[Federal Register Volume 73, Number 246 (Monday, December 22, 2008)]
[Rules and Regulations]
[Pages 78429-78465]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-29750]



[[Page 78429]]

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Part II





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; Final Rule

Federal Register / Vol. 73, No. 246 / Monday, December 22, 2008 / 
Rules and Regulations

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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, 301, and 602

[TD 9436]
RIN 1545-BG83


Tax Return Preparer Penalties Under Sections 6694 and 6695

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final 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 and section 506 of the Tax Extenders and 
Alternative Minimum Tax Relief Act of 2008. The final regulations 
affect tax return preparers and provide guidance regarding the amended 
provisions.

DATES: Effective Date: These regulations are effective on December 22, 
2008.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.6060-1(d), 1.6107-1(e), 1.6109-2(d), 1.6694-1(g), 1.6694-2(f), 
1.6694-3(g), 1.6694-4(d), 1.6695-1(g), 1.6695-2(d), 1.6696-1(k), 
20.6060-1(b), 20.6107-1(b), 20.6109-1(b), 20.6694-1(b), 20.6694-2(b), 
20.6694-3(b), 20.6694-4(b), 20.6695-1(b), 20.6696-1(b), 20.7701-1(b), 
25.6060-1(b), 25.6107-1(b), 25.6109-1(b), 25.6694-1(b), 25.6694-2(b), 
25.6694-3(b), 25.6694-4(b), 25.6695-1(b), 25.6696-1(b), 25.7701-1(b), 
26.6060-1(b), 26.6107-1(b), 26.6109-1(b), 26.6694-1(b), 26.6694-2(b), 
26.6694-3(b), 26.6694-4(b), 26.6695-1(b), 26.6696-1(b), 26.7701-1(b), 
31.6060-1(b), 31.6107-1(b), 31.6109-2(b), 31.6694-1(b), 31.6694-2(b), 
31.6694-3(b), 31.6694-4(b), 31.6695-1(b), 31.6696-1(b), 31.7701-1(b), 
40.6060-1(b), 40.6107-1(b), 40.6109-1(b), 40.6694-1(b), 40.6694-2(b), 
40.6694-3(b), 40.6694-4(b), 40.6695-1(b), 40.6696-1(b), 40.7701-1(b), 
41.6060-1(b), 41.6107-1(b), 41.6109-2(b), 41.6694-1(b), 41.6694-2(b), 
41.6694-3(b), 41.6694-4(b), 41.6695-1(b), 41.6696-1(b), 41.7701-1(b), 
44.6060-1(b), 44.6107-1(b), 44.6109-1(b), 44.6694-1(b), 44.6694-2(b), 
44.6694-3(b), 44.6694-4(b), 44.6695-1(b), 44.6696-1(b), 44.7701-1(b), 
53.6060-1(b), 53.6107-1(b), 53.6109-1(b), 53.6694-1(b), 53.6694-2(b), 
53.6694-3(b), 53.6694-4(b), 53.6695-1(b), 53.6696-1(b), 53.7701-1(b), 
54.6060-1(b), 54.6107-1(b), 54.6109-1(b), 54.6694-1(b), 54.6694-2(b), 
54.6694-3(b), 54.6694-4(b), 54.6695-1(b), 54.6696-1(b), 54.7701-1(b), 
55.6060-1(b), 55.6107-1(b), 55.6109-1(b), 55.6694-1(b), 55.6694-2(b), 
55.6694-3(b), 55.6694-4(b), 55.6695-1(b), 55.6696-1(b), 55.7701-1(b), 
56.6060-1(b), 56.6107-1(b), 56.6109-1(b), 56.6694-1(b), 56.6694-2(b), 
56.6694-3(b), 56.6694-4(b), 56.6695-1(b), 56.6696-1(b), 56.7701-1(b), 
156.6060-1(b), 156.6107-1(b), 156.6109-1(b), 156.6694-1(b), 156.6694-
2(b), 156.6694-3(b), 156.6694-4(b), 156.6695-1(b), 156.6696-1(b), 
156.7701-1(b), 157.6060-1(b), 157.6107-1(b), 157.6109-1(b), 157.6694-
1(b), 157.6694-2(b), 157.6694-3(b), 157.6694-4(b), 157.6695-1(b), 
157.6696-1(b), 157.7701-1(b), and 301.7701-15(g).

FOR FURTHER INFORMATION CONTACT: Michael E. Hara, (202) 622-4910, and 
Matthew S. Cooper, (202) 622-4940 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
were previously reviewed and approved by the Office of Management and 
Budget in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)) under control number 1545-1231. The collections of 
information in this final regulation are in Sec. Sec.  1.6060-1(a)(1), 
1.6107-1, 1.6694-2(d)(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 and section 
506 of the Tax Extenders and Alternative Minimum Tax Relief Act of 
2008. 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 final 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, Title VIII-B of Public Law 110-28 (121 
Stat. 190) (May 25, 2007) (the 2007 Act) and section 506 of the Tax 
Extenders and Alternative Minimum Tax Relief Act of 2008, Div. C of 
Public Law 110-343 (122 Stat. 3765) (October 3, 2008) (the 2008 Act).
    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

[[Page 78431]]

