposed Sec.  1.6694-1(e).

Electronically Signed Returns

    Proposed Sec.  1.6695-1(b)(2) provides that, in the case of an 
electronically signed tax return, a tax return preparer need not sign 
the return prior to presenting a completed copy of the return to the 
taxpayer. The tax return preparer, however, must furnish all of the 
information to the taxpayer contemporaneously with furnishing the Form 
8879, IRS e-file Signature Authorization, or similar IRS e-file 
signature form. The information may be furnished on a replica of an 
official form that provides all of the information.

Due Diligence for Earned Income Credit

    Proposed Sec.  1.6695-2(b)(3) establishes a reasonableness standard 
for signing tax return preparers' due diligence requirements with 
respect to determining eligibility for the earned income credit and 
adds examples.

Claims for Refund or Credit by Tax Return Preparers or Appraisers

    Proposed Sec.  1.6696-1, discussing the procedures for filing 
claims for credit or refund for penalties assessed against tax return 
preparers under sections 6694 or 6695, is revised to also cover the new 
appraiser penalty under section 6695A. Section 6695A was enacted by 
section 1219 of the Pension Protection Act of 2006 (Pub. L. 109-280 
(120 Stat. 780, 1084-86) (August 17, 2006)), as amended by the Tax 
Technical Corrections Act of 2007 (Public Law 110-172 (121 Stat. 2473, 
2474) December 29, 2007)). A separate regulation project will provide 
guidance under section 6695A.

Definition of Tax Return Preparer

    Proposed Sec. Sec.  301.7701-15(b)(1) and (2) add to the section 
7701 regulations the definitions of ``signing tax return preparer'' and 
``nonsigning tax return preparer'' that are included in Sec.  1.6694-1 
of the current regulations. Proposed Sec.  301.7701-15(b)(1) provides 
that a signing tax return preparer is any tax return preparer who signs 
or who is required to sign a return or claim for refund as a tax return 
preparer pursuant to Sec.  1.6695-1(b).
    Proposed Sec.  301.7701-15(b)(2) provides that a nonsigning tax 
return preparer is any tax return preparer who is not a signing tax 
return preparer but who prepares all or a substantial portion of a 
return or claim for refund within the meaning of Sec.  301.7701-
15(b)(3) with respect to events that have occurred at the time the 
advice is rendered. In determining whether an individual is a 
nonsigning tax return preparer, the proposed regulations provide that 
any time spent on advice that is given with respect to events that have 
occurred, which is less than 5 percent of the aggregate time incurred 
by the person with respect to the position(s) giving rise to the 
understatement will not be taken into account in determining whether an 
individual is a nonsigning tax return preparer. The Treasury Department 
and the IRS believe that this less than 5 percent test will encourage 
tax professionals who principally rendered advice regarding events that 
had not yet occurred to provide follow-up advice requested by a 
taxpayer without the concern that, by providing

[[Page 34567]]

such advice to a taxpayer, the advisor would become a tax return 
preparer under proposed Sec.  301.7701-15(b)(2) and (3).
    Consistent with the current regulations and the legislative history 
of the 1976 Act, proposed Sec.  301.7701-15(b)(3)(i) clarifies that 
whether a schedule, entry, or other portion of a return or claim for 
refund is a substantial portion is determined based upon all facts and 
circumstances, and a single tax entry may constitute a substantial 
portion of the tax required to be shown on a return. The proposed 
regulations include additional factors to consider in determining 
whether a schedule, entry, or other portion of a return or claim for 
refund is a substantial portion, such as the size and complexity of the 
item relative to the taxpayer's gross income and the size of the 
understatement attributable to the item compared to the taxpayer's 
reported tax liability.
    Proposed Sec.  301.7701-15(b)(3)(ii) increases the de minimis 
exception in determining a substantial portion of a return or claim for 
refund for nonsigning tax return preparers. Under the proposed 
regulations, the de minimis exception applies if the item giving rise 
to the understatement is (i) less than $10,000, or (ii) less than 
$400,000 if the item is also less than 20 percent of the taxpayer's 
gross income (or, for an individual, the individual's adjusted gross 
income). This de minimis rule does not apply for signing tax return 
preparers within the meaning of Sec.  301.7701-15(b)(1). This change to 
the regulations updates the current de minimis amounts to reflect the 
passage of time since those amounts were set in 1977. The Treasury 
Department and the IRS are considering whether other de minimis rules 
applicable to nonsigning tax return preparers of non-income tax returns 
are warranted.
    Consistent with the interim guidance set forth in Notice 2008-13, 
Sec.  301.7701-15(b)(4) is proposed to be amended by revising the 
definitions of ``return'' and ``claim for refund'' to only include 
preparers of returns and claims for refund that are specifically 
identified in published guidance in the Internal Revenue Bulletin. The 
Treasury Department and the IRS will publish this guidance 
simultaneously with the publication of final regulations and will 
likely maintain the three tiered approach used in the exhibits to 
Notice 2008-13, subject to any appropriate modifications. Under the 
substantial portion rule in section 7701(a)(36)(A), preparation of a 
broad range of information returns, schedules, and other documents can 
subject a person to the section 6694 penalties even though the 
documents may not themselves give rise to an understatement. 
Accordingly, the Treasury Department and the IRS believe that including 
a list of returns or other documents, the preparation of which may 
subject a tax return preparer to penalties, will further compliance by 
not unduly increasing the burden on persons preparing information 
returns and other documents.

Cross-References

    Conforming changes are made in Sec. Sec.  1.6060-1, 1.6107-1, 
1.6109-2, 1.6694-0, 1.6694-1, 1.6694-4, 1.6695-1, 1.6695-2, 1.6696-1, 
and 301.7701-15 to replace references to income tax return preparers 
with references to tax return preparers, consistent with the provisions 
of the 2007 Act. Conforming cross references are also made to Part 20, 
Estate Tax; Estates of Decedents Dying After August 16, 1954; Part 25, 
Gift Tax; Gifts Made After December 31, 1954; Part 26, Generation-
Skipping Transfer Tax Under the Tax Reform Act of 1986; Part 31, 
Employment Taxes and Collection of Income Tax at Source; Part 40, 
Procedural Excise Tax; Part 41, Highway Use Tax; Part 44, Wagering Tax; 
Part 53, Foundation and Similar Excise Taxes; Part 54, Pension Excise 
Taxes; Part 55, Excise Tax on Real Estate Investment Trusts and 
Regulated Investment Company Taxes; Part 56, Public Charity Excise 
Taxes; Part 156, Excise Tax on Greenmail; and Part 157, Excise Tax on 
Structured Settlement Factoring Transactions; to conform these parts 
with the provisions in Parts 1 and 301, consistent with the provisions 
of the 2007 Act.

Availability of IRS Documents

    The IRS notices referred to in this preamble are published in the 
Internal Revenue Bulletin and are available at http://www.irs.gov.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations.
    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), requires the agency to ``prepare 
and make available for public comment an initial regulatory flexibility 
analysis'' that will ``describe the impact of the proposed rule on 
small entities.'' (5 U.S.C. 603(a)). Section 605 of the RFA provides an 
exception to this requirement if the agency certifies that the proposed 
rulemaking will not have a significant economic impact on a substantial 
number of small entities.
    The proposed rules affect tax return preparers. The IRS estimates 
there are 38,566 tax return preparation firms and 260,338 self-employed 
tax return preparers that qualify as small entities. Therefore, the IRS 
has determined that these proposed rules will have an impact on a 
substantial number of small entities.
    The IRS has determined, however, that the impact on entities 
affected by the proposed rule will not be significant. The statute and 
proposed regulations would require entities that employ tax return 
preparers to retain a record of the name, taxpayer identification 
number and principal place of work of each tax return preparer 
employed. The IRS estimates that this would not require purchase of 
additional software and would take five minutes per tax return preparer 
employed. The statute and proposed regulations would also require tax 
return preparers to retain a complete copy of a return (or claim for 
refund) or a list of the name, taxpayer identification number and 
taxable year for each return (or claim for refund) and the name of the 
tax return preparer required to sign the return or claim for refund. 
Many tax return preparers have copying machines or scanners and already 
make copies of the returns prepared, and the IRS estimates this would 
not require the purchase of additional equipment. The IRS estimates 
that it would take an average of five minutes to make copies or prepare 
a record of the returns prepared. Accordingly, the burden on employers 
of tax return preparers to make a record of the name, taxpayer 
identification number, and principal place of work of each employed tax 
return preparer, and a copy of each return or claim for refund 
prepared, or a record, is insignificant.
    The proposed regulations also allow the tax return preparer to 
generally avoid imposition of the tax return preparer penalties under 
section 6694 in cases when a tax return position meets the 
``substantial authority'' standard but not the ``reasonable belief that 
the position would more likely than not be sustained on its merits'' 
standard if the tax return preparer advises the taxpayer of the penalty 
standards applicable to the taxpayer, and contemporaneously documents 
in the tax return preparer's files that this information or advice was 
provided. Often, tax return preparers will choose not to advise the 
taxpayer of the applicable penalty standards and will instead disclose 
the position on a

[[Page 34568]]

properly completed and filed Form 8275, ``Disclosure Statement,'' or 
Form 8275-R, ``Regulation Disclosure Statement,'' as appropriate, or on 
the tax return in accordance with the annual revenue procedure. In 
those instances when the tax return preparer elects to advise the 
taxpayer of the penalty standards, the IRS estimates that it would take 
an average of 15 minutes to document this advice. Accordingly, the 
burden on those who choose this option is insignificant.
    Although the proposed regulations also conform the standards of 
conduct and tax return preparer penalties to the provisions of the 2007 
Act, tax return preparers already enroll in educational seminars or 
training programs to keep up to date with the latest changes to the 
Code, and the provisions of the 2007 Act and the proposed regulations 
will generally be part of that training.
    Moreover, these proposed regulations are required to comply with 
the provisions of section 8246 of the 2007 Act and flow directly from 
amendments to the Code contained in the 2007 Act.
    Based on these facts, the IRS hereby certifies that the collection 
of information contained in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a Regulatory Flexibility Analysis is not required.
    Pursuant to section 7805(f) of the Code, these regulations have 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed regulations and how they can be made easier to 
understand. Comments are requested on the examples in the proposed 
regulations, and commentators are specifically invited to suggest 
changes to these examples or to suggest new examples that they believe 
would better illustrate the principles that should be included in the 
final regulations. The IRS and the Treasury Department also request 
comments on the accuracy of the certification that the regulations in 
this document will not have a significant economic impact on a 
substantial number of small entities. All comments will be available 
for public inspection and copying.
    A public hearing has been scheduled for Monday, August 18, 2008, at 
10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by August 18, 2008 and an outline of the topics to 
be discussed and the time to be devoted to each topic (a signed 
original and eight (8) copies) by Monday, August 4, 2008. A period of 
10 minutes will be allotted to each person for making comments. An 
agenda showing the scheduling of the speakers will be prepared after 
the deadline for receiving outlines has passed. Copies of the agenda 
will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are Matthew S. 
Cooper and Michael E. Hara, Office of the Associate Chief Counsel 
(Procedure and Administration).

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

26 CFR Part 26

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
Retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

26 CFR Part 40

    Excise taxes, Reporting and recordkeeping requirements.

26 CFR Part 41

    Excise, Motor vehicles, Reporting and recordkeeping requirements.

26 CFR Part 44

    Excise, Gambling, Reporting and recordkeeping requirements.

26 CFR Part 53

    Excise taxes, Foundations, Investments, Lobbying, Reporting and 
recordkeeping requirements.

26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

26 CFR Part 55

    Excise taxes, Investments, Reporting and recordkeeping 
requirements.

26 CFR Part 56

    Excise taxes, Lobbying, Nonprofit organizations, Reporting and 
recordkeeping requirements.

26 CFR Part 156

    Excise taxes, Reporting and recordkeeping requirements.

26 CFR Part 157

    Excise taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 20, 25, 26, 31, 40, 41, 44, 53, 54, 
55, 56, 156, 157, and 301 are proposed to be amended as follows:

PART 1--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * *
    Section 1.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 1.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 1.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 1.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 2. Section 1.6060-1 is amended by revising the section heading 
and paragraphs (a) and (c) and adding paragraph (d) to read as follows:


Sec.  1.6060-1  Reporting requirements for tax return preparers.

    (a) In general. (1) Each person who employs one or more signing tax 
return

[[Page 34569]]

preparers to prepare any return of tax or claim for refund of tax, 
other than for the person, at any time during a return period shall 
satisfy the requirements of section 6060 of the Internal Revenue Code 
by--
    (i) Retaining a record of the name, taxpayer identification number, 
and principal place of work during the return period of each tax return 
preparer employed by the person at any time during that period; and
    (ii) Making that record available for inspection upon request by 
the Commissioner.
    (2) The record described in this paragraph (a) must be retained and 
kept available for inspection for the 3-year period following the close 
of the return period to which that record relates.
    (3) The person may choose any form of documentation to be used 
under this section as a record of the signing tax return preparers 
employed during a return period. However, the record must disclose on 
its face which individuals were employed as tax return preparers during 
that period.
    (4) For the definition of the term ``signing tax return preparer,'' 
see section 7701(a)(36) and Sec.  301.7701-15(b)(1) of this chapter. 
For the definition of the term ``return period,'' see paragraph (b) of 
this section.
    (5)(i) For purposes of this section, any individual who, in acting 
as a signing tax return preparer, is not employed by another tax return 
preparer shall be treated as his or her own employer. Thus, a sole 
proprietor shall retain and make available a record with respect to 
himself (or herself) as provided in this section.
    (ii) A partnership shall, for purposes of this section, be treated 
as the employer of the partners of the partnership and shall retain and 
make available a record with respect to the partners and others 
employed by the partnership as provided in this section.
* * * * *
    (c) Penalty. For the civil penalty for failure to retain and make 
available a record of the tax return preparers employed during a return 
period as required under this section, or for failure to include an 
item in the record required to be retained and made available under 
this section, see Sec.  1.6695-1(e).
    (d) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 3. Section 1.6107-1 is revised to read as follows:


Sec.  1.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) Furnishing copy to taxpayer. A person who is a signing tax 
return preparer of any return of tax or claim for refund of tax under 
the Internal Revenue Code shall furnish a completed copy of the return 
or claim for refund to the taxpayer (or nontaxable entity) not later 
than the time the return or claim for refund is presented for the 
signature of the taxpayer (or nontaxable entity). For electronically 
filed Forms 1040EZ, ``Income Tax Return for Single Filers and Joint 
Filers With No Dependents,'' and Form 1040A, ``U.S. Individual Income 
Tax Return,'' filed for the 2009, 2010 and 2011 taxable years, the 
information may be provided on a replica of a Form 1040, ``U.S. 
Individual Income Tax Return,'' that provides all of the information. 
For other electronically filed returns, the information may be provided 
on a replica of an official form that provides all of the information. 
The signing tax return preparer may, at its option, request a receipt 
or other evidence from the taxpayer (or nontaxable entity) sufficient 
to show satisfaction of the requirement of this paragraph (a).
    (b) Copy or record to be retained. (1) A person who is a signing 
tax return preparer of any return or claim for refund shall--
    (i)(A) Retain a completed copy of the return or claim for refund; 
or
    (B) Retain a record, by list, card file, or otherwise of the name, 
taxpayer identification number, and taxable year of the taxpayer (or 
nontaxable entity) for whom the return or claim for refund was 
prepared, and the type of return or claim for refund prepared;
    (ii) Retain a record, by retention of a copy of the return or claim 
for refund, maintenance of a list or card file, or otherwise, for each 
return or claim for refund presented to the taxpayer (or nontaxable 
entity), of the name of the individual tax return preparer required to 
sign the return or claim for refund pursuant to Sec.  1.6695-1(b); and
    (iii) Make the copy or record of returns and claims for refund and 
record of the individuals required to sign available for inspection 
upon request by the Commissioner.
    (2) The material described in this paragraph (b) shall be retained 
and kept available for inspection for the 3-year period following the 
close of the return period during which the return or claim for refund 
was presented for signature to the taxpayer (or nontaxable entity). In 
the case of a return that becomes due (with extensions, if any) during 
a return period following the return period during which the return was 
presented for signature, the material shall be retained and kept 
available for inspection for the 3-year period following the close of 
the later return period in which the return became due. For the 
definition of ``return period,'' see section 6060(c). If the person 
subject to the record retention requirement of this paragraph (b) is a 
corporation or a partnership that is dissolved before completion of the 
3-year period, then all persons who are responsible for the winding up 
of the affairs of the corporation or partnership under state law shall 
be subject, on behalf of the corporation or partnership, to these 
record retention requirements until completion of the 3-year period. If 
state law does not specify any person or persons as responsible for 
winding up, then, collectively, the directors or general partners shall 
be subject, on behalf of the corporation or partnership, to the record 
retention requirements of this paragraph (b). For purposes of the 
penalty imposed by section 6695(d), such designated persons shall be 
deemed to be the tax return preparer and will be jointly and severally 
liable for each failure.
    (c) Tax return preparer. For the definition of ``signing tax return 
preparer,'' see section 7701(a)(36) and Sec.  301.7701-15(b)(1) of this 
chapter. For purposes of applying this section, in the case of--
    (1) An arrangement between two or more signing tax return 
preparers, the person who employs one or more other signing tax return 
preparers to prepare any return or claim for refund for compensation 
other than for the person shall be considered to be the sole signing 
tax return preparer; and
    (2) A partnership arrangement for the preparation of returns and 
claims for refund, the partnership shall be considered to be the sole 
signing tax return preparer.
    (d) Penalties. (1) For the civil penalty for failure to furnish a 
copy of the return or claim for refund to the taxpayers (or nontaxable 
entity) as required under paragraph (a) of this section, see section 
6695(a) and Sec.  1.6695-1(a).
    (2) For the civil penalty for failure to retain a copy of the 
return or claim for refund, or to retain a record as required under 
paragraph (b) of this section, see section 6695(d) and Sec.  1.6695-
1(d).
    (e) Effective/applicability date. This section is applicable to 
returns and claims for refund filed on the date that final regulations 
are published in the Federal Register.
    Par. 4. Section 1.6109-2 is amended by revising the section heading 
and paragraphs (a) and (d) to read as follows:

[[Page 34570]]

Sec.  1.6109-2  Tax return preparers furnishing identifying numbers for 
returns or claims for refund filed after December 31, 2008.