broader range of tax returns and claims for refund. 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 have a ``reasonable belief that the position 
would more likely than not be sustained on its merits.'' 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 were effective for 
tax returns prepared after the date of enactment, May 25, 2007.
    The Treasury Department and the IRS released Notice 2008-13 (2008-3 
IRB 282) on December 31, 2007, to provide interim guidance under the 
2007 Act. Additional guidance was simultaneously 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, to add 
certain returns and documents to Exhibits 1, 2, and 3 of Notice 2008-
13.
    On June 17, 2008, the Treasury Department and the IRS published in 
the Federal Register (73 FR 34560) proposed amendments to the 
regulations (REG-129243-07) reflecting amendments made by the 2007 Act 
and comments received on the notices. A public hearing was held on 
these proposals on August 18, 2008. Written public comments responding 
to the proposed regulations were received.
    On October 3, 2008, section 506 of the 2008 Act modified the 
standards of conduct that tax return preparers must meet in order to 
avoid imposition of the section 6694(a) penalty. Specifically, the 2008 
Act changed the standard for undisclosed positions from ``reasonable 
belief that the position more likely than not will be sustained on the 
merits'' to ``substantial authority for the position.'' The 2008 Act 
maintained the ``reasonable basis'' standard for disclosed positions. 
If a position is with respect to a tax shelter (as defined in section 
6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A 
applies, it must be ``reasonable to believe that the position more 
likely than not will be sustained on the merits.'' The amendments made 
by the 2008 Act are retroactively effective for tax returns prepared 
after May 25, 2007, except that the special rules applicable to 
positions with respect to tax shelters and reportable transactions to 
which section 6662A applies are effective for tax returns or claims for 
refund prepared for tax years ending after October 3, 2008, the date of 
enactment of the 2008 Act.
    After consideration of the public comments and the amendments made 
by the 2008 Act, the proposed regulations are adopted as revised by 
this Treasury decision. Section 1.6694-2 of these final regulations 
does not provide substantive guidance reflecting amendments to the Code 
made by the 2008 Act. Rather, the Treasury Department and the IRS are 
reserving Sec.  1.6694-2(c) in these final regulations and are 
simultaneously issuing a notice in the Internal Revenue Bulletin 
providing interim guidance on the amendments to the Code made by the 
2008 Act. With these final regulations, the Treasury Department and the 
IRS are also simultaneously issuing a revenue procedure in the Internal 
Revenue Bulletin that specifically identifies the returns and claims 
for refund subject to penalty under sections 6694 and 6695.

Summary of Comments and Explanation of Revisions

    Over 30 written comments were received in response to the notice of 
proposed rulemaking. All comments were considered and are available for 
public inspection upon request. A number of these comments are 
summarized in this preamble. The changes included in these final 
regulations are discussed in order of the Code sections to which they 
relate.
    In accordance with the 2007 Act, these final regulations amend 
existing regulations defining tax return preparers, which were 
previously limited to 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 final 
regulations also revise current 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 final regulations 
reflect changes to the computation of the section 6694 tax return 
preparer penalty made by the 2007 Act. These final 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. These final regulations are 
applicable to returns and claims for refund filed (and advice given) 
after December 31, 2008.

Furnishing of Copy of the Tax Return and Retaining Copy

    The final regulations adopt the proposed amendments to Sec.  
1.6107-1 regarding the requirement of a signing tax return preparer to 
furnish a copy of the completed tax return to the taxpayer and also to 
retain a copy, with modification.
    One commentator requested that the final regulations make clear 
that a tax return preparer may provide copies of tax returns to 
taxpayers in either hard copy or electronic formats. The Treasury 
Department and the IRS recognize that because many returns are prepared 
and filed electronically and consist of electronic data, it may be 
unclear what is an acceptable copy of a return that must be furnished 
to the taxpayer. Upon further consideration, the Treasury Department 
and the IRS agree that clarification is necessary. Under Sec.  1.6107-
1(a) of the final regulations, the tax return preparer must provide a 
complete copy of the return filed with the IRS to the taxpayer in any 
medium, including electronic, that is acceptable to both the taxpayer 
and the return preparer. In the case of an electronically-filed return, 
a complete copy of a taxpayer's return consists of the electronic 
portion of the return, including all schedules, forms, pdf attachments, 
and jurats, that was filed with the IRS. The copy provided to the 
taxpayer must include all information submitted to the IRS to enable 
the taxpayer to determine which schedules, forms, electronic files, and 
other supporting materials have been filed with the return. The copy, 
however, need not contain the identification number of the tax return 
preparer. The electronic portion of the return can be contained on a 
replica of an official form or on an unofficial form. On an unofficial 
form, however, data entries

[[Page 78432]]

must reference the line numbers or descriptions on an official form.
    The same commentator requested that the final regulations 
specifically provide that the copy of the tax return retained by tax 
return preparers may be retained electronically. The Treasury 
Department and the IRS, however, have concluded that revising the 
existing regulations to include this rule is not necessary. Existing 
revenue procedures address the maintenance of business records through 
use of electronic storage systems. See, for example, Rev. Proc. 97-22, 
1997-1 CB 652. Tax return preparers may retain copies of tax returns in 
accordance with existing revenue procedures to comply with the final 
regulations.
    Another commentator agreed with the general approach taken in Sec.  
1.6107-1(c) but suggested clarification of the language regarding who 
is a signing tax return preparer for purposes of the section 6107 
requirements. Upon consideration, the Treasury Department and the IRS 
agree that there is a potential for the proposed language to be 
misconstrued. Section 1.6107-1(c) of the final regulations clarifies 
that for purposes of complying with the requirements of section 6107, a 
corporation, partnership or other organization that employs a signing 
tax return preparer to prepare for compensation (or in which a signing 
tax return preparer is compensated as a partner or member to prepare) a 
return of tax or claim for refund shall be treated as the sole signing 
tax return preparer.

Furnishing Identification Number

    A commentator requested that the final regulations clarify whether 
the tax return preparer's identifying number must be included on the 
taxpayer's copy of the tax return as well as on the copy filed with the 
IRS. Section 6109(a)(4) provides that any return or claim for refund 
prepared by a tax return preparer shall bear an identification number 
for securing proper identification of the tax return preparer, his 
employer, or both as may be prescribed. Upon further consideration, the 
Treasury Department and the IRS agree that for identification purposes, 
it is only important for the tax return preparer identification number 
to be included on the return that is filed with the IRS. Section 
1.6109-2(a) of the final regulations, therefore, is amended to provide 
that each filed return or claim for refund containing the 
identification number of the tax return preparer required to sign the 
return (and the identification number of the person who has an 
employment arrangement or association with the individual tax return 
preparer, if applicable) will meet the needs of the IRS. This 
modification will assist in maintaining the privacy of the tax return 
preparer's information. Additional guidance may be provided in the 
future regarding tax return preparer identification numbers under 
section 6109.