    (a) Furnishing identifying number. (1) Each return of tax or claim 
for refund of tax under the Internal Revenue Code prepared by one or 
more tax return preparers must include the identifying number of the 
tax return preparer required by Sec.  1.6695-1(b) to sign the return or 
claim for refund. In addition, if there is an employment arrangement or 
association between the individual tax return preparer and another 
person (except to the extent the return prepared is for the person), 
the identifying number of the other person must also appear on the 
return or claim for refund. For the definition of the term ``tax return 
preparer,'' see section 7701(a)(36) and Sec.  301.7701-15 of this 
chapter.
    (2) The identifying number of an individual tax return preparer is 
that individual's social security account number, or such alternative 
number as may be prescribed by the Internal Revenue Service in forms, 
instructions, or other appropriate guidance.
    (3) If an individual tax return preparer described in paragraph 
(a)(2) of this section is employed by, or associated with, a person 
(whether an individual or entity) and prepares the return or claim for 
refund (other than a return prepared for the person), the identifying 
number is the person's employer identification number.
* * * * *
    (d) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register, but no sooner 
than December 31, 2008. For returns or claims for refund filed before 
January 1, 2000, see Sec.  1.6109-2A(a).
    Par 5. Section 1.6694-0 is revised to read as follows:


Sec.  1.6694-0  Table of contents.

    This section lists the captions that appear in Sec. Sec.  1.6694-1 
through 1.6694-4.

Sec.  1.6694-1 Section 6694 penalties applicable to tax return 
preparers.
    (a) Overview.
    (1) In general.
    (2) Date return is deemed prepared.
    (b) Tax return preparer.
    (1) In general.
    (2) Responsibility of signing tax return preparer.
    (3) Responsibility of nonsigning tax return preparer.
    (4) Tax return preparer and firm responsibility.
    (5) Examples.
    (c) Understatement of liability.
    (d) Abatement of penalty where taxpayer's liability not 
understated.
    (e) Verification of information furnished by taxpayer or other 
third party.
    (1) In general.
    (2) Verification of information on previously filed returns.
    (3) Examples.
    (f) Income derived (or to be derived) with respect to the return 
or claim for refund.
    (1) In general.
    (2) Compensation.
    (i) Multiple engagements.
    (ii) Reasonable allocation.
    (iii) Fee refunds.
    (iv) Reduction of compensation.
    (3) Individual and firm allocation.
    (4) Examples.
    (g) Effective/applicability date.
Sec.  1.6694-2 Penalty for understatement due to an unreasonable 
position.
    (a) In general.
    (1) Proscribed conduct.
    (2) Special rule for corporations, partnerships, and other 
firms.
    (b) Reasonable belief that the position would more likely than 
not be sustained on its merits.
    (1) In general.
    (2) No unreasonable assumptions.
    (3) Authorities.
    (4) Examples.
    (5) Written determinations.
    (6) When more likely than not standard must be satisfied.
    (c) Exception for adequate disclosure of positions with a 
reasonable basis.
    (1) In general.
    (2) Reasonable basis.
    (3) Adequate disclosure.
    (i) Signing tax return preparers.
    (ii) Nonsigning tax return preparers.
    (A) Advice to taxpayers.
    (B) Advice to another tax return preparer.
    (iii) Requirements for advice.
    (iv) Pass-through entities.
    (v) Examples.
    (d) Exception for reasonable cause and good faith.
    (1) Nature of the error causing the understatement.
    (2) Frequency of errors.
    (3) Materiality of errors.
    (4) Tax return preparer's normal office practice.
    (5) Reliance on advice of others.
    (6) Reliance on generally accepted administrative or industry 
practice.
    (e) Burden of proof.
    (f) Effective/applicability date.
Sec.  1.6694-3 Penalty for understatement due to willful, reckless, 
or intentional conduct.
    (a) In general.
    (1) Proscribed conduct.
    (2) Special rule for corporations, partnerships, and other 
firms.
    (b) Willful attempt to understate liability.
    (c) Reckless or intentional disregard.
    (d) Examples.
    (e) Rules or regulations.
    (f) Section 6694(b) penalty reduced by section 6694(a) penalty.
    (g) Burden of proof.
    (h) Effective/applicability date.
Sec.  1.6694-4 Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of 
taxpayer's liability and certain other procedural matters.
    (a) In general.
    (b) Tax return preparer must bring suit in district court to 
determine liability for penalty.
    (c) Suspension of running of period of limitations on 
collection.
    (d) Effective/applicability date.

    Par. 6. Section 1.6694-1 is revised to read as follows:


Sec.  1.6694-1  Section 6694 penalties applicable to tax return 
preparers.

    (a) Overview--(1) In general. Sections 6694(a) and (b) impose 
penalties on tax return preparers for conduct giving rise to certain 
understatements of liability on a return (including an amended or 
adjusted return) or claim for refund. The section 6694(a) penalty is 
imposed in an amount equal to the greater of $1,000, or 50 percent of 
the income derived (or to be derived) by the tax return preparer for an 
understatement of liability with respect to tax that is due to an 
undisclosed position for which the tax return preparer did not have a 
reasonable belief that the position would more likely than not be 
sustained on its merits (or due to a disclosed position for which there 
is no reasonable basis). The section 6694(b) penalty is imposed in an 
amount equal to the greater of $5,000, or 50 percent of the income 
derived (or to be derived) by the tax return preparer for an 
understatement of liability with respect to tax 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).
    (2) Date return is deemed prepared. For purposes of the penalties 
under section 6694, a return or claim for refund is deemed prepared on 
the date it is signed by the tax return preparer. If a signing tax 
return preparer within the meaning of Sec.  301.7701-15(b)(1) of this 
chapter fails to sign the return, the return is deemed prepared on the 
date the return is filed. See Sec.  1.6695-1 of this section. In the 
case of a nonsigning tax return preparer within the meaning of Sec.  
301.7701-15(b)(2) of this chapter, the relevant date is the date the 
nonsigning tax return preparer provides the tax advice with respect to 
the position giving rise to the understatement. This date will be 
determined based on all the facts and circumstances.
    (b) Tax return preparer--(1) In general. For purposes of this 
section, ``tax return preparer'' means any person who is a tax return 
preparer within the meaning of section 7701(a)(36) and

[[Page 34571]]

Sec.  301.7701-15 of this chapter. An individual is a tax return 
preparer subject to section 6694 if the individual is primarily 
responsible for the position(s) on the return or claim for refund 
giving rise to an understatement. There is only one individual within a 
firm who is primarily responsible for each position on the return or 
claim for refund giving rise to an understatement. In the course of 
identifying the individual who is primarily responsible for the 
position, the Internal Revenue Service may advise multiple individuals 
within the firm that it may be concluded that they are the individual 
within the firm who is primarily responsible. In some circumstances, 
there may be more than one tax return preparer who is primarily 
responsible for the position(s) giving rise to an understatement if 
multiple tax return preparers are employed by, or associated with, 
different firms.
    (2) Responsibility of signing tax return preparer. The signing tax 
return preparer within the meaning of Sec.  301.7701-15(b)(1) of this 
chapter will generally be considered the person who is primarily 
responsible for all of the positions on the return or claim for refund 
giving rise to an understatement. It may be concluded, however, based 
upon information received from the signing tax return preparer (or 
other relevant information from a source other than the signing tax 
return preparer) that another person within the signing tax return 
preparer's same firm was primarily responsible for the position(s) on 
the return or claim for refund giving rise to an understatement.
    (3) Responsibility of nonsigning tax return preparer. If there are 
one or more individuals within a firm who are nonsigning tax return 
preparers within the meaning of Sec.  301.7701-15(b)(2) of this chapter 
and there is no signing tax return preparer within the meaning of Sec.  
301.7701-15(b)(1) of this chapter for the return or claim for refund 
within that firm, the individual within the firm with overall 
supervisory responsibility for the position(s) giving rise to the 
understatement is the tax return preparer who is primarily responsible 
for the position for purposes of section 6694. Additionally, if, after 
the application of paragraph (b)(2) of this section, it is concluded 
that the signing tax return preparer is not primarily responsible for 
the position or the IRS cannot conclude which individual (as between 
the signing tax return preparer and other persons within the firm) is 
primarily responsible for the position, the individual within the firm 
with overall supervisory responsibility for the position(s) giving rise 
to the understatement is the tax return preparer who is primarily 
responsible for the position for purposes of section 6694.
    (4) Tax return preparer and firm responsibility. To the extent 
provided in Sec. Sec.  1.6694-2(a)(2) and 1.6694-3(a)(2), an individual 
and the firm that employs the individual, or the firm of which the 
individual is a partner, member, shareholder, or other equity holder, 
may both be subject to penalty under section 6694 with respect to the 
position(s) on the return or claim for refund giving rise to an 
understatement. If an individual (other than the sole proprietor) who 
is employed by a sole proprietorship is subject to penalty under 
section 6694, the sole proprietorship is considered a ``firm'' for 
purposes of this paragraph (b).
    (5) Examples. The provisions of paragraph (b) of this section are 
illustrated by the following examples:

    Example 1. Attorney A provides advice to Client C concerning the 
proper treatment of an item with respect to which all events have 
occurred on C's income tax return. In preparation for providing that 
advice, A seeks advice regarding the proper treatment of the item 
from Attorney B, who is within the same firm as A, but A is the 
attorney who signs C's return as a tax return preparer. B provides 
advice on the treatment of the item upon which A relies. B's advice 
is reflected on C's income tax return but no disclosure was made in 
accordance with Sec.  1.6694-2(c)(3). The advice constitutes 
preparation of a substantial portion of the return within the 
meaning of Sec.  301.7701-15(b)(3) and the IRS later challenges the 
position taken on the tax return, giving rise to an understatement 
of liability. For purposes of the regulations under section 6694, A 
is initially considered the tax return preparer with respect to C's 
return and the IRS advises A that A may be subject to the penalty 
under section 6694 with respect to C's return. Based upon 
information received from A or another source, it may be concluded 
that B had primary responsibility for the position taken on the 
return that gave rise to the understatement because B had overall 
supervisory responsibility for the position giving rise to an 
understatement.
     Example 2. Same as Example 1, except that neither Attorney A 
nor any other attorney within A's firm signs Client C's return as a 
tax return preparer. Attorney B is the nonsigning tax return 
preparer within the firm with overall supervisory responsibility for 
the position giving rise to an understatement. Accordingly, B is the 
tax return preparer who is primarily responsible for the position on 
C's return giving rise to an understatement and is subject to 
penalty under section 6694.
    Example 3. Same as Example 1, except Attorney D, who works for a 
different firm than A, also provides advice on the same position 
upon which A relies. It may be concluded that D is also primarily 
responsible for the position on the return.

    (c) Understatement of liability. For purposes of this section, 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 the Internal Revenue Code 
(Code), or an overstatement of the net amount creditable or refundable 
with respect to any tax imposed by the Code. The net amount payable in 
a taxable year with respect to the return for which the tax return 
preparer engaged in conduct proscribed by section 6694 is not reduced 
by any carryback. Tax imposed by the Code does not include additions to 
the tax, additional amounts, and assessable penalties imposed by 
subchapter 68 of the Code. 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 tax return preparer 
that is separate and 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 (b) concerning a 
return or claim for refund has been assessed against one or more tax 
return 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 position(s) on the 
return or claim for refund, then--
    (1) The assessment shall be abated; and
    (2) If any amount of the penalty was paid, that amount shall 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 or other 
party--(1) In general. For purposes of sections 6694(a) and (b) 
(including meeting the reasonable belief that the position would more 
likely than not be sustained on its merits and reasonable basis 
standards in Sec. Sec.  1.6694-2(b) and (c)(2), and demonstrating 
reasonable cause and good faith under Sec.  1.6694-2(d)), the tax 
return preparer generally may rely in good faith without verification 
upon information furnished by the taxpayer. A tax return preparer, 
however, may not rely on information provided by a taxpayer with 
respect to legal conclusions on Federal tax issues. A tax return 
preparer may also rely in good faith and without verification upon 
information furnished by another advisor, another tax return preparer 
or other party (including another advisor

[[Page 34572]]

or tax return preparer at the tax return preparer's firm). The tax 
return preparer is not required to audit, examine or review books and 
records, business operations, or documents or other evidence to verify 
independently information provided by the taxpayer, advisor, other tax 
return preparer, or other party. The tax return preparer, however, may 
not ignore the implications of information furnished to the tax return 
preparer or actually known by the tax return preparer. The tax return 
preparer must make reasonable inquiries if the information as furnished 
appears to be incorrect or incomplete. Additionally, some provisions of 
the Code or regulations require that specific facts and circumstances 
exist (for example, that the taxpayer maintain specific documents) 
before a deduction or credit may be claimed. The tax return preparer 
must make appropriate inquiries to determine the existence of facts and 
circumstances required by a Code section or regulation as a condition 
of the claiming of a deduction or credit.
    (2) Verification of information on previously filed returns. For 
purposes of section 6694(a) and (b) (including meeting the reasonable 
belief that the position would more likely than not would be sustained 
on its merits and reasonable basis standards in Sec. Sec.  1.6694-2(b) 
and (c)(2), and demonstrating reasonable cause and good faith under 
Sec.  1.6694-2(d)), a tax return preparer may rely in good faith 
without verification upon a tax return that has been previously 
prepared by a taxpayer or another tax return preparer and filed with 
the IRS. For example, a tax return preparer who prepares an amended 
return (including a claim for refund) need not verify the positions on 
the original return. The tax return preparer, however, may not ignore 
the implications of information furnished to the tax return preparer or 
actually known by the tax return preparer. The tax return preparer must 
make reasonable inquiries if the information as furnished appears to be 
incorrect or incomplete. The tax return preparer must confirm that the 
position being relied upon has not been adjusted by examination or 
otherwise.
    (3) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. During an interview conducted by Preparer E, a 
taxpayer stated that he had made a charitable contribution of real 
estate in the amount of $50,000 during the tax year, when in fact he 
had not made this charitable contribution. E did not inquire about 
the existence of a qualified appraisal or complete a Form 8283, 
Noncash Charitable Contributions, in accordance with the reporting 
and substantiation requirements under section 170(f)(11). E reported 
a deduction on the tax return for the charitable contribution, which 
resulted in an understatement of liability for tax, and signed the 
tax return as the tax return preparer. E is subject to a penalty 
under section 6694.
     Example 2. While preparing the 2008 tax return for an 
individual taxpayer, Preparer F realizes that the taxpayer did not 
provide a Form 1099 for a bank account that produced significant 
taxable income in 2008. When F inquired about any other income, the 
taxpayer furnished the Form 1099 to F for use in preparation of the 
2008 tax return. F did not know that the taxpayer owned an 
additional bank account that generated taxable income for 2008 and 
the taxpayer did not reveal this information to the tax return 
preparer notwithstanding F's general inquiry about any other income. 
F signed the taxpayer's return as the tax return preparer. F is not 
subject to a penalty under section 6694.
    Example 3. In preparing a tax return, Accountant G relies on the 
advice of an actuary concerning the limit on deductibility under 
section 404(a)(1)(A) of a contribution by an employer to a qualified 
pension trust. On the basis of this advice, G completed and signed 
the tax return. It is later determined that there is an 
understatement of liability for tax that resulted from the incorrect 
advice provided by the actuary. G had no reason to believe that the 
advice was incorrect or incomplete, and the advice appeared 
reasonable on its face. G was also not aware at the time the return 
was prepared of any reason why the actuary did not know all of the 
relevant facts or that the advice was no longer reliable due to 
developments in the law since the time the advice was given. G is 
not subject to a penalty under section 6694. The actuary, however, 
may be subject to penalty under section 6694 if the advice given by 
the actuary constitutes a substantial portion of the tax return 
within the meaning of Sec.  301.7701-15(b)(3) of this chapter.