Defining the Preparer Within a Firm

    The final regulations adopt the proposed amendments to Sec.  
1.6694-1(b)(1), with modification. Accordingly, the final regulations 
maintain a framework defining a ``preparer per position within a 
firm'', 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).
    Under this framework, 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 Sec.  1.6694-1(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.
    Three commentators questioned whether this framework will lead to 
significant problems in return preparer firms, in particular whether 
the framework may discourage any particular person within the firm from 
looking at the return in whole. These commentators also questioned 
whether the IRS will be able to identify the responsible party if 
individuals at the firm attempt to identify others at the firm who may 
be more responsible for the position. Two other commentators, however, 
agreed with this framework in light of the high level of specialization 
that exists in modern tax practice. The Treasury Department and the IRS 
continue to conclude that the expansion from a ``one preparer per 
firm'' to a ``one preparer per position within a firm'' will further 
compliance and will result in more equitable administration of the tax 
return preparer penalty regime. This framework, therefore, is adopted 
in the final regulations.
    Section 1.6694-1(b)(2) of the proposed regulations provided that 
the individual who signs the return or claim for refund as the tax 
return preparer generally will be considered the person within a firm 
who is primarily responsible for all of the positions on the return or 
claim for refund giving rise to an understatement. This language is 
finalized as proposed except for some minor conforming changes.
    Proposed Sec.  1.6694-1(b)(3) established a similar rule for 
situations when there are one or more nonsigning tax return preparers 
at the same firm and either no signing tax return preparer within the 
firm, it is concluded that the signer is not primarily responsible for 
the position, or the IRS cannot conclude which individual is primarily 
responsible for the position for purposes of section 6694. In these 
situations, the proposed regulations stated that 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.
    Several commentators requested that this rule for nonsigning tax 
return preparers not be adopted as proposed because it will lead to 
more harm than good. Specifically, one commentator requested the 
deletion of the clause ``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'' from proposed 
Sec.  1.6694-1(b)(3) because a tax return preparer penalty is not 
appropriate when the IRS is not able to reach a conclusion as to who is 
primarily responsible for the conduct giving rise to the position. The 
other commentator recommended qualifying the rule in proposed Sec.  
1.6694-1(b)(3) with the requirement that the individual with overall 
supervisory responsibility for the position either possess actual 
knowledge of the position or fail to exercise appropriate diligence in 
the review of the position subject to penalty through willfulness, 
recklessness, or gross indifference.
    Upon consideration of these comments, the Treasury Department and 
the IRS have revised Sec.  1.6694-1(b)(3) to provide that if there is 
no signing tax return preparer for the return or claim for refund 
within that firm or if, after the application of Sec.  1.6694-1(b)(2), 
it is concluded that the signing tax return preparer is not primarily 
responsible for the position, the nonsigning tax return preparer within 
the firm with overall supervisory responsibility for the position(s) 
giving rise to the understatement generally will be considered the tax 
return preparer who is primarily responsible for the position for 
purposes of section 6694. Based upon credible information from any 
source, however, it may be concluded that another nonsigning tax return 
preparer within the firm is primarily responsible for the position(s) 
on the return or claim for refund giving rise to an understatement.

[[Page 78433]]

    In response to the commentators' concerns that the default rule in 
proposed Sec.  1.6694-1(b)(3) assigning liability for the penalty to 
the nonsigning tax return preparer may lead to more harm than good, 
Sec.  1.6694-1(b)(4) of the final regulations is added. The final 
regulations in Sec.  1.6694-1(b)(4) provide that, if the information 
presented would support a finding that either the signing tax return 
preparer or a nonsigning tax return preparer within a firm is primarily 
responsible for the position(s) giving rise to the understatement, the 
IRS may assess the penalty against either one of the individuals within 
the firm, but not both, as the primarily responsible tax return 
preparer. This determination will be based upon all the evidence 
presented and will allow for certainty regarding the identification of 
the primarily responsible tax return preparer within the expiration of 
the period of limitations on making an assessment under section 
6694(a). It is expected that the IRS will assess the penalty under 
section 6694 under these rules against the tax return preparer with the 
greatest amount of responsibility for the position based upon the best 
information available to the IRS. The rule adopted in Sec.  1.6694-
1(b)(4) is not a rule reflecting joint and several liability for the 
penalty among the signing tax return preparer and nonsigning tax return 
preparer as the penalty may be assessed against one of these 
individuals, but not both.

Reliance on Information Provided

    The final regulations adopt the proposed amendments to Sec.  
1.6694-1(e), with modification. Most commentators supported expanding 
the regulations in Sec.  1.6694-1(e) 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 if the advisor or tax return preparer is within the tax 
return preparer's same firm) as long as the tax return preparer does 
not ignore the implications of information furnished to the tax return 
preparer or actually known by the tax return preparer, and makes 
reasonable inquiries if the information as furnished appears to be 
incorrect or incomplete.
    Commentators, however, requested that the final regulations clarify 
that a tax return preparer may rely on ``advice'' furnished by another 
advisor, another tax return preparer, or other party (even if the 
advisor or tax return preparer is within the tax return preparer's same 
firm). This recommendation is adopted in Sec.  1.6694-1(e)(1) of the 
final regulations. The same changes are made for conformity to the 
definitions of ``reasonable to believe that the position would more 
likely than not be sustained on its merits'' in Sec.  1.6694-2(b)(1), 
``reasonable basis'' in Sec.  1.6694-2(d)(2) and ``reasonable cause'' 
in Sec.  1.6694-2(e)(5). These modifications are consistent with the 
intent of the rules in the proposed regulations regarding reliance 
given the heightened standards imposed on tax return preparers by the 
2007 and 2008 Acts and the increased complexity of the law.
    Section 1.6694-1(e) of the proposed regulations also proposed a new 
rule providing that a tax return preparer may not rely on legal 
conclusions regarding Federal tax issues furnished by taxpayers. The 
purpose behind this proposal was the belief that in general, although 
it was reasonable to allow a tax return preparer to rely on facts 
furnished by the taxpayer in good faith without verification, the tax 
return preparer should not be able to rely on legal conclusions on 
issues when the taxpayer may not be an expert and looked to the tax 
return preparer to determine the legal issue for purposes of preparing 
the return or claim for refund.
    Most commentators expressed concern, however, that tax return 
preparers have long relied on information that involve mixed questions 
of fact and law furnished by taxpayers, in addition to legal 
conclusions. Moreover, the commentators point out that many large 
entity taxpayers have in-house tax departments staffed by tax 
professionals who are qualified to perform research and analysis 
necessary to address many legal issues.
    The Treasury Department and the IRS acknowledge that the proposed 
regulations may be unclear on how the ``no reliance on legal 
conclusions by taxpayers'' language in proposed Sec.  1.6694-1(e) 
interacts with the language in proposed Sec.  1.6694-2(b)(2) regarding 
unreasonable assumptions. Accordingly, the ``no reliance on legal 
conclusions by taxpayers'' is removed from Sec.  1.6694-1(e) of the 
final regulations. While this phrase is removed from the text of the 
final regulations, the tax return preparer nevertheless must meet the 
diligence standards otherwise imposed by this regulation in order to 
rely properly on information and advice provided by taxpayers or other 
individuals. Tax return preparers must have no reason to believe that 
the taxpayer is incompetent to make these conclusions, have no 
knowledge that the conclusions are incorrect or incomplete, and make 
reasonable inquiries if the information as furnished appears to be 
incorrect or incomplete.

Use of Estimates

    One commentator noted that the nature of accounting, upon which 
calculations of taxable income are based, requires the use of 
estimates, and urged the Treasury Department and the IRS to include a 
specific reference to allow the use of estimates in the final 
regulations. The Treasury Department and the IRS recognize that there 
are some circumstances when the use of reasonable estimates may be 
appropriate in the preparation of tax returns (see, for example, 
Sec. Sec.  1.448-2(d), 1.451-1(a), and 1.451-5(c)(1)(ii)), and there 
are some circumstances in which there may be no practical alternative 
to the use of reasonable estimates, for example, when the taxpayer's 
records are destroyed accidentally or through computer failure. The 
Treasury Department and the IRS, however, conclude that including a 
general rule regarding the use of estimates in the preparer penalty 
regulations that could impact other substantive tax provisions is not 
appropriate.

Income Derived Determination in Computing Penalty Amount

    The final regulations adopt the proposed amendments to Sec.  
1.6694-1(f), with minor modification. Section 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.
    Several commentators requested clarification on this definition of 
``income derived (or to be derived)'' for purposes of computing the 
section 6694 penalty because it is not necessarily clear what 
compensation is captured by this definition, which could be interpreted 
broadly. The final regulations maintain the same definition of ``income 
derived (or to be derived)'' as proposed because the Treasury 
Department and the IRS conclude that the other rules described in Sec.  
1.6694-1(f) provide appropriate limitations to this definition.
    In response to a commentator's request, the final regulations in 
Sec.  1.6694-1(f)(4) also add an example illustrating how the penalty 
will be computed in cases involving employees and partners who spend a 
portion of their time on a particular position

[[Page 78434]]

subject to the section 6694 penalty for which the firm earns a specific 
amount.

Firm Liability

    The final regulations adopt the proposed amendments to Sec. Sec.  
1.6694-2(a)(2) and 1.6694-3(a)(2), without modification. One 
commentator requested examples of a firm disregarding its review 
procedures through willfulness, recklessness, or gross indifference 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. The determination as to whether a firm disregards its review 
procedures will be made based upon all facts and circumstances. Because 
any example necessarily would be limited to the facts of a particular 
firm's review procedures, additional examples on this issue would not 
meaningfully add to the guidance provided in the proposed regulations.

Reasonable To Believe That More Likely Than Not

    Section 1.6694-2(b) of the final regulations defines the 
``reasonable to believe that the position would more likely than not be 
sustained on its merits'' standard that now applies to positions that 
are tax shelters and reportable transactions to which section 6662A 
applies. While the 2008 Act amendment to section 6694 includes a 
``reasonable to believe'' standard rather than the ``reasonable 
belief'' standard used in the 2007 Act, the Treasury Department and the 
IRS are of the view that the two standards have the same meaning. 
Conforming changes are made throughout the final regulations to reflect 
the 2008 Act terminology.
    Proposed Sec.  1.6694-2(b)(1) provided 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. 
The proposed regulations stated that 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. 
Moreover, in determining the level of diligence in a particular case, 
the proposed regulations provided that the IRS would 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.
    Several commentators requested that the final regulations specify 
that the amount of due diligence required on the part of the tax return 
preparer should not be disproportionate to the amount of the tax 
liability that would be affected by the position at issue. There was 
also some confusion on whether the due diligence rules in the proposed 
regulations allowed a less educated, sophisticated, or experienced tax 
return preparer to escape penalty liability more easily than educated, 
sophisticated, or experienced tax return preparers. This was not the 
intent of this rule in the proposed regulations. Due diligence is only 
one of many factors to consider in determining whether a tax return 
preparer meets the ``reasonable to believe that the position would more 
likely than not be sustained on its merits'' standard and all of the 
facts and circumstances of each specific case will need to be evaluated 
in making this determination.
    Several commentators suggested that the provisions in Sec.  1.6694-
2(d)(5) of the proposed regulations permitting tax return preparers to 
rely upon generally accepted administrative or industry practice in 
establishing reasonable cause relief from penalties under section 6694 
should be extended to allow consideration of generally accepted 
administrative or industry practice in determining whether the 
``reasonable to believe that the position would more likely than not be 
sustained on its merits'' standard is satisfied. These comments are not 
adopted in the final regulations because the Treasury Department and 
the IRS continue to conclude that the authorities contained in Sec.  
1.6662-4(d)(3)(iii) (or any successor provision) are the appropriate 
authorities to be considered in determining whether it is reasonable to 
believe that the position would more likely than not be sustained on 
its merits. The ``reasonable to believe that the position would more 
likely than not be sustained on its merits'' standard relates to the 
tax return preparer's evaluation of the merits of a return position, 
and the merits of a tax return position must be considered in light of 
established relevant legal authorities. Generally accepted 
administrative or industry practice are less relevant in considering 
the merits of a tax return position under applicable law and guidance, 
although they may be appropriate factors to consider in the context of 
a tax return preparer's reasonable cause and good faith.
    Based upon a comment received, the final regulations in Sec.  
1.6694-2(b)(4) adopt the same rule as in Sec.  1.6662-4(d)(3)(iv)(B) 
regarding the effect of the taxpayer's jurisdiction on meeting the 
appropriate standard. The Treasury Department and the IRS are of the 
view that it is appropriate that the same rule apply for purposes of 
satisfying the ``reasonable to believe that the position more likely 
than not be sustained on its merits'' standard. This approach supports 
uniform disclosure by taxpayers and tax return preparers and prevents 
conflicts between taxpayers and tax return preparers in complying with 
the federal tax laws.