    (f) Income derived (or to be derived) with respect to the return or 
claim for refund--(1) In general. For purposes of sections 6694(a) and 
(b), income derived (or to be derived) means all compensation the tax 
return preparer receives or expects to receive with respect to the 
engagement of preparing the return or claim for refund or providing tax 
advice (including research and consultation) with respect to the 
position(s) taken on the return or claim for refund that gave rise to 
the understatement. In the situation of a tax return preparer who is 
not compensated directly by the taxpayer, but rather by a firm that 
employs the tax return preparer or with whom the tax return preparer is 
associated, income derived (or to be derived) means all compensation 
the tax return preparer receives from the firm that can be reasonably 
allocated to the engagement of preparing the return or claim for refund 
or providing tax advice (including research and consultation) with 
respect to the position(s) taken on the return or claim for refund that 
gave rise to the understatement. In the situation where a firm that 
employs the individual tax return preparer (or the firm of which the 
individual tax return preparer is a partner, member, shareholder, or 
other equity holder) is subject to a penalty under section 6694(a) or 
(b) pursuant to the provisions in Sec. Sec.  1.6694-2(a)(2) or 1.6694-
3(a)(2), income derived (or to be derived) means all compensation the 
firm receives or expects to receive with respect to the engagement of 
preparing the return or claim for refund or providing tax advice 
(including research and consultation) with respect to the position(s) 
taken on the return or claim for refund that gave rise to the 
understatement.
    (2) Compensation--(i) Multiple engagements. For purposes of 
applying paragraph (f)(1) of this section, if the tax return preparer 
or the tax return preparer's firm has multiple engagements related to 
the same return or claim for refund, only those engagements relating to 
the position(s) taken on the return or claim for refund that gave rise 
to the understatement are considered for purposes of calculating the 
income derived (or to be derived) with respect to the return or claim 
for refund.
    (ii) Reasonable allocation. For purposes of applying paragraph 
(f)(1) of this section, only compensation for tax advice that is given 
with respect to events that have occurred at the time the advice is 
rendered and that relates to the position(s) giving rise to the 
understatement will be taken into account for purposes of calculating 
the section 6694(a) and (b) penalties. If a lump sum fee is received 
that includes amounts not taken into account under the preceding 
sentence, the amount of income derived will be based on a reasonable 
allocation of the lump sum fee between the tax advice giving rise to 
the penalty and the advice that does not give rise to the penalty.
    (iii) Fee refunds. For purposes of applying paragraph (f)(1) of 
this section, a refund to the taxpayer of all or part of the amount 
paid to the tax return preparer or the tax return preparer's firm will 
not reduce the amount of the section 6694 penalty assessed. A refund in 
this context does not include a discounted fee or alternative billing 
arrangement for the services provided.
    (iv) Reduction of compensation. For purposes of applying paragraph 
(f)(1) of this section, it may be concluded based upon information 
provided by the tax return preparer or the tax return

[[Page 34573]]

preparer's firm that an appropriate allocation of compensation 
attributable to the position(s) giving rise to the understatement on 
the return or claim for refund is less than the total amount of 
compensation associated with the engagement. For example, the number of 
hours of the engagement spent on the position(s) giving rise to the 
understatement may be less than the total hours associated with the 
engagement. If this is concluded, the amount of the penalty will be 
calculated based upon the compensation attributable to the position(s) 
giving rise to the understatement. Otherwise, the total amount of 
compensation from the engagement will be the amount of income derived 
for purposes of calculating the penalty under section 6694.
    (3) Individual and firm allocation. If both an individual within a 
firm and a firm that employs the individual (or the firm of which the 
individual is a partner, member, shareholder, or other equity holder) 
are subject to a penalty under section 6694(a) or (b) pursuant to the 
provisions in Sec. Sec.  1.6694-2(a)(2) or 1.6694-3(a)(2), the amount 
of penalties assessed against the individual and the firm shall not 
exceed 50 percent of the income derived (or to be derived) by the firm 
from the engagement of preparing the return or claim for refund or 
providing tax advice (including research and consultation) with respect 
to the position(s) taken on the return or claim for refund that gave 
rise to the understatement. The portion of the total amount of the 
penalty assessed against the individual tax return preparer shall not 
exceed 50 percent of the individual's compensation as determined under 
paragraphs (f)(1) and (2) of this section.
    (4) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Signing Tax Return Preparer H is engaged by a 
taxpayer and paid a total of $21,000. Of this amount, $20,000 
relates to research and consultation regarding a transaction that is 
later reported on a return, and $1,000 for the activities relating 
to the preparation of the return. Based on H's hourly rates, a 
reasonable allocation of the amount of compensation related to the 
advice rendered prior to the occurrence of events that are the 
subject of the advice is $5,000. The remaining compensation of 
$16,000 is considered to be compensation related to the advice 
rendered after the occurrence of events that are the subject of the 
advice and return preparation. The income derived by H with respect 
to the return for purposes of computing the penalty under section 
6694(a) is $16,000, and the amount of the penalty imposed under 
section 6694(a) is $8,000.
     Example 2. Accountants I, J, and K are employed by Firm L. I is 
a principal manager of Firm L and provides corporate tax advice for 
the taxpayer after all events have occurred subject to an engagement 
for corporate tax advice. J provides international tax advice for 
the taxpayer after all events have occurred subject to a different 
engagement for international tax advice. K prepares and signs the 
taxpayer's return under a general tax services engagement. I's 
advice is the source of an understatement on the return and the 
advice constitutes preparation of a substantial portion of the 
return within the meaning of Sec.  301.7701-15(b) of this chapter. I 
is the nonsigning tax return preparer within the firm with overall 
supervisory responsibility for the position on the taxpayer's return 
giving rise to an understatement. Thus, I is the tax return preparer 
who is primarily responsible for the position on the taxpayer's 
return giving rise to the understatement. Because K's signature as 
the signing tax return preparer is on the return, the IRS advises K 
that K may be subject to the section 6694(a) penalty against K to 
the understatement. K provides information that I is the tax return 
preparer with primary responsibility for the position that gave rise 
to the understatement and K formed a reasonable belief that the 
position would more likely than not be sustained on the merits by 
relying on the advice provided by I. Furthermore, K has reasonable 
cause because K relied on I for the advice on the corporate tax 
matter. The IRS, therefore, assesses the section 6694 penalty 
against I. The portion of the total amount of the penalty allocable 
to I does not exceed that part of I's compensation that is 
attributable to the corporate tax advice engagement. In the event 
that Firm L is also liable under the provisions in Sec.  1.6694-
2(a)(2), the IRS assesses the section 6694 penalty in an amount not 
exceeding 50 percent of Firm L's firm compensation based on the 
engagement relating to the corporate tax advice services provided by 
I where there is no applicable reduction in compensation pursuant to 
Sec.  1.6694-1(f)(2)(iii).
    Example 3. Same facts as Example 2, except that I provides the 
advice on the corporate matter when the events have not yet 
occurred. I's advice is the cause of an understatement position on 
the return but I is not a tax return preparer pursuant to Sec.  
301.7701-15(b)(2) or (3) of this chapter. K has reasonable cause 
because K relied on I for the advice on the corporate tax matter and 
K is not limited to reliance on persons who provide post-
transactional advice if such reliance is reasonable and in good 
faith. I, K and Firm L are not liable for the section 6694 penalty.

    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 7. Section 1.6694-2 is revised to read as follows:


Sec.  1.6694-2  Penalty for understatement due to an unreasonable 
position.

    (a) In general--(1) Proscribed conduct. Except as otherwise 
provided in this section, a tax return preparer is liable for a penalty 
under section 6694(a) equal to the greater of $1,000 or 50 percent of 
the income derived (or to be derived) by the tax return preparer for 
any return or claim for refund that it prepares that results in an 
understatement of liability due to a position if the tax return 
preparer knew (or reasonably should have known) of the position and 
either--
    (i) The position was not disclosed as provided in this section and 
there was not a reasonable belief that the position would more likely 
than not be sustained on its merits; or
    (ii) The position was disclosed as provided in this section but 
there was no reasonable basis for the position.
    (2) Special rule for corporations, partnerships, and other firms. A 
firm that employs a tax return preparer subject to a penalty under 
section 6694(a) (or a firm of which the individual tax return preparer 
is a partner, member, shareholder or other equity holder) is also 
subject to penalty if, and only if--
    (i) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or knew of the 
conduct proscribed by section 6694(a);
    (ii) The corporation, partnership, or other firm entity failed to 
provide reasonable and appropriate procedures for review of the 
position for which the penalty is imposed; or
    (iii) Such review procedures were disregarded by the corporation, 
partnership, or other firm entity through willfulness, recklessness, or 
gross indifference (including ignoring facts that would lead a person 
of reasonable prudence and competence to investigate or ascertain) in 
the formulation of the advice, or the preparation of the return or 
claim for refund, that included the position for which the penalty is 
imposed.
    (b) Reasonable belief that the position would more likely than not 
be sustained on its merits--(1) In general. A tax return preparer may 
``reasonably believe that a position would more likely than not be 
sustained on its merits'' if the tax return preparer analyzes the 
pertinent facts and authorities, and in reliance upon that analysis, 
reasonably concludes in good faith that the position has a greater than 
50 percent likelihood of being sustained on its merits. In reaching 
this conclusion, the possibility that the position will not be 
challenged by the Internal Revenue Service (IRS) (for example, because 
the taxpayer's return may not be audited or because the issue may not 
be raised on audit) is not to be taken into account. The

[[Page 34574]]

analysis prescribed by Sec.  1.6662-4(d)(3)(ii) (or any successor 
provision) for purposes of determining whether substantial authority is 
present applies for purposes of determining whether the more likely 
than not standard is satisfied. Whether a tax return preparer meets 
this standard will be determined based upon all facts and 
circumstances, including the tax return preparer's diligence. In 
determining the level of diligence in a particular situation, the tax 
return preparer's experience with the area of Federal tax law and 
familiarity with the taxpayer's affairs, as well as the complexity of 
the issues and facts, will be taken into account. A tax return preparer 
may reasonably believe that a position more likely than not would be 
sustained on its merits despite the absence of other types of authority 
if the position is supported by a well-reasoned construction of the 
applicable statutory provision. For purposes of determining whether the 
tax return preparer has a reasonable belief that the position would 
more likely than not be sustained on the merits, a tax return preparer 
may rely in good faith without verification upon information furnished 
by the taxpayer, advisor, other tax return preparer, or other party 
(including another advisor or tax return preparer at the tax return 
preparer's firm), as provided in Sec.  1.6694-1(e).
    (2) No unreasonable assumptions. A position must not be based on 
unreasonable factual or legal assumptions (including assumptions as to 
future events) and must not unreasonably rely on the representations, 
statements, findings, or agreements of the taxpayer or any other 
person. For example, a position must not be based on a representation 
or assumption that the tax return preparer knows, or has reason to 
know, is inaccurate.
    (3) Authorities. The authorities considered in determining whether 
a position satisfies the more likely than not standard are those 
authorities provided in Sec.  1.6662-4(d)(3)(iii) (or any successor 
provision).
    (4) Examples. The provisions of paragraphs (b)(1) through (b)(3) of 
this section are illustrated by the following examples:

    Example 1. A new statute is silent as to whether the taxpayer 
may take advantage of certain tax benefits. The Treasury Department 
and the IRS have not issued any interpretative guidance for the 
newly enacted provision. A well-reasoned construction of the 
statutory text supports the position that a taxpayer may claim the 
tax benefits. Preparer M may avoid the section 6694(a) penalty by 
taking the position that M reasonably believed that the taxpayer's 
position would more likely than not be sustained on its merits.
    Example 2. After the passage of legislation containing a new 
statutory provision, a taxpayer engaged in a transaction that is 
adversely affected by the new provision. Prior law supported a 
position favorable to the taxpayer. Preparer N believes that the new 
statute is inequitable as applied to the taxpayer's situation. The 
statutory language, however, is unambiguous as applied to the 
transaction to deny the result claimed by the taxpayer previously. 
In considering the new statutory provision as applied to the 
taxpayer's position, N may not avoid the section 6694(a) penalty by 
taking the position that the tax return preparer reasonably believed 
that the position would more likely than not be sustained on its 
merits.
    Example 3. While preparing the taxpayer's return, Preparer O 
determines that a statute is silent as to whether the taxpayer may 
take a certain position on the taxpayer's 2007 Federal income tax 
return. Three private letter rulings issued to other taxpayers in 
2002 and 2003 support the taxpayer's position. Temporary regulations 
issued in 2004, however, are clearly contrary to the taxpayer's 
position. After the issuance of the temporary regulations, the 
earlier private letter rulings cease to be authorities and are not 
taken into account in determining whether the taxpayer's position 
satisfies the reasonable belief that the position would more likely 
than not be sustained on its merits standard. Preparer O may not 
avoid the section 6694(a) penalty by taking the position that the 
tax return preparer reasonably believed that the taxpayer's position 
would more likely than not be sustained on its merits.
    Example 4. In the course of researching whether an 
interpretation of a phrase in the Internal Revenue Code (Code) is a 
position that more likely than not will be sustained on its merits, 
Preparer P discovers that the only relevant authorities include 
decisions of five U.S. courts of appeal. Three U.S. courts of appeal 
have construed the language as being taxpayer favorable. Two other 
U.S. courts of appeal, however, have construed the identical 
language as being favorable to the government's position. The U.S. 
court of appeals in the jurisdiction where the taxpayer is located 
has not addressed this issue. P reasonably believes that the 
taxpayer's facts more closely parallel the facts involved in the 
three U.S. courts of appeals' decisions that were taxpayer 
favorable. Under the analysis prescribed by Sec.  1.6662-
4(d)(3)(ii), P may avoid the section 6694(a) penalty by taking the 
position that the tax return preparer reasonably believed that a 
well-reasoned position consistent with the taxpayer favorable 
interpretation would more likely than not be sustained on its 
merits.

    (5) Written determinations. The tax return preparer may avoid the 
section 6694(a) penalty by taking the position that the tax return 
preparer reasonably believed that the taxpayer's position satisfies the 
``more likely than not'' standard if the taxpayer is the subject of a 
``written determination'' as provided in Sec.  1.6662-4(d)(3)(iv)(A).
    (6) When ``more likely than not'' standard must be satisfied. For 
purposes of this section, the requirement that a position satisfies the 
``more likely than not'' standard must be satisfied on the date the 
return is deemed prepared, as prescribed by Sec.  1.6694-1(a)(2).
    (c) Exception for adequate disclosure of positions with a 
reasonable basis--(1) In general. The section 6694(a) penalty will not 
be imposed on a tax return preparer if the position taken has a 
reasonable basis and is adequately disclosed within the meaning of 
paragraph (c)(3) of this section. For an exception to the section 
6694(a) penalty for reasonable cause and good faith, see paragraph (d) 
of this section.
    (2) Reasonable basis. For purposes of this section, ``reasonable 
basis'' has the same meaning as in Sec.  1.6662-3(b)(3) or any 
successor provision of the accuracy-related penalty regulations. For 
purposes of determining whether the tax return preparer has a 
reasonable basis for a position, a tax return preparer may rely in good 
faith without verification upon information furnished by the taxpayer, 
advisor, other tax return preparer, or other party (including another 
advisor or tax return preparer at the tax return preparer's firm), as 
provided in Sec.  1.6694-1(e).
    (3) Adequate disclosure--(i) Signing tax return preparers. In the 
case of a signing tax return preparer within the meaning of Sec.  
301.7701-15(b)(1) of this chapter, disclosure of a position for which 
there is a reasonable basis but for which the tax return preparer does 
not have a reasonable belief that the position would more likely than 
not be sustained on the merits is adequate if the tax return preparer 
meets any of the following standards:
    (A) The position is disclosed in accordance with Sec.  1.6662-4(f) 
(which permits disclosure on a properly completed and filed Form 8275, 
``Disclosure Statement,'' or Form 8275-R, ``Regulation Disclosure 
Statement,'' as appropriate, or on the tax return in accordance with 
the annual revenue procedure described in Sec.  1.6662-4(f)(2)).
    (B) For income tax returns, if the position would not meet the 
standard for the taxpayer to avoid a penalty under section 
6662(d)(2)(B) without disclosure (no substantial authority), the tax 
return preparer provides the taxpayer with the prepared tax return that 
includes the disclosure in accordance with Sec.  1.6662-4(f).
    (C) For income tax returns, if the position would otherwise meet 
the standard for nondisclosure under section 6662(d)(2)(B)(i) 
(substantial

[[Page 34575]]

authority), the tax return preparer advises the taxpayer of all the 
penalty standards applicable to the taxpayer under section 6662. The 
tax return preparer must also contemporaneously document the advice in 
the tax return preparer's files.
    (D) For income tax returns, if section 6662(d)(2)(B) does not apply 
because the position may be described in section 6662(d)(2)(C) or 
section 6662A (a tax shelter, reportable transaction with a significant 
purpose of tax avoidance or evasion, or a listed transaction), the tax 
return preparer advises the taxpayer that there needs to be at a 
minimum substantial authority for the position, that the taxpayer must 
possess a reasonable belief that the tax treatment was more likely than 
not the proper treatment in order to avoid a penalty under section 
6662(d) or section 6662A as applicable, and that disclosure will not 
protect the taxpayer from assessment of an accuracy-related penalty if 
either section 6662(d)(2)(C) or 6662A applies to the position. The tax 
return preparer must also contemporaneously document the advice in the 
tax return preparer's files.
    (E) For returns or claims for refund that are subject to penalties 
pursuant to section 6662 other than the substantial understatement 
penalty under section 6662(b)(2) and (d), the tax return preparer 
advises the taxpayer of the penalty standards applicable to the 
taxpayer under sections 6662. The tax return preparer must also 
contemporaneously document the advice in the tax return preparer's 
files.
    (ii) Nonsigning tax return preparers. In the case of a nonsigning 
tax return preparer within the meaning of Sec.  301.7701-15(b)(2) of 
this chapter, disclosure of a position that satisfies the reasonable 
basis standard but does not satisfy the reasonable belief that a 
position would more likely than not be sustained on its merits standard 
is adequate if the position is disclosed in accordance with Sec.  
1.6662-4(f) (which permits disclosure on a properly completed and filed 
Form 8275 or Form 8275-R, as appropriate, or on the return in 
accordance with an annual revenue procedure described in Sec.  1.6662-
4(f)(2)). In addition, disclosure of a position is adequate in the case 
of a nonsigning tax return preparer if, with respect to that position, 
the tax return preparer complies with the provisions of paragraph 
(c)(3)(ii)(A) or (B) of this section, whichever is applicable.
    (A) Advice to taxpayers. If a nonsigning tax return preparer 
provides advice to the taxpayer with respect to a position for which 
there is a reasonable basis but for which the nonsigning tax return 
preparer does not have a reasonable belief that the position would more 
likely than not be sustained on the merits, disclosure of that position 
is adequate if the tax return preparer advises the taxpayer of any 
opportunity to avoid penalties under section 6662 that could apply to 
the position, if relevant, and of the standards for disclosure to the 
extent applicable. The tax return preparer must also contemporaneously 
document the advice in the tax return preparer's files.
    (B) Advice to another tax return preparer. If a nonsigning tax 
return preparer provides advice to another tax return preparer with 
respect to a position for which there is a reasonable basis but for 
which the nonsigning tax return preparer does not have a reasonable 
belief that the position would more likely than not be sustained on the 
merits, disclosure of that position is adequate if the tax return 
preparer advises the other tax return preparer that disclosure under 
section 6694(a) may be required. The tax return preparer must also 
contemporaneously document the advice in the tax return preparer's 
files.
    (iii) Requirements for advice. For purposes of satisfying the 
disclosure standards of paragraphs (c)(3)(i) and (ii) of this section, 
each return position for which there is a reasonable basis but for 
which the tax return preparer does not have a reasonable belief that 
the position would more likely than not be sustained on the merits must 
be addressed by the tax return preparer. The advice to the taxpayer 
with respect to each position, therefore, must be particular to the 
taxpayer and tailored to the taxpayer's facts and circumstances. The 
tax return preparer is required to contemporaneously document the fact 
that the advice was provided. There is no general pro forma language or 
special format required for a tax return preparer to comply with these 
rules. No form of a general boilerplate disclaimer, however, is 
sufficient to satisfy these standards. A tax return preparer may choose 
to comply with the documentation standard in one document covering each 
position, or in multiple documents covering all of the positions.
    (iv) Pass-through entities. Disclosure in the case of items 
attributable to a pass-through entity is adequate if made at the entity 
level in accordance with the rules in Sec.  1.6662-4(f)(5) or at the 
entity level in accordance with the rules in paragraphs (c)(3)(i) or 
(ii) of this section.
    (v) Examples. The provisions of paragraph (c)(3) of this section 
are illustrated by the following examples:

    Example 1. An individual taxpayer hires Accountant Q to prepare 
its income tax return. Q does not reasonably believe that a 
particular position taken on the tax return would more likely than 
not be sustained on its merits although there is substantial 
authority for the position. Q prepares and signs the tax return 
without disclosing the position taken on the tax return, but advises 
the individual taxpayer of the penalty standards applicable to the 
taxpayer under section 6662, and contemporaneously documents in Q's 
files that this advice was provided. The individual taxpayer signs 
and files the tax return without disclosing the position because the 
position meets the standards for nondisclosure under section 
6662(d)(2)(B)(i). The IRS later challenges the position taken on the 
tax return, resulting in an understatement of liability. Q is not 
subject to a penalty under section 6694.
    Example 2. Attorney R advises a large corporate taxpayer 
concerning the proper treatment of complex entries on the corporate 
taxpayer's tax return. R has reason to know that the tax 
attributable to the entries is a substantial portion of the tax 
required to be shown on the tax return within the meaning of Sec.  
301.7701-15(b)(3). When providing the advice, R concludes that one 
position with respect to these entries does not meet the reasonable 
belief that the position would more likely than not be sustained on 
the merits standard and also does not have substantial authority, 
although the position meets the reasonable basis standard. R, in 
good faith, advises the corporate taxpayer that the position lacks 
substantial authority and the taxpayer will be subject to an 
accuracy-related penalty under section 6662 unless the position is 
disclosed in a disclosure statement included in the return. R also 
documents the fact that this advice was contemporaneously provided 
to the corporate taxpayer at the time the advice was provided. 
Neither R nor any other attorney within R's firm signs the corporate 
taxpayer's return as a tax return preparer, but the advice by R 
constitutes preparation of a substantial portion of the tax return 
and R is the individual with overall supervisory responsibility for 
the position giving rise to the understatement. Thus, R is a tax 
return preparer for purposes of section 6694. R, however, will not 
be subject to a penalty under section 6694.

    (d) Exception for reasonable cause and good faith. The penalty 
under section 6694(a) will not be imposed if, considering all the facts 
and circumstances, it is determined that the understatement was due to 
reasonable cause and that the tax return preparer acted in good faith. 
Factors to consider include:
    (1) Nature of the error causing the understatement. The error 
resulted from a provision that was complex, uncommon, or highly 
technical and a competent tax return preparer of tax returns or claims 
for refund of the type at issue reasonably could have made the error. 
The reasonable cause and good faith exception, however, does not

[[Page 34576]]

apply to an error that would have been apparent from a general review 
of the return or claim for refund by the tax return preparer.
    (2) Frequency of errors. The understatement was the result of an 
isolated error (such as an inadvertent mathematical or clerical error) 
rather than a number of errors. Although the reasonable cause and good 
faith exception generally applies to an isolated error, it does not 
apply if the isolated error is so obvious, flagrant, or material that 
it should have been discovered during a review of the return or claim 
for refund. Furthermore, the reasonable cause and good faith exception 
does not apply if there is a pattern of errors on a return or claim for 
refund even though any one error, in isolation, would have qualified 
for the reasonable cause and good faith exception.
    (3) Materiality of errors. The understatement was not material in 
relation to the correct tax liability. The reasonable cause and good 
faith exception generally applies if the understatement is of a 
relatively immaterial amount. Nevertheless, even an immaterial 
understatement may not qualify for the reasonable cause and good faith 
exception if the error or errors creating the understatement are 
sufficiently obvious or numerous.
    (4) Tax return preparer's normal office practice. The tax return 
preparer's normal office practice, when considered together with other 
facts and circumstances, such as the knowledge of the tax return 
preparer, indicates that the error in question would rarely occur and 
the normal office practice was followed in preparing the return or 
claim for refund in question. Such a normal office practice must be a 
system for promoting accuracy and consistency in the preparation of 
returns or claims for refund and generally would include, in the case 
of a signing tax return preparer, checklists, methods for obtaining 
necessary information from the taxpayer, a review of the prior year's 
return, and review procedures. Notwithstanding these rules, the 
reasonable cause and good faith exception does not apply if there is a 
flagrant error on a return or claim for refund, a pattern of errors on 
a return or claim for refund, or a repetition of the same or similar 
errors on numerous returns or claims for refund.
    (5) Reliance on advice of others. For purposes of demonstrating 
reasonable cause and good faith, a tax return preparer may rely without 
verification upon advice and information furnished by the taxpayer or 
other party, as provided in Sec.  1.6694-1(e). The tax return preparer 
may reasonably rely in good faith on the advice of, or schedules or 
other documents prepared by, the taxpayer, another advisor, another tax 
return preparer, or other party (including another advisor or tax 
return preparer at the tax return preparer's firm), and who the tax 
return preparer had reason to believe was competent to render the 
advice or other information. The advice or information may be written 
or oral, but in either case the burden of establishing that the advice 
or information was received is on the tax return preparer. A tax return 
preparer is not considered to have relied in good faith if--
    (i) The advice or information is unreasonable on its face;
    (ii) The tax return preparer knew or should have known that the 
other party providing the advice or information was not aware of all 
relevant facts; or
    (iii) The tax return preparer knew or should have known (given the 
nature of the tax return preparer's practice), at the time the return 
or claim for refund was prepared, that the advice or information was no 
longer reliable due to developments in the law since the time the 
advice was given.
    (6) Reliance on generally accepted administrative or industry 
practice. The tax return preparer reasonably relied in good faith on 
generally accepted administrative or industry practice in taking the 
position that resulted in the understatement. A tax return preparer is 
not considered to have relied in good faith if the tax return preparer 
knew or should have known (given the nature of the tax return 
preparer's practice), at the time the return or claim for refund was 
prepared, that the administrative or industry practice was no longer 
reliable due to developments in the law or IRS administrative practice 
since the time the practice was developed.
    (e) Burden of proof. In any proceeding with respect to the penalty 
imposed by section 6694(a), the issues on which the tax return preparer 
bears the burden of proof include whether--
    (1) The tax return preparer knew or reasonably should have known 
that the questioned position was taken on the return;
    (2) There is reasonable cause and good faith with respect to such 
position; and
    (3) The position was disclosed adequately in accordance with 
paragraph (c) of this section.
    (f) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 8. Section 1.6694-3 is amended by revising paragraphs (a), 
(c)(2) and (3), (d), (e), (f), (g) and (h) to read as follows:


Sec.  1.6694-3  Penalty for understatement due to willful, reckless, or 
intentional conduct.

    (a) In general--(1) Proscribed conduct. A tax return preparer is 
liable for a penalty under section 6694(b) equal to the greater of 
$5,000 or 50 percent of the income derived (or to be derived) by the 
tax return preparer if any part of an understatement of liability for a 
return or claim for refund that is prepared is due to--
    (i) A willful attempt in any manner to understate the liability for 
tax by a tax return preparer on the return or claim for refund; or
    (ii) Any reckless or intentional disregard of rules or regulations 
by any such person.
    (2) Special rule for corporations, partnerships, and other firms. A 
firm that employs a tax return preparer subject to a penalty under 
section 6694(b) (or a firm of which the individual tax return preparer 
is a partner, member, shareholder or other equity holder) is also 
subject to penalty if, and only if--
    (i) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or knew of the 
conduct proscribed by section 6694(b);
    (ii) The corporation, partnership, or other firm entity failed to 
provide reasonable and appropriate procedures for review of the 
position for which the penalty is imposed; or
    (iii) Such review procedures were disregarded by the corporation, 
partnership, or other firm entity through willfulness, recklessness, or 
gross indifference (including ignoring facts that would lead a person 
of reasonable prudence and competence to investigate or ascertain) in 
the formulation of the advice, or the preparation of the return or 
claim for refund, that included the position for which the penalty is 
imposed.
* * * * *
    (c) Reckless or intentional disregard--(1)* * *
    (2) A tax return preparer is not considered to have recklessly or 
intentionally disregarded a rule or regulation if the position contrary 
to the rule or regulation has a reasonable basis as defined in Sec.  
1.6694-2(c)(2) and is adequately disclosed in accordance with Sec.  
1.6694-2(c)(3). In the case of a position contrary to a regulation, the 
position must represent a good faith challenge to the validity of the 
regulation and, when disclosed in accordance with Sec.  1.6694-2(c)(3), 
the

[[Page 34577]]

tax return preparer must identify the regulation being challenged. For 
purposes of this section, disclosure on the return in accordance with 
an annual revenue procedure under Sec.  1.6662-4(f)(2) is not 
applicable.
    (3) In the case of a position contrary to a revenue ruling or 
notice (other than a notice of proposed rulemaking) published by the 
Internal Revenue Service in the Internal Revenue Bulletin, a tax return 
preparer also is not considered to have recklessly or intentionally 
disregarded the ruling or notice if the tax return preparer reasonably 
believes that the position would more likely than not be sustained on 
its merits in accordance with Sec.  1.6694-2(b).
    (d) Examples. The provisions of paragraphs (b) and (c) of this 
section are illustrated by the following examples:

    Example 1. A taxpayer provided Preparer S with detailed check 
registers reflecting personal and business expenses. One of the 
expenses was for domestic help, and this expense was identified as 
personal on the check register. S knowingly deducted the expenses of 
the taxpayer's domestic help as wages paid in the taxpayer's 
business. S is subject to the penalty under section 6694(b).
    Example 2. A taxpayer provided Preparer T with detailed check 
registers to compute the taxpayer's expenses. T, however, knowingly 
overstated the expenses on the return. After adjustments by the 
examiner, the tax liability increased significantly. Because T 
disregarded information provided in the check registers, T is 
subject to the penalty under section 6694(b).
    Example 3. Preparer U prepares a taxpayer's return and 
encounters certain expenses incurred in the purchase of a business. 
Final regulations provide that such expenses incurred in the 
purchase of a business must be capitalized. One U.S. Tax Court case 
has expressly invalidated that portion of the regulations. Under 
these facts, U will have a reasonable basis for the position as 
defined in Sec.  1.6694-2(c)(2) and will not be subject to the 
section 6694(b) penalty if the position is adequately disclosed in 
accordance with paragraph (c)(2) of this section because the 
position represents a good faith challenge to the validity of the 
regulations.

    (e) Rules or regulations. The term rules or regulations includes 
the provisions of the Internal Revenue Code, temporary or final 
Treasury regulations issued under the Code, and revenue rulings or 
notices (other than notices of proposed rulemaking) issued by the 
Internal Revenue Service and published in the Internal Revenue 
Bulletin.
    (f) Section 6694(b) penalty reduced by section 6694(a) penalty. The 
amount of any penalty to which a tax return preparer may be subject 
under section 6694(b) for a return or claim for refund is reduced by 
any amount assessed and collected against the tax return preparer under 
section 6694(a) for the same return or claim for refund.
    (g) Burden of proof. In any proceeding with respect to the penalty 
imposed by section 6694(b), the government bears the burden of proof on 
the issue of whether the tax return preparer willfully attempted to 
understate the liability for tax. See section 7427. The tax return 
preparer bears the burden of proof on such other issues as whether--
    (1) The tax return preparer recklessly or intentionally disregarded 
a rule or regulation;
    (2) A position contrary to a regulation represents a good faith 
challenge to the validity of the regulation; and
    (3) Disclosure was adequately made in accordance with Sec.  1.6694-
3(c)(2).
    (h) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 9. Section 1.6694-4 is amended by revising paragraph (a) to 
read as follows:


Sec.  1.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. (1) The Internal Revenue Service will investigate 
the preparation by a tax return preparer of a return of tax under the 
Internal Revenue Code (Code) or claim for refund of tax under the Code 
as described in Sec.  301.7701-15(b)(4) of this chapter, and will send 
a report of the examination to the tax return preparer before the 
assessment of either--
    (i) A penalty for understating tax liability due to a position for 
which there was not a reasonable belief that the position would more 
likely than not be sustained on its merits under section 6694(a) (or 
not a reasonable basis for disclosed positions); or
    (ii) A penalty for willful understatement of liability or reckless 
or intentional disregard of rules or regulations under section 6694(b).
* * * * *
    (d) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 10. Section 1.6695-1 is revised to read as follows:


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

    (a) Failure to furnish copy to taxpayer. (1) A person who is a 
signing tax return preparer as described in Sec.  301.7701-15(b)(1) of 
this chapter of any return of tax or claim for refund of tax under the 
Internal Revenue Code (Code), and who fails to satisfy the requirements 
imposed by section 6107(a) and Sec.  1.6107-1(a) to furnish a copy of 
the return or claim for refund to the taxpayer (or nontaxable entity), 
shall be subject to a penalty of $50 for such failure, with a maximum 
penalty 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.
    (2) No penalty may be imposed under section 6695(a) and paragraph 
(a)(1) of this section upon a tax return preparer who furnishes a copy 
of the return or claim for refund to taxpayers who--
    (i) Hold an elected or politically appointed position with the 
government of the United States or a state or political subdivision 
thereof; and
    (ii) In order faithfully to carry out their official duties, have 
so arranged their affairs that they have less than full knowledge of 
the property that they hold or of the debts for which they are 
responsible, if information is deleted from the copy in order to 
preserve or maintain this arrangement.
    (b) Failure to sign return. (1) An individual who is a tax return 
preparer as described in Sec.  301.7701-15 of this chapter with respect 
to a return of tax or claim for refund of tax under the Code that is 
not signed electronically 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. For rules covering electronically 
signed returns, see paragraph (b)(2) of this section. For purposes of 
this paragraph (b), a return of tax shall not include information 
returns under subpart B and subpart C of Part III of Subtitle F. If the 
tax return preparer is unavailable for signature, another tax return 
preparer shall review the entire preparation of the return or claim for 
refund, and then shall sign the return or claim for refund. The tax 
return preparer shall sign the return in the manner prescribed by the 
Commissioner in forms, instructions, or other appropriate guidance.
    (2) In the case of electronically signed tax returns, the tax 
return preparer need not sign the return prior to presenting a 
completed copy of the return to the taxpayer. The tax return preparer, 
however, must furnish all of the information that will be transmitted 
as

[[Page 34578]]

the electronically signed tax return to the taxpayer contemporaneously 
with furnishing the Form 8879, ``IRS e-file Signature Authorization,'' 
or other similar Internal Revenue Service (IRS) e-file signature form. 
The information may be furnished on a replica of an official form. The 
tax return preparer shall electronically sign the return in the manner 
prescribed by the Commissioner in forms, instructions, or other 
appropriate guidance.
    (3) If more than one tax return preparer is involved in the 
preparation of the return or claim for refund, the individual tax 
return preparer who has the primary responsibility as between or among 
the tax return preparers for the overall substantive accuracy of the 
preparation of such return or claim for refund shall be considered to 
be the signing tax return preparer for purposes of this paragraph (b) 
and Sec.  301.7701-15(b)(1) of this chapter. Any other tax return 
preparer as described in Sec.  301.7701-15(b)(2) of this chapter is not 
required to sign the return or claim for refund.
    (4) Examples. The application of this paragraph (b) is illustrated 
by the following examples:

    Example 1. Law Firm A employs B, a lawyer, to prepare for 
compensation estate tax returns and claims for refund of taxes. Firm 
A is engaged by C to prepare a Federal estate tax return. Firm A 
assigns B to prepare the return. B obtains the information necessary 
for completing the return from C and makes determinations with 
respect to the proper application of the tax laws to such 
information in order to determine the estate's tax liability. B then 
forwards such information to D, a computer tax service that performs 
the mathematical computations and prints the return by means of 
computer processing. D then sends the completed estate tax return to 
B who reviews the accuracy of the return. B is the individual tax 
return preparer who is primarily responsible for the overall 
accuracy of the estate tax return. B must sign the return as tax 
return preparer.
    Example 2. Partnership E is a national accounting firm that 
prepares returns and claims for refund of taxes for compensation. F 
and G, employees of Partnership E, are involved in preparing the 
Form 990-T, Exempt Organization Business Income Tax Return, for H, a 
tax exempt organization. After they complete the return, including 
the gathering of the necessary information, analyzing the proper 
application of the tax laws to such information, and the performance 
of the necessary mathematical computations, I, a supervisory 
employee of Partnership E, reviews the return. As part of this 
review, I reviews the information provided and the application of 
the tax laws to this information. The mathematical computations and 
carried-forward amounts are reviewed by J, an employee of 
Partnership E. The policies and practices of Partnership E require 
that K, a partner, finally review the return. The scope of K's 
review includes reviewing the information provided and applying to 
this information his knowledge of H's affairs, observing that 
Partnership E's policies and practices have been followed, and 
making the final determination with respect to the proper 
application of the tax laws to determine H's tax liability. K 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 I (or F and G), and other factors. K 
is the individual tax return preparer who is primarily responsible 
for the overall accuracy of H's return. K must sign the return as 
tax return preparer.
     Example 3. L corporation maintains an office in Seattle, 
Washington, for the purpose of preparing partnership returns for 
compensation. L makes compensatory arrangements with individuals 
(but provides no working facilities) in several states to collect 
information from partners of a partnership and to make decisions 
with respect to the proper application of the tax laws to the 
information in order to prepare the partnership return and calculate 
the partnership's distributive items. M, an individual, who has such 
an arrangement in Los Angeles with L, collects information from N, 
the general partner of a partnership, and completes a worksheet kit 
supplied by L that is stamped with M's name and an identification 
number assigned to M by L. In this process, M classifies this 
information in appropriate categories for the preparation of the 
partnership return. The completed worksheet kit signed by M is then 
mailed to L. O, an employee in L's office, reviews the worksheet kit 
to make sure it was properly completed. O does not review the 
information obtained from N for its validity or accuracy. O may, but 
did not, make the final decision with respect to the proper 
application of tax laws to the information provided. The data from 
the worksheet is entered into a computer and the return form is 
completed. The return is prepared for submission to N with filing 
instructions. M is the individual tax return preparer primarily 
responsible for the overall accuracy of the partnership return. M 
must sign the return as tax return preparer.
    Example 4. P employs R, S, and T to prepare gift tax returns for 
taxpayers. After R and S have collected the information from a 
taxpayer and applied the tax laws to the information, the return 
form is completed by a computer service. On the day the returns 
prepared by R and S are ready for their signatures, R is away from 
the city for 1 week on another assignment and S is on detail to 
another office in the same city for the day. T may sign the gift tax 
returns prepared by R, provided that T reviews the information 
obtained by R relative to the taxpayer, and T reviews the 
preparation of each return prepared by R. T may not sign the returns 
prepared by S because S is available.

    (5) 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 tax 
return preparer asserts reasonable cause for failure to sign, the IRS 
will require a written statement to substantiate the tax return 
preparer's claim of reasonable cause. For purposes of this paragraph 
(b), reasonable cause is a cause that arises despite ordinary care and 
prudence exercised by the individual tax return preparer.
    (6) Effective/applicability date. This paragraph (b) is applicable 
to returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    (c) Failure to furnish identifying number. (1) A person who is a 
signing tax return preparer as described in Sec.  301.7701-15(b)(1) of 
this chapter of any return of tax under the Code or claim for refund of 
tax under the Code, and who fails to satisfy the requirement of section 
6109(a)(4) and Sec.  1.6109-2(a) to furnish one or more identifying 
numbers of signing tax return preparers or persons employing the 
signing tax return preparer (or with which the signing tax return 
preparer is associated) on a return or claim for refund after it is 
completed and before it is presented to the taxpayer (or nontaxable 
entity) for signature shall be subject to a penalty of $50 for each 
failure, 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.
    (2) No more than one penalty of $50 may be imposed under section 
6695(c) and paragraph (c)(1) of this section with respect to a single 
return or claim for refund.
    (d) Failure to retain copy or record. (1) A person who is a signing 
tax return preparer as described in Sec.  301.7701-15(b)(1) of this 
chapter of any return of tax under the Code or claim for refund of tax 
under the Code, and who fails to satisfy the requirements imposed upon 
him or her by section 6107(b) and Sec.  1.6107-1(b) and (c) (other than 
the record requirement described in both Sec.  1.6107-1(b)(2) and (3)) 
to retain and make available for inspection a copy of the return or 
claim for refund, or to include the return or claim for refund in a 
record of returns and claims for refund and make the record available 
for inspection, shall be subject to a penalty of $50 for the failure, 
unless it is shown that the failure is due to reasonable cause and not 
due to willful neglect.
    (2) A person may not, for returns or claims for refund presented to 
the

[[Page 34579]]

taxpayers (or nontaxable entities) during any single return period, be 
subject to more than $25,000 in penalties under section 6695(d) and 
paragraph (d)(1) of this section.
    (e) Failure to file correct information returns. A person who is 
subject to the reporting requirements of section 6060 and Sec.  1.6060-
1 and who fails to satisfy these requirements shall pay a penalty of 
$50 for each such failure, with a maximum of $25,000 per person imposed 
for each calendar year, unless such failure was due to reasonable cause 
and not due to willful neglect.
    (f) Negotiation of check. (1) No person who is a tax return 
preparer as described in Sec.  301.7701-15 of this chapter may endorse 
or otherwise negotiate, directly or through an agent, a check for the 
refund of tax under the Code that is issued to a taxpayer other than 
the tax return preparer if the person was a tax return preparer of the 
return or claim for refund which gave rise to the refund check.
    (2) Section 6695(f) and paragraphs (f)(1) and (3) of this section 
do not apply to a tax return preparer-bank that--
    (i) Cashes a refund check and remits all of the cash to the 
taxpayer or accepts a refund check for deposit in full to a taxpayer's 
account, so long as the bank does not initially endorse or negotiate 
the check (unless the bank has made a loan to the taxpayer on the basis 
of the anticipated refund); or
    (ii) Endorses a refund check for deposit in full to a taxpayer's 
account pursuant to a written authorization of the taxpayer (unless the 
bank has made a loan to the taxpayer on the basis of the anticipated 
refund).
    (3) A tax return preparer-bank may also subsequently endorse or 
negotiate a refund check as a part of the check-clearing process 
through the financial system after initial endorsement or negotiation.
    (4) The tax return preparer shall be subject to a penalty of $500 
for each endorsement or negotiation of a check prohibited under section 
6695(f) and paragraph (f)(1) of this section.
    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 11. Section 1.6695-2 is amended by revising the section 
heading and paragraphs (a), (b)(3), (c) and (d) to read as follows:


Sec.  1.6695-2  Tax return preparer due diligence requirements for 
determining earned income credit eligibility.

    (a) Penalty for failure to meet due diligence requirements. A 
person who is a signing tax return preparer of a tax return or claim 
for refund under the Internal Revenue Code with respect to determining 
the eligibility for, or the amount of, the earned income credit (EIC) 
under section 32 and who fails to satisfy the due diligence 
requirements of paragraph (b) of this section will be subject to a 
penalty of $100 for each such failure.
    (b) * * *
    (3) Knowledge--(i) In general. The tax return preparer must not 
know, or have reason to know, that any information used by the tax 
return preparer in determining the taxpayer's eligibility for, or the 
amount of, the EIC is incorrect. The tax return preparer may not ignore 
the implications of information furnished to, or known by, the tax 
return preparer, and must make reasonable inquiries if the information 
furnished to the tax return preparer appears to be incorrect, 
inconsistent, or incomplete. A tax return preparer must make reasonable 
inquiries if a reasonable and well-informed tax return preparer 
knowledgeable in the law would conclude that the information furnished 
to the tax return preparer appears to be incorrect, inconsistent, or 
incomplete. The tax return preparer must also contemporaneously 
document in the files the reasonable inquiries made and the responses 
to these inquiries.
    (ii) Examples. The provisions of paragraph (b)(3)(i) of this 
section are illustrated by the following examples:

    Example 1. A 22 year-old taxpayer wants to claim two sons, ages 
10 and 11, as qualifying children for purposes of the EIC. Preparer 
A must make additional reasonable inquiries regarding the 
relationship between the taxpayer and the children as the age of the 
taxpayer appears inconsistent with the ages of the children claimed 
as sons.
    Example 2. An 18 year-old female taxpayer with an infant has 
$3,000 in earned income and states that she lives with her parents. 
Taxpayer wants to claim the infant as a qualifying child for the 
EIC. This information appears incomplete and inconsistent because 
the taxpayer lives with her parents and earns very little income. 
Preparer B must make additional reasonable inquires to determine if 
the taxpayer is the qualifying child of her parents and, therefore, 
ineligible to claim the EIC.
    Example 3. In March 2008, Mr. D has Preparer C prepare his tax 
year 2007 return using Married Filing Separate filing status, and an 
address of 25 Main Street, Mytown, Mystate. Two weeks later Mrs. D 
has C prepare her tax year 2007 return, and she asks C to use the 
Head of Household filing status, claiming two qualifying children, 
and the EIC. She tells C that her address is 25 Main Street, Mytown, 
Mystate. Mrs. D's filing status appears incorrect based on the 
filing status used by Mr. D. Therefore, C must make additional 
reasonable inquiries to determine Mrs. D's proper filing status.
    Example 4. Taxpayer asks Preparer E to prepare her tax return 
and tells D that she has a Schedule C business, that she has two 
qualifying children and that she wants to claim the EIC. Taxpayer 
indicates that she earned $10,000 from her Schedule C business, but 
that she has no expenses. This information appears incomplete 
because it is very unlikely that someone who is self-employed has no 
business expenses. E must make additional reasonable inquiries 
regarding taxpayer's business to determine whether the information 
regarding both income and expenses is correct.

    (c) Exception to penalty. The section 6695(g) penalty will not be 
applied with respect to a particular tax return or claim for refund if 
the tax return preparer can demonstrate to the satisfaction of the 
Internal Revenue Service that, considering all the facts and 
circumstances, the tax return preparer's normal office procedures are 
reasonably designed and routinely followed to ensure compliance with 
the due diligence requirements of paragraph (b) of this section, and 
the failure to meet the due diligence requirements of paragraph (b) of 
this section with respect to the particular return or claim for refund 
was isolated and inadvertent.
    (d) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 12. Section 1.6696-1 is revised to read as follows:


Sec.  1.6696-1  Claims for credit or refund by tax return preparers or 
appraisers.

    (a) Notice and demand. (1) The Internal Revenue Service (IRS) shall 
issue to each tax return preparer or appraiser one or more statements 
of notice and demand for payment for all penalties assessed against the 
tax return preparer or appraiser under section 6694 and Sec.  1.6694-1, 
under section 6695 and Sec.  1.6695-1, or under section 6695A (and any 
subsequently issued regulations).
    (2) For the definition of the term ``tax return preparer,'' see 
section 7701(a)(36) and Sec.  301.7701-15 of this chapter. A person who 
prepares a claim for credit or refund under this section for another 
person, however, is not, with respect to that preparation, a tax return 
preparer as defined in section 7701(a)(36) and Sec.  301.7701-15 of 
this chapter.
    (b) Claim filed by tax return preparer or appraiser. A claim for 
credit or refund of a penalty (or penalties) assessed against a tax 
return preparer or appraiser under section 6694 and Sec.  1.6694-1, 
under section 6695 and Sec.  1.6695-1, or under section 6695A (and

[[Page 34580]]

any subsequently issued regulations) may be filed under this section 
only by the tax return preparer or the appraiser (or the tax return 
preparer's or appraiser's estate) against whom the penalty (or 
penalties) is assessed and not by, for example, the tax return 
preparer's or appraiser's employer. This paragraph (b) is not intended, 
however, to impose any restrictions on the preparation of this claim 
for credit or refund. The claim may be prepared by the tax return 
preparer's or appraiser's employer or by other persons. In all cases, 
however, the claim for credit or refund shall contain the information 
specified in paragraph (d) of this section and, as required by 
paragraph (d) of this section, shall be verified by a written 
declaration by the tax return preparer or appraiser that the 
information is provided under penalty of perjury.
    (c) Separation and consolidation of claims. (1) Unless paragraph 
(c)(2) of this section applies, a tax return preparer shall file a 
separate claim for each penalty assessed in each statement of notice 
and demand issued to the tax return preparer.
    (2) A tax return preparer may file one or more consolidated claims 
for any or all penalties imposed on the tax return preparer by a single 
IRS Office under section 6695(a) and Sec.  1.6695-1(a) (relating to 
failure to furnish copy of return to taxpayer), section 6695(b) and 
Sec.  1.6695-1(b) (relating to failure to sign), section 6695(c) and 
Sec.  1.6695-1(c) (relating to failure to furnish identifying number), 
or under section 6695(d) and Sec.  1.6695-1(d) (relating to failure to 
retain copy of return or record), whether the penalties are asserted on 
a single or on separate statements of notice and demand. In addition, a 
tax return preparer may file one consolidated claim for any or all 
penalties imposed on the tax return preparer by a single IRS Office 
under section 6695(e) and Sec.  1.6695-1(e) (relating to failure to 
file correct information return), which are asserted on a single 
statement of notice and demand.
    (d) Content of claim. Each claim for credit or refund for any 
penalty (or penalties) paid by a tax return preparer under section 6694 
and Sec.  1.6694-1, or under section 6695 and Sec.  1.6695-1, or paid 
by an appraiser under section 6695A (and any subsequently issued 
regulations) shall include the following information, verified by a 
written declaration by the tax return preparer or appraiser that the 
information is provided under penalty of perjury:
    (1) The tax return preparer's or appraiser's name.
    (2) The tax return preparer's or appraiser's identification number. 
If the tax return preparer or appraiser is--
    (i) An individual (not described in paragraph (d)(2)(iii) of this 
section) who is a citizen or resident of the United States, the tax 
return preparer's or appraiser's social security account number (or 
such alternative number as may be prescribed by the IRS in forms, 
instructions, or other appropriate guidance) shall be provided;
    (ii) An individual who is not a citizen or resident of the United 
States and also was not employed by another tax return preparer or 
appraiser to prepare the document (or documents) with respect to which 
the penalty (or penalties) was assessed, the tax return preparer's or 
appraiser's employer identification number shall be provided; or
    (iii) A person (whether an individual, corporation, or partnership) 
that employed one or more persons to prepare the document (or 
documents) with respect to which the penalty (or penalties) was 
assessed, the tax return preparer's or appraiser's employer 
identification number shall be provided.
    (3) The tax return preparer's or appraiser's address where the IRS 
mailed the statement (or statements) of notice and demand and, if 
different, the tax return preparer's or appraiser's address shown on 
the document (or documents) with respect to which the penalty (or 
penalties) was assessed.
    (4)(i) The address of the IRS campus or office that issued the 
statement (or statements) of notice and demand for payment of the 
penalty (or penalties).
    (ii) The date (or dates) and identifying number (or numbers) of the 
statement (or statements) of notice and demand.
    (5)(i) The identification, by amount, type, and document to which 
related, of each penalty included in the claim. Each document referred 
to in the preceding sentence shall be identified by the form title or 
number, by the taxpayer's (or nontaxable entity's) name and taxpayer 
identification number, and by the taxable year to which the document 
relates.
    (ii) The date (or dates) of payment of the amount (or amounts) of 
the penalty (or penalties) included in the claim.
    (iii) The total amount claimed.
    (6) A statement setting forth in detail--
    (i) Each ground upon which each penalty overpayment claim is based; 
and
    (ii) Facts sufficient to apprise the IRS of the exact basis of each 
such claim.
    (e) Form for filing claim. Notwithstanding Sec.  301.6402(c) of 
this chapter, Form 6118, ``Claim for Refund of Tax Return Preparer 
Penalties,'' is the form prescribed for making a claim as provided in 
this section.
    (f) Place for filing claim. A claim filed under this section shall 
be filed with the IRS campus or office that issued to the tax return 
preparer or appraiser the statement (or statements) of notice and 
demand for payment of the penalty (or penalties) included in the claim.
    (g) Time for filing claim. (1)(i) Except as provided in section 
6694(c)(1) and Sec.  1.6694-2(a)(3)(ii) and (4), and in section 6694(d) 
and Sec.  1.6694-1(c):
    (A) A claim for a penalty paid by a tax return preparer under 
section 6694 and Sec.  1.6694-1, or under section 6695 and Sec.  
1.6695-1, or by a appraiser under section 6695A (and any subsequently 
issued regulations) shall be filed within three years from the date the 
payment was made.
    (B) A consolidated claim, permitted under paragraph (c)(2) of this 
section, shall be filed within three years from the first date of 
payment of any penalty included in the claim.
    (ii) For purposes of this paragraph (g)(1), payment is considered 
made on the date payment is received by the IRS or, if applicable, on 
the date an amount is credited in satisfaction of the penalty.
    (2) For purposes of determining whether a claim is timely filed, 
the rules under sections 7502 and 7503 and the provisions of Sec. Sec.  
1.7502-1, 1.7502-2, and 1.7503-1 apply.
    (h) Application of refund to outstanding liability of tax return 
preparer or appraiser. The IRS may, within the applicable period of 
limitations, credit any amount of an overpayment by a tax return 
preparer or appraiser of a penalty (or penalties) paid under section 
6694 and Sec.  1.6694-1, under section 6695 and Sec.  1.6695-1, or 
under section 6695A (and any subsequently issued regulations) against 
any outstanding liability for any tax (or for any interest, additional 
amount, addition to the tax, or assessable penalty) owed by the tax 
return preparer or appraiser making the overpayment. If a portion of an 
overpayment is so credited, only the balance will be refunded to the 
tax return preparer or appraiser.
    (i) Interest. (1) Section 6611 and Sec.  301.6611-1 of this chapter 
apply to the payment by the IRS of interest on an overpayment by a tax 
return preparer or appraiser of a penalty (or penalties) paid under 
section 6694 and Sec.  1.6694-1, under section 6695 and Sec.  1.6695-1, 
or under section 6695A (and any subsequently issued regulations).
    (2) Section 6601 and Sec.  301.6601-1 of this chapter apply to the 
payment of interest by a tax return preparer or appraiser to the IRS on 
any penalty (or