Adequate Disclosure

    The final regulations adopt the proposed amendments to Sec.  
1.6694-2(d)(3), with modification based upon comments received and 
revisions made in the 2008 Act. For a signing tax return preparer 
within the meaning of Sec.  301.7701-15(b)(1), the final regulations 
provide that disclosure of a position for which there is a reasonable 
basis but for which there is not substantial authority is adequate 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 applicable annual revenue procedure. See Revenue 
Procedure 2008-14 (2008-7 IRB 435 (February 19, 2008)). Second, 
disclosure of the position is adequate if the tax return preparer 
provides the taxpayer with a prepared tax return that includes the 
appropriate disclosure in accordance with Sec.  1.6662-4(f). Third, 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 third 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 the case of a nonsigning tax return preparer 
within the meaning of Sec.  301.7701-15(b)(2), the final regulations in 
Sec.  1.6694-2(d)(3)(ii) maintain the same three disclosure rules that 
were in the proposed regulations.
    Two commentators requested clarification of the prohibition against 
a boilerplate disclaimer and recommended clarifying that a firm does 
not violate the prohibition simply by adopting a standard approach to 
disclosure issues. Section 1.6694-2(d)(3)(iii) of the final regulations 
is revised to provide that no general disclaimer is allowed with 
respect to the

[[Page 78435]]

specific facts and circumstances of the taxpayer and the position for 
which there is no substantial authority. Tax return preparers, and 
their firms, may use standard language to describe applicable law and 
may adopt a standard approach to disclosure issues.
    One commentator stated that it is unclear what specifically must be 
documented by the nonsigning tax return preparer in order to avoid 
imposition of penalties. The final regulations are revised by 
clarifying that the documented advice that would constitute adequate 
disclosure in Sec.  1.6694-2(d)(3)(ii)(A) with respect to a nonsigning 
tax return preparer's advice to a taxpayer, if the firm is advising the 
taxpayer, should confirm that the affected taxpayer has been advised by 
a tax return preparer in the firm of the potential penalties and the 
opportunity, if any, to avoid penalty through disclosure.
    Similarly, in Sec.  1.6694-2(d)(3)(ii)(B) with respect to a 
nonsigning preparer's advice to another tax return preparer, if 
providing nonsigning preparer advice to another preparer in the same 
firm, contemporaneous documentation should be satisfied if there is a 
single instance of contemporaneous documentation within the firm. If 
the firm is advising another preparer outside of the firm, the final 
regulations provide that this documentation should confirm that the 
preparer outside the firm has been advised that disclosure under 
section 6694(a) may be required.
    Finally, the disclosure rules in Sec.  1.6694-3(c)(2) of the final 
regulations are revised to clarify that 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(d)(2) and is adequately 
disclosed in accordance with Sec. Sec.  1.6694-2(d)(3)(i)(A) or (C) or 
1.6694-2(d)(3)(ii). In the case of a position contrary to a revenue 
ruling or notice, a tax return preparer also is not considered to have 
recklessly or intentionally disregarded the ruling or notice if the 
position meets the substantial authority standard described in Sec.  
1.6662-4(d) and is not with respect to a reportable transaction to 
which section 6662A applies. This modification ensures that tax return 
preparers may advise their clients to challenge an IRS ruling or notice 
under the appropriate circumstances.

Reasonable Cause

    The final regulations in Sec.  1.6694-2(e) adopt the proposed 
amendments to Sec.  1.6694-2(e) regarding reasonable cause, with minor 
conforming changes.
    Section 1.6694-2(e)(5) permits tax return preparers to rely upon 
generally accepted administrative or industry practice in establishing 
reasonable cause relief from penalties under section 6694. Several 
commentators indicated that guidance is necessary to explain how a tax 
return preparer should determine whether a practice is ``generally 
accepted'' and ``industry practice.'' The final regulations do not 
provide further guidance regarding these terms. An accepted 
administrative or industry practice will be determined based upon all 
facts and circumstances.

Burden of Proof

    One commentator urged that the rules regarding ``burden of proof'' 
in tax return preparer penalty litigation cases should be either 
eliminated or be substantially revised to comport with section 7491. 
Section 7427 imposes upon the Secretary the burden of proof on the 
issue of whether a tax return preparer has willfully attempted in any 
manner to understate the liability for tax. Section 7491(c) imposes 
upon the Secretary the burden of production in any court proceeding 
with respect to the liability of any individual for a penalty. After 
consideration of the comment, proposed Sec. Sec.  1.6694-2(f) and 
1.6694-3(g) are removed from the final regulations because these other 
Code sections as well as case law provide the substantive rules 
regarding burden of proof and burden of production for penalties.

Negotiation of Check

    Section 6695(f) and Sec.  1.6695-1(f)(1) prohibit a tax return 
preparer from endorsing or negotiating a refund check relating to a 
return for which he or she is a preparer. One commentator recommended 
that the regulations be clarified to state specifically that a tax 
return preparer is not prohibited from affixing the taxpayer's name on 
a refund check (typically accomplished via a mechanical stamp) for the 
purpose of depositing the check into an account in the name of the 
taxpayer. This comment is adopted in Sec.  1.6695-1(f)(1) of the final 
regulations.

Due Diligence for Earned Income Credit

    Section 1.6695-2(b)(3) of these final regulations adopt the rules 
regarding a signing tax return preparer's due diligence requirements 
with respect to determining eligibility for the earned income credit, 
with minor modification. Based upon the concerns of a commentator about 
one of the examples in this section addressing the representation of 
married but separated individuals, Example 3 in the proposed 
regulations is removed. The Treasury Department and the IRS agree that 
this example may raise conflict of interest issues and, therefore, 
replace the example with another example focusing on the need of the 
tax return preparer to ask relevant questions if a taxpayer attempts to 
claim a niece or nephew as a qualifying child.