[[Page 34581]]

penalties) assessed against the tax return preparer under section 6694 
and Sec.  1.6694-1, under section 6695 and Sec.  1.6695-1, or under 
section 6695A (and any subsequently issued regulations).
    (j) Suits for refund of penalty. (1) A tax return preparer or 
appraiser may not maintain a civil action for the recovery of any 
penalty paid under section 6694 and Sec.  1.6694-1, under section 6695 
and Sec.  1.6695-1, or under section 6695A (and any subsequently issued 
regulations), unless the tax return preparer or appraiser has 
previously filed a claim for credit or refund of the penalty as 
provided in this section (and the court has jurisdiction of the 
proceeding). See sections 6694(c) and 7422.
    (2)(i) Except as provided in section 6694(c)(2) and Sec.  1.6694-
2(b), the periods of limitation contained in section 6532 and Sec.  
301.6532-1 of this chapter apply to a tax return preparer's or 
appraiser's suit for the recovery of any penalty paid under section 
6694 and Sec.  1.6694-1, under section 6695 and Sec.  1.6695-1, or 
under section 6695A (and any subsequently issued regulations).
    (ii) The rules under section 7503 and Sec.  301.7503-1 of this 
chapter apply to the timely commencement by a tax return preparer or 
appraiser of a suit for the recovery of any penalty paid under section 
6694 and Sec.  1.6694-1, under section 6695 and Sec.  1.6695-1, or 
under section 6695A (and any subsequently issued regulations).
    (k) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

    Par. 13. The authority citation for part 20 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 20.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 20.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 20.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 20.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 14. Section 20.6060-1 is added to read as follows:


Sec.  20.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of estate tax 
under chapter 11 of subtitle B of the Internal Revenue Code, other than 
for the person, at any time during a return period, shall satisfy the 
recordkeeping and inspection requirements in the manner stated in Sec.  
1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 15. Section 20.6107-1 is added to read as follows:


Sec.  20.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of estate tax under chapter 11 of 
subtitle B of the Internal Revenue Code shall furnish a completed copy 
of the return or claim for refund to the estate, and retain a completed 
copy or record in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 16. Section 20.6109-1 is added to read as follows:


Sec.  20.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each estate tax return or claim for refund prepared 
by one or more signing tax return preparers must include the 
identifying number of the preparer required by Sec.  1.6695-1(b) of 
this chapter to sign the return or claim for refund in the manner 
stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 17. Section 20.6694-1 is added to read as follows:


Sec.  20.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of estate tax returns or claims see 
Sec.  1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 18. Section 20.6694-2 is added to read as follows:


Sec.  20.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of estate tax under chapter 11 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(a) of the Code in the manner stated in Sec.  1.6694-2 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 19. Section 20.6694-3 is added to read as follows:


Sec.  20.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of estate tax under chapter 11 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(b) of the Code in the manner stated in Sec.  1.6694-3 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 20. Section 20.6694-4 is added to read as follows:


Sec.  20.6694-4  Extension of period of collection when preparer pays 
15 percent of a penalty for understatement of taxpayer's liability and 
certain other procedural matters.

    (a) In general. For rules relating to the extension of the period 
of collection when a tax return preparer who prepared a return or claim 
for refund for estate tax under chapter 11 of subtitle B of the 
Internal Revenue Code pays 15 percent of a penalty for understatement 
of the taxpayer's liability, and procedural matters relating to the 
investigation, assessment and collection of the penalties under 
sections 6694(a) and (b), the rules under Sec.  1.6694-4 of this 
chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 21. Section 20.6695-1 is added to read as follows:


Sec.  20.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim

[[Page 34582]]

for refund of estate tax under chapter 11 of subtitle B of the Internal 
Revenue Code (Code) shall be subject to penalties for failure to 
furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure 
to furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 22. Section 20.6696-1 is added to read as follows:


Sec.  20.6696-1  Claims for credit or refund by tax return preparers or 
appraisers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for estate 
tax under chapter 11 of subtitle B of the Internal Revenue Code, or by 
an appraiser that prepared an appraisal in connection with such a 
return or claim for refund under section 6695A, the rules under Sec.  
1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 23. Section 20.7701-1 is added to read as follows:


Sec.  20.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

    Par. 24. The authority citation for part 25 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 25.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 25.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 25.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 25.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 25. Section 25.6060-1 is added to read as follows:


Sec.  25.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of gift tax 
under chapter 12 of subtitle B of the Internal Revenue Code, other than 
for the person, at any time during a return period, shall satisfy the 
record keeping and inspection requirements in the manner stated in 
Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 26. Section 25.6107-1 is added to read as follows:


Sec.  25.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of gift tax under chapter 12 of subtitle 
B of the Internal Revenue Code shall furnish a completed copy of the 
return or claim for refund to the taxpayer, and retain a completed copy 
or record in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 27. Section 25.6109-1 is added to read as follows:


Sec.  25.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each gift tax return or claim for refund prepared 
by one or more signing tax return preparers must include the 
identifying number of the preparer required by Sec.  1.6695-1(b) of 
this chapter to sign the return or claim for refund in the manner 
stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 28. Section 25.6694-1 is added to read as follows:


Sec.  25.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of gift tax returns or claims see 
Sec.  1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 29. Section 25.6694-2 is added to read as follows:


Sec.  25.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of gift tax under chapter 12 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(a) of the Code in the manner stated in Sec.  1.6694-2 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 30. Section 25.6694-3 is added to read as follows:


Sec.  25.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of gift tax under chapter 12 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(b) of the Code in the manner stated in Sec.  1.6694-3 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 31. Section 25.6694-4 is added to read as follows:


Sec.  25.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules for the extension of period of collection 
when a tax return preparer who prepared a return or claim for refund 
for gift tax under chapter 12 of subtitle B of the Internal Revenue 
Code pays 15 percent of a penalty for understatement of taxpayer's 
liability, and procedural matters relating to the investigation of , 
assessment and collection of the penalties under section 6694(a) and 
(b), the rules under Sec.  1.6694-4 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and

[[Page 34583]]

claims for refund filed, and advice provided, after the date that final 
regulations are published in the Federal Register.
    Par. 32. Section 25.6695-1 is added to read as follows:


Sec.  25.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of gift tax under chapter 12 of subtitle B of the 
Internal Revenue Code (Code) shall be subject to penalties for failure 
to furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure 
to furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 33. Section 25.6696-1 is added to read as follows:


Sec.  25.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for gift tax 
under chapter 12 of subtitle B of the Internal Revenue Code, or by an 
appraiser that prepared an appraisal in connection with such a return 
or claim for refund under section 6695A, the rules under Sec.  1.6696-1 
of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 34. Section 25.7701-1 is added to read as follows:


Sec.  25.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 26--GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX 
REFORM ACT OF 1986

    Par. 35. The authority citation for part 26 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 26.6060-1 also issued under 26 U.S.C. 6060(a).* * *
    Section 26.6109-2 also issued under 26 U.S.C. 6109(a).* * *
    Section 26.6695-1 also issued under 26 U.S.C. 6695(b).* * *
    Section 26.6695-2 also issued under 26 U.S.C. 6695(g).* * *

    Par. 36. Section 26.6060-1 is added to read as follows:


Sec.  26.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of generation-
skipping transfer tax under chapter 13 of subtitle B of the Internal 
Revenue Code, other than for the person, at any time during a return 
period, shall satisfy the record keeping and inspection requirements in 
the manner stated in Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 37. Section 26.6107-1 is added to read as follows:


Sec.  26.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of generation-skipping transfer tax 
under chapter 13 of subtitle B of the Internal Revenue Code shall 
furnish a completed copy of the return or claim for refund to the 
estate, and retain a completed copy or record in the manner stated in 
Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 38. Section 26.6109-1 is added to read as follows:


Sec.  26.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each generation-skipping transfer tax return or 
claim for refund prepared by one or more signing tax return preparers 
must include the identifying number of the preparer required by Sec.  
1.6695-1(b) of this chapter to sign the return or claim for refund in 
the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 39. Section 26.6694-1 is added to read as follows:


Sec.  26.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of generation-skipping transfer tax 
returns or claims see Sec.  1.66994-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 40. Section 26.6694-2 is added to read as follows:


Sec.  26.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of generation-skipping transfer tax under chapter 
13 of subtitle B of the Internal Revenue Code (Code) shall be subject 
to penalties under section 6694(a) of the Code in the manner stated in 
Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 41. Section 26.6694-3 is added to read as follows:


Sec.  26.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of generation-skipping transfer tax under chapter 
13 of subtitle B of the Internal Revenue Code (Code) shall be subject 
to penalties under section 6694(b) of the Code in the manner stated in 
Sec.  1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 42. Section 26.6694-4 is added to read as follows:

[[Page 34584]]

Sec.  26.6694-4  Extension of period of collection when preparer pays 
15 percent of a penalty for understatement of taxpayer's liability and 
certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for generation-skipping transfer tax under chapter 13 of 
subtitle B of the Internal Revenue Code pays 15 percent of a penalty 
for understatement of taxpayer's liability, and procedural matters 
relating to the investigation, assessment and collection of the 
penalties under section 6694(a) and (b), the rules under Sec.  1.6694-4 
of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 43. Section 26.6695-1 is added to read as follows:


Sec.  26.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of generation-skipping transfer tax under chapter 
13 of subtitle B of the Internal Revenue Code (Code) shall be subject 
to penalties for failure to a furnish copy to the taxpayer under 
section 6695(a) of the Code, failure to sign the return under section 
6695(b) of the Code, failure to furnish an identification number under 
section 6695(c) of the Code, failure to retain a copy or list under 
section 6695(d) of the Code, failure to file a correct information 
return under section 6695(e) of the Code, and negotiation of a check 
under section 6695(f) of the Code, in the manner stated in Sec.  
1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 44. Section 26.6696-1 is added to read as follows:


Sec.  26.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for 
generation-skipping transfer tax under chapter 13 of subtitle B of the 
Internal Revenue Code, or by an appraiser that prepared an appraisal in 
connection with such a return or claim for refund under section 6695A, 
the rules under Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 45. Section 26.7701-1 is added to read as follows:


Sec.  26.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE 
SOURCE

    Par. 46. The authority citation for part 31 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 31.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 31.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 31.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 31.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 47. Section 31.6060-1 is added to read as follows:


Sec.  31.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of employment 
tax under chapters 21 through 25 of subtitle C of the Internal Revenue 
Code, other than for the person, at any time during a return period, 
shall satisfy the record keeping and inspection requirements in the 
manner stated in Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 48. Section 31.6107-1 is added to read as follows:


Sec.  31.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of employment tax under chapters 21 
through 25 of subtitle C of the Internal Revenue Code shall furnish a 
completed copy of the return or claim for refund to the taxpayer, and 
retain a completed copy or record in the manner stated in Sec.  1.6107-
1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 49. Section 31.6109-2 is added to read as follows:


Sec.  31.6109-2  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each employment tax return or claim for refund of 
employment tax under chapters 21 through 25 of subtitle C of the 
Internal Revenue Code prepared by one or more signing tax return 
preparers must include the identifying number of the preparer required 
by Sec.  1.6695-1(b) of this chapter to sign the return or claim for 
refund in the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 50. Section 31.6694-1 is added to read as follows:


Sec.  31.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of employment tax returns or claims 
of employment tax under chapters 21 through 25 of subtitle C of the 
Internal Revenue Code, see Sec.  1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 51. Section 31.6694-2 is added to read as follows:


Sec.  31.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of employment tax under chapters 21 through 25 of 
subtitle C of the Internal Revenue Code (Code) shall be subject to 
penalties under section 6694(a) of the Code in the manner stated in 
Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

[[Page 34585]]

    Par. 52. Section 31.6694-3 is added to read as follows:


Sec.  31.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of employment tax under chapters 21 through 25 of 
subtitle C of the Internal Revenue Code (Code) shall be subject to 
penalties under section 6694(b) of the Code in the manner stated in 
1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 53. Section 31.6694-4 is added to read as follows:


Sec.  31.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for employment tax under chapters 21 through 25 of subtitle 
C of the Internal Revenue Code pays 15 percent of a penalty for 
understatement of taxpayer's liability, and procedural matters relating 
to the investigation, assessment and collection of the penalties under 
section 6694(a) and (b), the rules under Sec.  1.6694-4 of this chapter 
will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 54. Section 31.6695-1 is added to read as follows:


Sec.  31.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of employment tax under chapters 21 through 25 of 
subtitle C of the Internal Revenue Code (Code) shall be subject to 
penalties for failure to furnish a copy to the taxpayer under section 
6695(a) of the Code, failure to sign the return under section 6695(b) 
of the Code, failure to furnish an identification number under section 
6695(c) of the Code, failure to retain a copy or list under section 
6695(d) of the Code, failure to file a correct information return under 
section 6695(e) of the Code, and negotiation of a check under section 
6695(f) of the Code, in the manner stated in Sec.  1.6695-1 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 55. Section 31.6696-1 is added to read as follows:


Sec.  31.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for 
employment tax under chapters 21 through 25 of subtitle C of the 
Internal Revenue Code, the rules under Sec.  1.6696-1 of this chapter 
will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 56. Section 31.7701-1 is added to read as follows:


Sec.  31.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

    Par. 57. The authority citation for part 40 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 40.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 40.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 40.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 40.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 58. Section 40.6060-1 is added to read as follows:


Sec.  40.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of excise tax 
under chapters 31, 32 (other than section 4181), 33, 34, 36 (other than 
section 4461), 38, and 39 of subtitle D of the Internal Revenue Code, 
other than for the person, at any time during a return period, shall 
satisfy the recordkeeping and inspection requirements in the manner 
stated in Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 59. Section 40.6107-1 is added to read as follows:


Sec.  40.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of excise tax under chapters 31, 32 
(other than section 4181), 33, 34, 36 (other than section 4461), 38, 
and 39 of subtitle D of the Internal Revenue Code shall furnish a 
completed copy of the return or claim for refund to the taxpayer, and 
retain a completed copy or record in the manner stated in Sec.  1.6107-
1 of this chapter.
    (b) Effective/applicability date. This section is applicable for 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 60. Section 40.6109-1 is added to read as follows:


Sec.  40.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each return or claim for refund of excise tax under 
chapters 31, 32 (other than section 4181), 33, 34, 36 (other than 
section 4461), 38, and 39 of subtitle D of the Internal Revenue Code 
prepared by one or more signing tax return preparers must include the 
identifying number of the preparer required by Sec.  1.6695-1(b) of 
this chapter to sign the return or claim for refund in the manner 
stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 61. Section 40.6694-1 is added to read as follows:


Sec.  40.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of returns or claims for refund of 
excise tax under chapters 31, 32 (other than section 4181), 33, 34, 36 
(other than section 4461), 38, and 39 of subtitle D of the Internal 
Revenue Code, see Sec.  1.6694-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice

[[Page 34586]]

provided, after the date that final regulations are published in the 
Federal Register.
    Par. 62. Section 40.6694-2 is added to read as follows:


Sec.  40.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under chapters 31, 32 (other than 
section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of 
subtitle D of the Internal Revenue Code (Code) shall be subject to 
penalties under section 6694(a) of the Code in the manner stated in 
Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 63. Section 40.6694-3 is added to read as follows:


Sec.  40.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under chapters 31, 32 (other than 
section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of 
subtitle D of the Internal Revenue Code (Code) shall be subject to 
penalties under section 6694(b) of the Code in the manner stated in 
Sec.  1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 64. Section 40.6694-4 is added to read as follows:


Sec.  40.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for excise tax under chapters 31, 32 (other than section 
4181), 33, 34, 36 (other than section 4461), 38, and 39 of subtitle D 
of the Internal Revenue Code pays 15 percent of a penalty for 
understatement of taxpayer's liability, and procedural matters relating 
to the investigation, assessment and collection of the penalties under 
section 6694(a) and (b), the rules under Sec.  1.6694-4 of this chapter 
will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 65. Section 40.6695-1 is added to read as follows:


Sec.  40.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under chapters 31, 32 (other than 
section 4181), 33, 34, 36 (other than section 4461), 38, and 39 of 
subtitle D of the Internal Revenue Code (Code) shall be subject to 
penalties for failure to furnish a copy to the taxpayer under section 
6695(a) of the Code, failure to sign the return under section 6695(b) 
of the Code, failure to furnish an identification number under section 
6695(c) of the Code, failure to retain a copy or list under section 
6695(d) of the Code, failure to file a correct information return under 
section 6695(e) of the Code, and negotiation of a check under section 
6695(f) of the Code, in the manner stated in Sec.  1.6695-1 of this 
chapter.
    (b) Effective/applicability date. This section is applicable for 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 66. Section 40.6696-1 is added to read as follows:


Sec.  40.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for excise 
tax under chapters 31, 32 (other than section 4181), 33, 34, 36 (other 
than section 4461), 38, and 39 of subtitle D of the Internal Revenue 
Code, the rules under Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 67. Section 40.7701-1 is added to read as follows:


Sec.  40.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 41--EXCISE TAX ON USE OF CERTAIN HIGHWAY MOTOR VEHICLES

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 41--EXCISE TAX ON USE OF CERTAIN HIGHWAY MOTOR VEHICLES

    Par. 68. The authority citation for part 41 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 41.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 41.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 41.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 41.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 69. Section 41.6060-1 is added to read as follows:


Sec.  41.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of excise tax 
under section 4481 of the Internal Revenue Code, other than for the 
person, at any time during a return period, shall satisfy the record 
keeping and inspection requirements in the manner stated in Sec.  
1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable for 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 70. Section 41.6107-1 is added to read as follows:


Sec.  41.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of excise tax section 4481 of the 
Internal Revenue Code shall furnish a completed copy of the return or 
claim for refund to the taxpayer, and retain a completed copy or record 
in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable for 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.