Definition of Tax Return Preparer

    The final regulations adopt the proposed amendments to Sec.  
301.7701-15(b)(1) and (2), with modification. Section 301.7701-15(b)(1) 
and (2) of the final regulations adds to the section 7701 regulations 
the definitions of ``signing tax return preparer'' and ``nonsigning tax 
return preparer.''
    Several commentators requested that the final regulations expressly 
state who is required to sign a tax return. Section 301.7701-15(b)(1) 
of the final regulations is revised to provide that a signing tax 
return preparer is the individual tax return preparer who has the 
primary responsibility for the overall substantive accuracy of the 
preparation of such return or claim for refund. Conforming changes are 
additionally made to Sec.  1.6695-1(b). The definitions of nonsigning 
tax return preparer in Sec.  301.7701-15(b)(2) and substantial portion 
in Sec.  301.7701-15(b)(3) are generally adopted as proposed. An anti-
abuse rule, however, is added in Sec.  301.7701-15(b)(2)(i) based upon 
several commentators' suggestions. The anti-abuse rule provides that 
time spent on advice given after events have occurred, even if such 
time is less than 5 percent of the aggregate time incurred by such 
individual with respect to the position(s) giving rise to the 
understatement, will be taken into account if all facts and 
circumstances show that an individual is primarily responsible for a 
position taken on a return, gave advice on that position before events 
occurred primarily to avoid treatment as a tax return preparer subject 
to section 6694, and for purposes of preparing a tax return the 
individual confirmed the advice after events had occurred.

List of Returns Subject to Penalty

    Several commentators contended that proposed Sec.  301.7701-
15(b)(4) and the accompanying revenue procedure listing the returns and 
claims for refund subject to the section 6694 penalty should not 
include information returns and should limit the definition of return 
to exclude documents that do not report a tax liability. Similarly, 
commentators requested excluding Form 8038, Information Return for Tax-
Exempt Private Activity Bond Issues, Form

[[Page 78436]]

8038-G, Information Return for Government Purpose Tax-Exempt Bond 
Issues, Form 8038-GC, Consolidated Information Return for Small Tax-
Exempt Government Bond Issues, and Form 5500, Annual Return/Report of 
Employee Benefit Plan. After consideration of the comments, the Forms 
8038, 8038-G, and 8038-GC are classified in the contemporaneously 
issued revenue procedure with forms that will not subject the preparer 
to a penalty under section 6694(a), but may subject the preparer to a 
willful or reckless conduct penalty under section 6694(b) if the 
information reported on the form constitutes a substantial portion of 
the tax return or claim for refund and is prepared willfully in any 
manner to understate the liability of tax on a tax return or claim for 
refund, or in reckless or intentional disregard of rules or 
regulations. Also, Form 8038-T, Arbitrage Rebate and Penalty in Lieu of 
Arbitrage Rebate, and Form 8038-R, Request for Recovery of Overpayment 
Under Arbitrage Rebate Provisions, are added to the list of forms of 
returns in the revenue procedure subject to the section 6694 penalties. 
Form 5500 remains in the same category as in Notice 2008-13.
    The same commentators also raised the issue of whether the Treasury 
Department and the IRS should publish the list of returns and claims 
for refund subject to penalty under sections 6694 and 6695 in these 
final regulations, rather than in separate guidance in the Internal 
Revenue Bulletin. The Treasury Department and the IRS continue to 
conclude that it is appropriate to publish a revenue procedure in the 
Internal Revenue Bulletin. Notices 2008-12, -13, and -46, along with 
the previously issued proposed regulations, provided the public with 
notice of, and an opportunity to comment on, the forms subject to 
penalty.
    Another commentator requested that the final regulations in both 
Sec.  301.7701-15(f) and Circular 230 specifically define the terms 
``in-house tax professional'' and ``employer'' and provide other 
guidance on the applicability of these return preparer rules to in-
house counsel in Circular 230. Section 7701(a)(36) and Sec.  301.7701-
15(f)(ix) already except from the definition of tax return preparer any 
person who prepares a return or claim for refund of the employer (or of 
an officer or employee of the employer) by whom he or she is regularly 
and continuously employed. Additionally, Sec.  301.7701-15(f)(4) of the 
final regulations deems an 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, to be the employee of the other 
corporation as well. The Treasury Department and the IRS will consider 
if any other changes are necessary on this issue in future revisions to 
Sec.  10.34 of Circular 230.

Appraisers

    Under Treasury Regulations in place since 1977 and the proposed 
regulations, an appraiser might be subject to penalties under section 
6694 as a nonsigning tax return preparer if the appraisal is a 
substantial portion of the return or claim for refund and the 
applicable standards of care under section 6694 are not met. Several 
commentators have stated that appraisers should not be subject to 
penalties under section 6694 because they are subject to new, higher 
standards of conduct under section 6695A as set out in the Pension 
Protection Act of 2006, Public Law No. 109-280. The commentators have 
also urged that assessment of penalties under section 6694 against 
appraisers would result in imposition of a gratuitous and unnecessary 
layer of requirements and sanctions without any additional public 
policy benefit.
    After consideration of the comment, the Treasury Department and the 
IRS continue to include appraisers in the definition of both signing 
and non-signing preparers, thereby providing the IRS with discretion to 
impose the section 6694 and 6695A penalties in the alternative against 
an appraiser depending on the facts and circumstances of the 
appraiser's conduct. The IRS, however, will not stack the penalties 
under sections 6694 and 6695A with respect to the same conduct. A 
separate regulation will provide guidance under section 6695A.

Disclosure Under Section 6103

    One commentator recommended that the Treasury Department and the 
IRS issue regulations under section 6103 authorizing the disclosure of 
tax returns and return information to a tax return preparer at the tax 
return preparer's request upon initiation of an examination of the tax 
return preparer for tax return preparer penalties to the extent the 
returns and return information are relevant and material to the tax 
return preparer examination. The Treasury Department and the IRS 
conclude that no further guidance on this issue in these regulations is 
necessary because section 6103(h)(4) already authorizes the disclosure 
of returns and return information by the Government in federal or 
state, judicial or administrative tax proceedings if the disclosure 
meets an item or transaction test and the third-party return or return 
information is directly related to the resolution of an issue in the 
case.