[[Page 34587]]

    Par. 71. Section 41.6109-2 is added to read as follows:


Sec.  41.6109-2  Tax return preparers furnishing identifying numbers 
for returns or claims for refund filed after December 31, 2008.

    (a) In general. Each excise tax return or claim for refund under 
section 4481 prepared by one or more signing tax return preparers must 
include the identifying number of the preparer required by Sec.  
1.6695-1(b) of this chapter to sign the return or claim for refund in 
the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. This section is applicable for 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 72. Section 41.6694-1 is added to read as follows:


Sec.  41.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of tax returns or claims for refund, 
see Sec.  1.6694-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 73. Section 41.6694-2 is added to read as follows:


Sec.  41.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under section 4481 of the Internal 
Revenue Code (Code) shall be subject to penalties under section 6694(a) 
of the Code in the manner stated in Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 74. Section 41.6694-3 is added to read as follows:


Sec.  41.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under section 4481 of the Internal 
Revenue Code (Code) shall be subject to penalties under section 6694(b) 
of the Code in the manner stated in Sec.  1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 75. Section 41.6694-4 is added to read as follows:


Sec.  41.6694-4  Extension of period of collection when preparer pays 
15 percent of a penalty for understatement of taxpayer's liability and 
certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for excise tax under section 4481 of the Internal Revenue 
Code pays 15 percent of a penalty for understatement of taxpayer's 
liability, and procedural matters relating to the investigation, 
assessment and collection of the penalties under section 6694(a) and 
(b), the rules under Sec.  1.6694-4 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 76. Section 41.6695-1 is added to read as follows:


Sec.  41.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under section 4481 of the Internal 
Revenue Code (Code) shall be subject to penalties for failure to 
furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign a return under section 6695(b) of the Code, failure to 
furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 77. Section 41.6696-1 is added to read as follows:


Sec.  41.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for excise 
tax under section 4481 of the Internal Revenue Code, the rules under 
Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 78. Section 41.7701-1 is added to read as follows:


Sec.  41.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 44--TAXES ON WAGERING; EFFECTIVE JANUARY 1, 1955

    Par. 79. The authority citation for part 44 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 44.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 44.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 44.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 44.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 80. Section 44.6060-1 is added to read as follows:


Sec.  44.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of tax on 
wagers under sections 4401 or 4411 of the Internal Revenue Code, other 
than for the person, at any time during a return period, shall satisfy 
the record keeping and inspection requirements in the manner stated in 
Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 81. Section 44.6107-1 is added to read as follows:


Sec.  44.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of tax on wagers under sections 4401 or 
4411 of the

[[Page 34588]]

Internal Revenue Code shall furnish a completed copy of the return or 
claim for refund to the taxpayer, and retain a completed copy or record 
in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable for 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 82. Section 44.6109-1 is added to read as follows:


Sec.  44.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each tax return or claim for refund of tax under 
sections 4401 or 4411 prepared by one or more signing tax return 
preparers must include the identifying number of the preparer required 
by Sec.  1.6695-1(b) of this chapter to sign the return or claim for 
refund in the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. This section is applicable for 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 83. Section 44.6694-1 is added to read as follows:


Sec.  44.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of wagering tax returns or claims for 
refund under sections 4401 or 4411, see Sec.  1.6694-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 84. Section 44.6694-2 is added to read as follows:


Sec.  44.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax on wagers under sections 4401 or 4411 of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(a) of the Code in the manner stated in Sec.  1.6694-2 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 85. Section 44.6694-3 is added to read as follows:


Sec.  44.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax on wagers under sections 4401 or 4411 of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(b) of the Code in the manner stated in Sec.  1.6694-3 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 86. Section 44.6694-4 is added to read as follows:


Sec.  44.6694-4  Extension of period of collection when preparer pays 
15 percent of a penalty for understatement of taxpayer's liability and 
certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for tax on wagers under sections 4401 or 4411 of the 
Internal Revenue Code pays 15 percent of a penalty for understatement 
of taxpayer's liability, and procedural matters relating to the 
investigation, assessment and collection of the penalties under section 
6694(a) and (b), the rules under Sec.  1.6694-4 of this chapter will 
apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 87. Section 44.6695-1 is added to read as follows:


Sec.  44.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax on wagers under sections 4401 or 4411 of the 
Internal Revenue Code (Code) shall be subject to penalties for failure 
to furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure 
to furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 88. Section 44.6696-1 is added to read as follows:


Sec.  44.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for tax on 
wagers under sections 4401 or 4411 of the Internal Revenue Code, the 
rules under Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 89. Section 44.7701-1 is added to read as follows:


Sec.  44.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

    Par. 90. The authority citation for part 53 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 53.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 53.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 53.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 53.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 91. Section 53.6060-1 is added to read as follows:


Sec.  53.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of tax under 
Chapter 42 of the Internal Revenue Code, other than for the person, at 
any time during a return period, shall satisfy the record keeping and 
inspection requirements in the manner stated in Sec.  1.6060-1 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and

[[Page 34589]]

claims for refund filed after the date that final regulations are 
published in the Federal Register.
    Par. 92. Section 53.6107-1 is added to read as follows:


Sec.  53.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of tax under Chapter 42 of the Internal 
Revenue Code shall furnish a completed copy of the return or claim for 
refund to the taxpayer, and retain a completed copy or record in the 
manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 93. Section 53.6109-1 is added to read as follows:


Sec.  53.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund filed.

    (a) In general. Each tax return or claim for refund under Chapter 
42 of the Internal Revenue Code prepared by one or more signing tax 
return preparers must include the identifying number of the preparer 
required by Sec.  1.6695-1(b) of this chapter to sign the return or 
claim for refund in the manner stated in Sec.  1.6109-2 of this 
chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 94. Section 53.6694-1 is added to read as follows:


Sec.  53.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of tax returns or claims for refund 
under Chapter 42 of the Internal Revenue Code, see Sec.  1.6694-1 of 
this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 95. Section 53.6694-2 is added to read as follows:


Sec.  53.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under Chapter 42 of the Internal Revenue 
Code (Code) shall be subject to penalties under section 6694(a) of the 
Code in the manner stated in Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 96. Section 53.6694-3 is added to read as follows:


Sec.  53.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under Chapter 42 of the Internal Revenue 
Code (Code) shall be subject to penalties under section 6694(b) of the 
Code in the manner stated in Sec.  1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 97. Section 53.6694-4 is added to read as follows:


Sec.  53.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund of tax under Chapter 42 of the Internal Revenue Code pays 15 
percent of a penalty for understatement of taxpayer's liability, and 
procedural matters relating to the investigation, assessment and 
collection of the penalties under section 6694(a) and (b), the rules 
under Sec.  1.6694-4 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 98. Section 53.6695-1 is added to read as follows:


Sec.  53.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under Chapter 42 of the Internal Revenue 
Code (Code) shall be subject to penalties for failure to furnish a copy 
to the taxpayer under section 6695(a) of the Code, failure to sign the 
return under section 6695(b) of the Code, failure to furnish an 
identification number under section 6695(c) of the Code, failure to 
retain a copy or list under section 6695(d) of the Code, failure to 
file a correct information return under section 6695(e) of the Code, 
and negotiation of a check under section 6695(f) of the Code, in the 
manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 99. Section 53.6696-1 is added to read as follows:


Sec.  53.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for tax under 
Chapter 42 of the Internal Revenue Code, the rules under Sec.  1.6696-1 
of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 100. Section 53.7701-1 is added to read as follows:


Sec.  53.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 54--PENSION EXCISE TAXES

    Par. 101. The authority citation for part 54 is amended by adding 
entries in numerical order to read in part as follows:

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

    Section 54.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 54.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 54.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 54.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 102. Section 54.6060-1 is added to read as follows:


Sec.  54.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund under Chapter 
43 of subtitle D of the Internal Revenue Code, other than for the 
person, at any time during

[[Page 34590]]

a return period, shall satisfy the record keeping and inspection 
requirements in the manner stated in Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 103. Section 54.6107-1 is added to read as follows:


Sec.  54.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of tax under Chapter 43 of subtitle D of 
the Internal Revenue Code, shall furnish a completed copy of the return 
or claim for refund to the taxpayer, and retain a completed copy or 
record in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 104. Section 54.6109-1 is added to read as follows:


Sec.  54.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund filed.

    (a) In general. Each tax return or claim for refund of tax under 
Chapter 43 of subtitle D prepared by one or more signing tax return 
preparers must include the identifying number of the preparer required 
by Sec.  1.6695-1(b) of this chapter to sign the return or claim for 
refund in the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 105. Section 54.6694-1 is added to read as follows:


Sec.  54.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of tax returns or claims for refund 
of tax under Chapter 43 of subtitle D, see Sec.  1.6694-1 of this 
chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 106. Section 54.6694-2 is added to read as follows:


Sec.  54.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under chapter 43 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(a) of the Code in the manner stated in Sec.  1.6694-2 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 107. Section 56.6694-3 is added to read as follows:


Sec.  54.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under chapter 43 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(b) of the Code in the manner stated in Sec.  1.6694-3 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 108. Section 54.6694-4 is added to read as follows:


Sec.  54.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for tax under chapter 43 of subtitle D of the Internal 
Revenue Code pays 15 percent of a penalty for understatement of 
taxpayer's liability, and procedural matters relating to the 
investigation, assessment and collection of the penalties under section 
6694(a) and (b), the rules under Sec.  1.6694-4 of this chapter will 
apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 109. Section 54.6695-1 is added to read as follows:


Sec.  54.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under chapter 43 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties for failure 
to furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure 
to furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 110. Section 54.6696-1 is added to read as follows:


Sec.  54.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for excise 
tax under chapter 43 of subtitle D of the Internal Revenue Code, the 
rules under Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 111. Section 54.7701-1 is added to read as follows:


Sec.  54.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 55--EXCISE TAX ON REAL ESTATE INVESTMENT TRUSTS AND REGULATED 
INVESTMENT COMPANIES

    Par. 112. The authority citation for part 55 is amended by adding 
entries in numerical order to read in part as follows:

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

    Section 55.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 55.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 55.6695-1 also issued under 26 U.S.C. 6695(b). * * *

[[Page 34591]]

    Section 55.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 113. Section 55.6060-1 is added to read as follows:


Sec.  55.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund under chapter 
44 of subtitle D of the Internal Revenue Code, other than for the 
person, at any time during a return period, shall satisfy the record 
keeping and inspection requirements in the manner stated in Sec.  
1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 114. Section 55.6107-1 is added to read as follows:


Sec.  55.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of tax under Chapter 44 of subtitle D of 
the Internal Revenue Code shall furnish a completed copy of the return 
or claim for refund to the taxpayer, and retain a completed copy or 
record in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 115. Section 55.6109-1 is added to read as follows:


Sec.  55.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each tax return or claim for refund of tax under 
chapter 44 of Subtitle D prepared by one or more signing tax return 
preparers must include the identifying number of the preparer required 
by Sec.  1.6695-1(b) of this chapter to sign the return or claim for 
refund in the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 116. Section 55.6694-1 is added to read as follows:


Sec.  55.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of tax returns or claims for refund 
of tax under chapter 44 of Subtitle D see Sec.  1.6694-1 of this 
chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 117. Section 55.6694-2 is added to read as follows:


Sec.  55.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under chapter 44 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(a) of the Code in the manner stated in Sec.  1.6694-2 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 118. Section 55.6694-3 is added to read as follows:


Sec.  55.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under chapter 44 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(b) of the Code in the manner stated in Sec.  1.6694-3 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 119. Section 55.6694-4 is added to read as follows:


Sec.  55.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for excise tax under chapter 44 of subtitle D of the 
Internal Revenue Code pays 15 percent of a penalty for understatement 
of taxpayer's liability, and procedural matters relating to the 
investigation, assessment and collection of the penalties under section 
6694(a) and (b), the rules under Sec.  1.6694-4 of this chapter will 
apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 120. Section 55.6695-1 is added to read as follows:


Sec.  55.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under chapter 44 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties for failure 
to furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure 
to furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 121. Section 55.6696-1 is added to read as follows:


Sec.  55.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for tax under 
chapter 44 of subtitle D of the Internal Revenue Code, the rules under 
Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 122. Section 55.7701-1 is added to read as follows:


Sec.  55.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

[[Page 34592]]

PART 56--PUBLIC CHARITY EXCISE TAXES

    Par. 123. The authority citation for part 56 is amended by adding 
entries in numerical order to read in part as follows:

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

    Section 56.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 56.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 56.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 56.6695-2 also issued under 26 U.S.C. 6695(g).* * *

    Par. 124. Section 56.6060-1 is added to read as follows:


Sec.  56.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund of tax under 
chapter 41 of subtitle D of the Internal Revenue Code, other than for 
the person, at any time during a return period, shall satisfy the 
record keeping and inspection requirements in the manner stated in 
Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 125. Section 56.6107-1 is added to read as follows:


Sec.  56.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of tax under Chapter 41 of subtitle D of 
the Internal Revenue Code shall furnish a completed copy of the return 
or claim for refund to the estate, and retain a completed copy or 
record in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 126. Section 56.6109-1 is added to read as follows:


Sec.  56.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each tax return or claim for refund for tax under 
chapter 41 of subtitle D prepared by one or more tax signing return 
preparers must include the identifying number of the preparer required 
by Sec.  1.6695-1(b) of this chapter to sign the return or claim for 
refund in the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 127. Section 56.6694-1 is added to read as follows:


Sec.  56.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of tax returns or claims for refund 
of tax under chapter 41 of subtitle D see Sec.  1.6694-1 of this 
chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 128. Section 56.6694-2 is added to read as follows:


Sec.  56.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of excise tax under chapter 41 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(a) of the Code in the manner stated in Sec.  1.6694-2 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 129. Section 56.6694-3 is added to read as follows:


Sec.  56.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under chapter 41 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties under 
section 6694(b) of the Code in the manner stated in Sec.  1.6694-3 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 130. Section 56.6694-4 is added to read as follows:


Sec.  56.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for tax under chapter 41 of subtitle D of the Internal 
Revenue Code pays 15 percent of a penalty for understatement of 
taxpayer's liability, and procedural matters relating to the 
investigation, assessment and collection of the penalties under section 
6694(a) and (b), the rules under Sec.  1.6694-4 of this chapter will 
apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 131. Section 56.6695-1 is added to read as follows:


Sec.  56.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under chapter 41 of subtitle D of the 
Internal Revenue Code (Code) shall be subject to penalties for failure 
to furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure 
to furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 132. Section 56.6696-1 is added to read as follows:


Sec.  56.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules relating to claims for credit or refund 
by a tax return preparer who prepared a return or claim for refund for 
tax under chapter 41 of subtitle D of the Internal Revenue Code, the 
rules under Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

[[Page 34593]]

    Par. 133. Section 56.7701-1 is added to read as follows:


Sec.  56.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 156--EXCISE TAX ON GREENMAIL

    Par. 134. The authority citation for part 156 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 156.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 156.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 156.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 156.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 135. Section 156.6060-1 is added to read as follows:


Sec.  156.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund under section 
5881 of the Internal Revenue Code, other than for the person, at any 
time during a return period, shall satisfy the record keeping and 
inspection requirements in the manner stated in Sec.  1.6060-1 of this 
chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 136. Section 156.6107-1 is added to read as follows:


Sec.  156.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of tax under Section 5881 of the 
Internal Revenue Code shall furnish a completed copy of the return or 
claim for refund to the taxpayer, and retain a completed copy or record 
in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 137. Section 156.6109-1 is added to read as follows:


Sec.  156.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each tax return or claim for refund for tax under 
section 5881 of the Internal Revenue Code prepared by one or more 
signing tax return preparers must include the identifying number of the 
preparer required by Sec.  1.6695-1(b) of this chapter to sign the 
return or claim for refund in the manner stated in Sec.  1.6109-2 of 
this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 138. Section 156.6694-1 is added to read as follows:


Sec.  156.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of tax returns or claims for refund 
for tax under section 5881 of the Internal Revenue Code, see Sec.  
1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 139. Section 156.6694-2 is added to read as follows:


Sec.  156.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under section 5881 of the Internal Revenue 
Code (Code) shall be subject to penalties under section 6694(a) of the 
Code in the manner stated in Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 140. Section 156.6694-3 is added to read as follows:


Sec.  156.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under section 5881 of the Internal Revenue 
Code (Code) shall be subject to penalties under section 6694(b) of the 
Code in the manner stated in Sec.  1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 141. Section 156.6694-4 is added to read as follows:


Sec.  156.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for tax under section 5881 of the Internal Revenue Code pays 
15 percent of a penalty for understatement of taxpayer's liability, and 
procedural matters relating to the investigation, assessment and 
collection of the penalties under section 6694(a) and (b), the rules 
under Sec.  1.6694-4 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 142. Section 156.6695-1 is added to read as follows:


Sec.  156.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under section 5881 of the Internal Revenue 
Code (Code) shall be subject to penalties for failure to furnish a copy 
to the taxpayer under section 6695(a) of the Code, failure to sign the 
return under section 6695(b) of the Code, failure to furnish an 
identification number under section 6695(c) of the Code, failure to 
retain a copy or list under section 6695(d) of the Code, failure to 
file a correct information return under section 6695(e) of the Code, 
and negotiation of a check under section 6695(f) of the Code, in the 
manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 143. Section 156.6696-1 is added to read as follows:


Sec.  156.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for tax under 
section 5881 of the Internal Revenue Code, the rules under Sec.  
1.6696-1 of this chapter will apply.