Appeal Rights

    A number of individual commentators questioned whether the proposed 
regulations would remove the administrative appeal rights available to 
tax return preparers who are subject to penalty under section 6694. 
Under Treasury Regulations in place since 1991, the IRS will send a 30-
day letter to the tax return preparer notifying the tax return preparer 
of the proposed penalty or penalties and offering an opportunity to the 
tax return preparer to request further administrative consideration and 
a final administrative determination by the IRS concerning the proposed 
assessment prior to assessment of a penalty under section 6694 (unless 
the period of limitations (if any) under section 6696(d) may expire 
without adequate opportunity for assessment). If the tax return 
preparer then makes a timely request, assessment may not be made until 
the IRS makes a final administrative determination adverse to the tax 
return preparer. These appeal rights are maintained in Sec.  1.6694-
4(a) of the final regulations.

Applicability Dates

    To eliminate any adverse impact that the adoption of these final 
regulations could have on pending or recently filed returns, these 
final regulations will apply to returns and claims for refund filed, 
and advice provided, after December 31, 2008.

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.

Effect on Other Documents

    The following publications are obsolete as of January 1, 2009:
    Notice 2007-54 (2007-27 IRB 12).
    Notice 2008-11 (2008-3 IRB 279).
    Notice 2008-12 (2008-3 IRB 280).
    Notice 2008-13 (2008-3 IRB 282).
    Notice 2008-46 (2008-18 IRB 868).

Special Analyses

    It has been determined that this final rule 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.

[[Page 78437]]

    When an agency issues a rulemaking, the Regulatory Flexibility Act 
(5 U.S.C. chapter 6) (RFA), 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 final 
rulemaking will not have a significant economic impact on a substantial 
number of small entities.
    The final 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 final 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 final rule will not be significant. The statute and 
final 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 final 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 or claims for refund 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 final regulations also conform the standards of conduct for the 
tax return preparer penalties under section 6694(a) to the provisions 
of the 2007 and 2008 Acts. 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 and 2008 
Acts and the regulations generally will be part of that training.
    Based on these facts, it is certified that the collection of 
information contained in these final 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, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal authors of these final 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

    Generation-skipping transfer taxes, Reporting and recordkeeping 
requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

26 CFR Part 26

    Generation-skipping transfer 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 taxes, Motor vehicles, Reporting and recordkeeping 
requirements.

26 CFR Part 44

    Excise taxes, 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.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 20, 25, 26, 31, 40, 41, 44, 53, 54, 55, 
56, 156, 157, 301, and 602 are amended as follows:

PART 1--INCOME TAXES

0
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). * * *


0
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 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

[[Page 78438]]

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. The record, however, 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 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 December 31, 2008.

0
Par. 3. Section 1.6107-1 is revised to read as follows:


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

    (a) Furnishing copy to taxpayer--(1) 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). 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).
    (2) The tax return preparer must provide a complete copy of the 
return or claim for refund filed with the IRS to the taxpayer in any 
media, including electronic media, that is acceptable to both the 
taxpayer and the tax return preparer. In the case of an electronically 
filed return, a complete copy of a taxpayer's return or claim for 
refund consists of the electronic portion of the return or claim for 
refund, including all schedules, forms, pdf attachments, and jurats, 
that was filed with the IRS. The copy provided to the taxpayer must 
include all information submitted to the IRS to enable the taxpayer to 
determine what schedules, forms, electronic files, and other supporting 
materials have been filed with the return. The copy, however, need not 
contain the identification number of the paid tax return preparer. The 
electronic portion of the return or claim for refund may be contained 
on a replica of an official form or on an unofficial form. On an 
unofficial form, however, data entries must reference the line numbers 
or descriptions on an official form.
    (3) 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.
    (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, 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 Sec.  301.7701-15(b)(1) of this chapter. For purposes 
of applying this section, a corporation, partnership or other 
organization that employs a signing tax return preparer to prepare for 
compensation (or in which a signing tax return preparer is compensated 
as a partner or member to prepare) a return of tax or claim for refund 
shall be treated as 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 paragraphs (a) of this section, see section 
6695(a) and Sec.  1.6695-1(a).

[[Page 78439]]

    (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 
paragraphs (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 after December 31, 2008.

0
Par. 4. Section 1.6109-2 is amended by revising the section heading and 
paragraphs (a) and (d) to read as follows:


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 filed 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 
filed 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) The identifying number of a person (whether an individual or 
entity) who employs or associates with an individual tax return 
preparer described in paragraph (a)(2) of this section to prepare the 
return or claim for refund (other than a return prepared for the 
person) 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 December 31, 
2008. For returns or claims for refund filed before January 1, 2000, 
see Sec.  1.6109-2A(a).

0
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) Responsibility of signing and nonsigning tax return 
preparer.
    (5) Tax return preparer and firm responsibility.
    (6) 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 to believe that the position would more likely 
than not be sustained on its merits.
    (1) In general.
    (2) Authorities.
    (3) Written determinations.
    (4) Taxpayer's jurisdiction.
    (5) When ``more likely than not'' standard must be satisfied.
    (c) Substantial authority.
    (d) 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.
    (e) 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.
    (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) 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.