[[Page 34594]]

    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 144. Section 156.7701-1 is added to read as follows:


Sec.  156.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 157--EXCISE TAX ON STRUCTURED SETTLEMENT FACTORING 
TRANSACTIONS

    Par. 145. The authority citation for part 157 is amended by adding 
entries in numerical order to read in part as follows:

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

    Section 157.6060-1 also issued under 26 U.S.C. 6060(a). * * *
    Section 157.6109-2 also issued under 26 U.S.C. 6109(a). * * *
    Section 157.6695-1 also issued under 26 U.S.C. 6695(b). * * *
    Section 157.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 146. Section 157.6060-1 is added to read as follows:


Sec.  157.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs (or engages) one or more tax 
return preparers to prepare a return or claim for refund for tax under 
section 5891 of the Internal Revenue Code, other than for the person, 
at any time during a return period, shall satisfy the record keeping 
and inspection requirements in the manner stated in Sec.  1.6060-1 of 
this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 147. Section 157.6107-1 is added to read as follows:


Sec.  157.6107-1  Tax return preparer must furnish copy of return to 
taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of tax under section 5891 of the 
Internal Revenue Code shall furnish a completed copy of the return or 
claim for refund to the taxpayer, and retain a completed copy or record 
in the manner stated in Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 148. Section 157.6109-1 is added to read as follows:


Sec.  157.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each tax return or claim for refund for tax under 
section 5891 of the Internal Revenue Code prepared by one or more 
signing tax return preparers must include the identifying number of the 
preparer required by Sec.  1.6695-1(b) of this chapter to sign the 
return or claim for refund in the manner stated in Sec.  1.6109-2 of 
this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed after the date that 
final regulations are published in the Federal Register.
    Par. 149. Section 157.6694-1 is added to read as follows:


Sec.  157.6694-1  Section 6694 penalties applicable to tax return 
preparer.

    (a) In general. For general definitions regarding section 6694 
penalties applicable to preparers of tax returns or claims for refund 
for tax under section 5891 of the Internal Revenue Code see Sec.  
1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for refund filed, and advice provided, 
after the date that final regulations are published in the Federal 
Register.
    Par. 150. Section 157.6694-2 is added to read as follows:


Sec.  157.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under section 5891 of the Internal Revenue 
Code (Code) shall be subject to penalties under section 6694(a) of the 
Code in the manner stated in Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 151. Section 157.6694-3 is added to read as follows:


Sec.  157.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under section 5891 of the Internal Revenue 
Code (Code) shall be subject to penalties under section 6694(b) of the 
Code in the manner stated in Sec.  1.6694-3 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 152. Section 157.6694-4 is added to read as follows:


Sec.  157.6694-4  Extension of period of collection when preparer pays 
15 percent of a penalty for understatement of taxpayer's liability and 
certain other procedural matters.

    (a) In general. For rules relating to the extension of period of 
collection when a tax return preparer who prepared a return or claim 
for refund for tax under section 5891 of the Internal Revenue Code pays 
15 percent of a penalty for understatement of taxpayer's liability, and 
procedural matters relating to the investigation, assessment and 
collection of the penalties under section 6694(a) and (b), the rules 
under Sec.  1.6694-4 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 153. Section 157.6695-1 is added to read as follows:


Sec.  157.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of tax under section 5891 of the Internal Revenue 
Code (Code) shall be subject to penalties for failure to furnish a copy 
to the taxpayer under section 6695(a) of the Code, failure to sign the 
return under section 6695(b) of the Code, failure to furnish an 
identification number under section 6695(c) of the Code, failure to 
retain a copy or list under section 6695(d) of the Code, failure to 
file a correct information return under section 6695(e) of the Code, 
and negotiation of a check under section 6695(f) of the Code, in the 
manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after the date that final 
regulations are published in the Federal Register.
    Par. 154. Section 157.6696-1 is added to read as follows:

[[Page 34595]]

Sec.  157.6696-1  Claims for credit or refund by tax return preparers.

    (a) In general. For rules for claims for credit or refund by a tax 
return preparer who prepared a return or claim for refund for tax under 
section 5891 of the Internal Revenue Code, the rules under Sec.  
1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.
    Par. 155. Section 157.7701-1 is added to read as follows:


Sec.  157.7701-1  Tax return preparer.

    (a) In general. For the definition of a tax return preparer, see 
Sec.  301.7701-15 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 156. The authority citation for part 301 continues to read in 
part as follows:

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

    Par. 157. Section 301.7701-15 is amended to read as follows:


Sec.  301.7701-15  Tax return preparer.

    (a) In general. A tax return preparer is any person who prepares 
for compensation, or who employs one or more persons to prepare for 
compensation, all or a substantial portion of any return of tax or any 
claim for refund of tax under the Internal Revenue Code (Code).
    (b) Definitions--(1) Signing tax return preparer. A signing tax 
return preparer is any tax return preparer who signs or who is required 
to sign a return or claim for refund as a tax return preparer pursuant 
to Sec.  1.6695-1(b) of this chapter.
    (2) Nonsigning tax return preparer--(i) In general. A nonsigning 
tax return preparer is any tax return preparer who is not a signing tax 
return preparer but who prepares all or a substantial portion of a 
return or claim for refund within the meaning of paragraph(b)(3) of 
this section with respect to events that have occurred at the time the 
advice is rendered. In determining whether an individual is a 
nonsigning tax return preparer, time spent on advice that is given 
after events have occurred that represents less than 5 percent of the 
aggregate time incurred by such individual with respect to the 
position(s) giving rise to the understatement shall not be taken into 
account. Examples of nonsigning tax return preparers are tax return 
preparers who provide advice (written or oral) to a taxpayer (or to 
another tax return preparer) when that advice constitutes a substantial 
portion of the return within the meaning of paragraph (b)(3) of this 
section.
    (ii) Examples. The provisions of this paragraph (b)(2) are 
illustrated by the following examples:

    Example 1. Attorney A, an attorney in a law firm, provides legal 
advice to a large corporate taxpayer regarding a completed corporate 
transaction. The advice provided by A is directly relevant to the 
determination of an entry on the taxpayer's return and this advice 
constitutes a substantial portion of the return. A, however, does 
not prepare any other portion of the taxpayer's return and is not 
the signing tax return preparer of this return. A is considered a 
tax return preparer.
    Example 2. Attorney B, an attorney in a law firm, provides legal 
advice to a large corporate taxpayer regarding the tax consequences 
of a proposed corporate transaction. Based upon this advice, the 
corporate taxpayer enters into the transaction. Once the transaction 
is completed, the corporate taxpayer does not receive any additional 
advice from B with respect to the transaction. B did not provide 
advice with respect to events that have occurred and is not 
considered a tax return preparer.
    Example 3. The facts are the same as Example 2, except that 
Attorney B provides supplemental advice to the corporate taxpayer on 
a phone call after the transaction is completed. The time incurred 
on this supplemental advice by B represented less than 5 percent of 
the aggregate amount of time spent by B providing tax advice on the 
position. B is not considered a tax return preparer.

    (3) Substantial portion. (i) Only a person who prepares all or a 
substantial portion of a return or claim for refund shall be considered 
to be a tax return preparer of the return or claim for refund. A person 
who renders tax advice on a position that is directly relevant to the 
determination of the existence, characterization, or amount of an entry 
on a return or claim for refund will be regarded as having prepared 
that entry. Whether a schedule, entry, or other portion of a return or 
claim for refund is a substantial portion is determined based upon 
whether the person knows or reasonably should know that the tax 
attributable to the schedule, entry, or other portion of a return or 
claim for refund is a substantial portion of the tax required to be 
shown on the return or claim for refund. A single tax entry may 
constitute a substantial portion of the tax required to be shown on a 
return. Factors to consider in determining whether a schedule, entry, 
or other portion of a return or claim for refund is a substantial 
portion include but are not limited to--
    (A) The size and complexity of the item relative to the taxpayer's 
gross income; and
    (B) The size of the understatement attributable to the item 
compared to the taxpayer's reported tax liability.
    (ii)(A) For purposes of applying the rules of paragraph (b)(3)(i) 
of this section to a nonsigning tax return preparer within the meaning 
of paragraph (b)(2) of this section only, if the schedule, entry, or 
other portion of the return or claim for refund involves amounts of 
gross income, amounts of deductions, or amounts on the basis of which 
credits are determined that are--
    (1) Less than $10,000; or
    (2) Less than $400,000 and also less than 20 percent of the gross 
income as shown on the return or claim for refund (or, for an 
individual, the individual's adjusted gross income), then the schedule 
or other portion is not considered to be a substantial portion.
    (B) If more than one schedule, entry or other portion is involved, 
all schedules, entries or other portions shall be aggregated in 
applying this rule. This paragraph shall not apply to a signing tax 
return preparer within the meaning of paragraph (b)(1) of this section.
    (iii) A tax return preparer with respect to one return is not 
considered to be a tax return preparer of another return merely because 
an entry or entries reported on the first return may affect an entry 
reported on the other return, unless the entry or entries reported on 
the first return are directly reflected on the other return and 
constitute a substantial portion of the other return. For example, the 
sole preparer of a partnership return of income or small business 
corporation income tax return is considered a tax return preparer of a 
partner's or a shareholder's return if the entry or entries on the 
partnership or small business corporation return reportable on the 
partner's or shareholder's return constitute a substantial portion of 
the partner's or shareholder's return.
    (iv) Examples. The provisions of this paragraph (b)(3) are 
illustrated by the following examples:

    Example 1. Accountant C prepares a Form 8886, ``Reportable 
Transaction Disclosure Statement'', that is used to disclose 
reportable transactions. C does not prepare the tax return or advise 
the taxpayer regarding the tax return reporting position of the 
transaction to which the Form 8886

[[Page 34596]]

relates. The preparation of the Form 8886 is not directly relevant 
to the determination of the existence, characterization, or amount 
of an entry on a tax return or claim for refund. Rather, the Form 
8886 is prepared by C to disclose a reportable transaction. C has 
not prepared a substantial portion of the tax return and is not 
considered a tax return preparer under section 6694.

    Example 2. Accountant D prepares a schedule for an individual 
taxpayer's Form 1040, ``U.S. Individual Income Tax Return'', 
reporting $4,000 in dividend income and gives oral or written advice 
about Schedule A, which results in a claim of a medical expense 
deduction totaling $5,000, but does not sign the tax return. D is 
not a tax return preparer because the total aggregate amount of the 
deductions is less than $10,000.

    (4) Return and claim for refund--(i) Return. For purposes of this 
section, a return of tax is a return (including an amended or adjusted 
return) filed by or on behalf of a taxpayer reporting the liability of 
the taxpayer for tax under the Code, if the type of return is 
identified in published guidance in the Internal Revenue Bulletin. A 
return of tax also includes any information return or other document 
identified in published guidance in the Internal Revenue Bulletin, and 
that reports information that is or may be reported on another 
taxpayer's return under the Code if the information reported on the 
information return or other document constitutes a substantial portion 
of the taxpayer's return within the meaning of paragraph (b)(3) of this 
section.
    (ii) Claim for refund. For purposes of this section, a claim for 
refund of tax includes a claim for credit against any tax that is 
included in published guidance in the Internal Revenue Bulletin. A 
claim for refund also includes a claim for payment under section 6420, 
6421, or 6427.
    (c) Mechanical or clerical assistance. A person who furnishes to a 
taxpayer or other tax return preparer sufficient information and advice 
so that completion of the return or claim for refund is largely a 
mechanical or clerical matter is considered a tax return preparer, even 
though that person does not actually place or review placement of 
information on the return or claim for refund. See also paragraph 
(b)(3) of this section.
    (d) Qualifications. A person may be a tax return preparer without 
regard to educational qualifications and professional status 
requirements.
    (e) Outside the United States. A person who prepares a return or 
claim for refund outside the United States is a tax return preparer, 
regardless of the person's nationality, residence, or the location of 
the person's place of business, if the person otherwise satisfies the 
definition of tax return preparer. Notwithstanding the provisions of 
Sec.  301.6109-1(g), the person shall secure an employer identification 
number if the person is an employer of another tax return preparer, is 
a partnership in which one or more of the general partners is a tax 
return preparer, is a firm entity in which one or more of the equity 
holders is a tax return preparer, or is an individual not employed by 
another tax return preparer.
    (f) Persons who are not tax return preparers. (1) The following 
persons are not tax return preparers:
    (i) An official or employee of the Internal Revenue Service (IRS) 
performing their official duties.
    (ii) Any individual who provides tax assistance under a Volunteer 
Income Tax Assistance (VITA) program established by the IRS, but only 
with respect to those returns prepared as part of the VITA program.
    (iii) Any organization sponsoring or administering a VITA program 
established by the IRS, but only with respect to that sponsorship or 
administration.
    (iv) Any individual who provides tax counseling for the elderly 
under a program established pursuant to section 163 of the Revenue Act 
of 1978, but only with respect to those returns prepared as part of 
that program.
    (v) Any organization sponsoring or administering a program to 
provide tax counseling for the elderly established pursuant to section 
163 of the Revenue Act of 1978, but only with respect to that 
sponsorship or administration.
    (vi) Any individual who provides tax assistance as part of a 
qualified Low-Income Taxpayer Clinic (LITC), as defined by section 
7526, subject to the requirements of paragraphs (f)(2) and (3) of this 
section, but only with respect to those returns prepared as part of the 
LITC program.
    (vii) Any organization that is a qualified LITC, as defined by 
section 7526, subject to the requirements of paragraphs (h)(2) and (3) 
of this section.
    (viii) An individual providing only typing, reproduction, or other 
mechanical assistance in the preparation of a return or claim for 
refund.
    (ix) An individual preparing a return or claim for refund of a 
person, or an officer, a general partner, member, shareholder, or 
employee of a person, by whom the individual is regularly and 
continuously employed or compensated or in which the individual is a 
general partner.
    (x) An individual preparing a return or claim for refund for a 
trust, estate, or other entity of which the person either is a 
fiduciary or is an officer, general partner, or employee of the 
fiduciary.
    (xi) An individual preparing a claim for refund for a taxpayer in 
response to--
    (A) A notice of deficiency issued to the taxpayer; or
    (B) A waiver of restriction on assessment after initiation of an 
audit of the taxpayer or another taxpayer if a determination in the 
audit of the other taxpayer affects, directly or indirectly, the 
liability of the taxpayer for tax under subtitle A.
    (xii) A person who prepares a return or claim for refund for a 
taxpayer with no explicit or implicit agreement for compensation, even 
if the person receives an insubstantial gift, return service, or favor.
    (2) Paragraphs (f)(1) (vi) and (vii) of this section apply only if 
any assistance with a return of tax or claim for refund is directly 
related to a controversy with the IRS for which the qualified LITC is 
providing assistance, or is an ancillary part of an LITC program to 
inform individuals for whom English is a second language about their 
rights and responsibilities under the Code.
    (3) Notwithstanding paragraph (f)(2) of this section, paragraphs 
(f)(1)(vi) and (f)(1)(vii) of this section do not apply if an LITC 
charges a separate fee or varies a fee based on whether the LITC 
provides assistance with a return of tax or claim for refund under the 
Code, or if the LITC charges more than a nominal fee for its services.
    (4) For purposes of paragraph (f)(1)(ix) of this section, the 
employee of a corporation owning more than 50 percent of the voting 
power of another corporation, or the employee of a corporation more 
than 50 percent of the voting power of which is owned by another 
corporation, is considered the employee of the other corporation as 
well.
    (5) For purposes of paragraph (f)(1)(x) of this section, an estate, 
guardianship, conservatorship, committee, or any similar arrangement 
for a taxpayer under a legal disability (such as a minor, an 
incompetent, or an infirm individual) is considered a trust or estate.
    (6) Examples. The mechanical assistance exception described in 
paragraph (f)(1)(viii) of this section is illustrated by the following 
examples:

    Example 1. A reporting agent received employment tax information 
from a client from the client's business records. The reporting 
agent did not render any tax advice to the client or exercise any 
discretion or independent judgment on the client's underlying tax 
positions. The reporting agent processed the client's information, 
signed the

[[Page 34597]]

return as authorized by the client pursuant to Form 8655, Reporting 
Agent Authorization, and filed the client's return using the 
information supplied by the client. The reporting agent is not a tax 
return preparer.
    Example 2. A reporting agent rendered tax advice to a client on 
determining whether its workers are employees or independent 
contractors for Federal tax purposes. For compensation, the 
reporting agent received employment tax information from the client, 
processed the client's information and filed the client's return 
using the information supplied by the client. The reporting agent is 
a tax return preparer.

    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after the 
date that final regulations are published in the Federal Register.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E8-12898 Filed 6-16-08; 8:45 am]
BILLING CODE 4830-01-P