0
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. For positions other than those 
with respect to tax shelters (as defined in section 6662(d)(2)(C)(ii)) 
and reportable transactions to which section 6662A applies, 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 tax liability that is due to 
an undisclosed position for which the tax return preparer did not have 
substantial authority or due to a disclosed position for which there is 
no reasonable basis. For positions with respect to tax shelters (as 
defined in section 6662(d)(2)(C)(ii)) or reportable transactions to 
which section 6662A applies, 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 tax liability for which it is not reasonable to 
believe that the position would more likely than not be sustained on 
its merits. 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. Refer to Sec.  1.6694-2 for rules relating to the

[[Page 78440]]

penalty under section 6694(a). Refer to 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 or claim for refund is 
deemed prepared on the date the return or claim 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 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. See Sec.  301.7701-15(b)(3). 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 (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.
    (2) Responsibility of signing tax return preparer. If there is a 
signing tax return preparer within the meaning of Sec.  301.7701-
15(b)(1) of this chapter within a firm, the signing tax return preparer 
generally will 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 unless, based upon credible information from any 
source, it is concluded that the nonsigning tax return preparer is not 
primarily responsible for the position(s) on the return or claim for 
refund giving rise to an understatement. In that case, a nonsigning tax 
return preparer within the signing tax return preparer's firm (as 
determined in paragraph (b)(3) of this section) will be considered the 
tax return preparer who is 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 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 the 
firm or 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, the nonsigning tax return preparer within 
the meaning of Sec.  301.7701-15(b)(2) of this chapter within the firm 
with overall supervisory responsibility for the position(s) giving rise 
to the understatement generally will be considered the tax return 
preparer who is primarily responsible for the position for purposes of 
section 6694 unless, based upon credible information from any source, 
it is concluded that another nonsigning tax return preparer within that 
firm is primarily responsible for the position(s) on the return or 
claim for refund giving rise to the understatement.
    (4) Responsibility of signing and nonsigning tax return preparer. 
If the information presented would support a finding that, within a 
firm, either the signing tax return preparer or a nonsigning tax return 
preparer is primarily responsible for the position(s) giving rise to 
the understatement, the penalty may be assessed against either one of 
the individuals, but not both, as the primarily responsible tax return 
preparer.
    (5) 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, 
both may 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).
    (6) 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 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 tax return but no disclosure was made in 
accordance with Sec.  1.6694-2(d)(3). The advice constitutes 
preparation of a substantial portion of the return within the 
meaning of Sec.  301.7701-15(b)(3). 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, rather than A, had primary responsibility for the position 
taken on the return that gave rise to the understatement and may be 
subject to penalty under section 6694 instead of A.
    Example 2. Same as Example 1, except that neither Attorney A nor 
any other source produce credible information that Attorney B had 
primary responsibility for the position on the return giving rise to 
an understatement. Attorney A is the tax return preparer who may be 
subject to penalty under section 6694 with respect to C's return.
    Example 3. 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 may be subject to 
penalty under section 6694.
    Example 4. 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 and may be subject to 
penalty under section 6694.
    Example 5. Same as Example 1, except Attorney B is able to 
present credible information that A is also responsible for the 
position on C's return giving rise to an understatement. The IRS may 
conclude between A and B, the two responsible persons for the 
position, who is primarily responsible and may assess a section 6694 
penalty against A or B, but not both, as the primarily responsible 
tax return preparer.

    (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

[[Page 78441]]

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 demonstrating that a position complied with relevant 
standards under section 6694(a) and demonstrating reasonable cause and 
good faith under Sec.  1.6694-2(e)), the tax return preparer generally 
may rely in good faith without verification upon information furnished 
by the taxpayer. A tax return preparer also may rely in good faith and 
without verification upon information and advice furnished by another 
advisor, another tax return preparer or other party (including another 
advisor 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, 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 
to believe 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 
(d)(2), and demonstrating reasonable cause and good faith under Sec.  
1.6694-2(e)), 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-INT, ``Interest Income'', for a bank account that produced 
significant taxable income in 2007. When F inquired about any other 
income, the taxpayer furnished the Form 1099-INT 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, for purposes of 
determining the deductibility of a contribution by an employer for a 
qualified pension plan, Accountant G relies on a computation of the 
section 404 limit on deductible amounts made by the enrolled actuary 
for the plan. On the basis of this calculation, G completed and 
signed the tax return. It is later determined that there is an 
understatement of liability for tax that resulted from the 
overstatement of the section 404 limit on deductible amounts made by 
the actuary. G had no reason to believe that the actuary's 
calculation of the limit on deductible contributions was incorrect 
or incomplete, and the calculation 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 calculation of the limit on deductible contributions was no 
longer reliable due to developments in the law since the time the 
calculation 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 calculation provided 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 which 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

[[Page 78442]]

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 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 credible information that I is the 
tax return preparer with primary responsibility for the position 
that gave rise to the understatement. 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 50 percent of 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 is not limited to 
reliance on persons who provide post-transactional advice if such 
reliance is reasonable and in good faith. Further, K has reasonable 
cause because K relied on I for the advice on the corporate tax 
matter. I, K and Firm L are not liable for the section 6694 penalty.
    Example 4. Attorney M is an employee of Firm N with a salary of 
$75,000 per year. M performs tax preparation work for Client O. 
Client O's return contains a position that results in an 
understatement subject to the section 6694 penalty. M spent 100 
hours on the position (out of a total 2,000 billed during the year). 
The total fees earned by Firm N with respect to the position 
reflected on Client O's return are $50,000. If M is subject to the 
penalty, the penalty amount computed under the 50 percent of income 
standard is .5 x (100/2,000) x $75,000 = $1,875. If Firm N is 
subject to the penalty, the penalty amount computed under the 50% of 
income standard is .5 x $50,000 = $25,000, less any penalty amount 
imposed against M. If a penalty of $1,875 was assessed against M and 
Firm N was subject to the penalty, a penalty of $23,125 would be the 
amount of penalty assessed against Firm N.

    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after 
December 31, 2008.

0
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

[[Page 78443]]

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 is with respect to a tax shelter (as defined in 
section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 
6662A applies, and it was not reasonable to believe that the position 
would more likely than not be sustained on its merits;
    (ii) The position was not disclosed as provided in this section, 
the position is not with respect to a tax shelter (as defined in 
section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 
6662A applies, and there was not substantial authority for the 
position; or
    (iii) The position (other than a position with respect to a tax 
shelter or a reportable transaction to which section 6662A applies) 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) The corporation, partnership, or other firm entity 
disregarded its reasonable and appropriate review procedures 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 to believe that the position would more likely than 
not be sustained on its merits--(1) In general. If a position is with 
respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a 
reportable transaction to which section 6662A applies, it is 
``reasonable to 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 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 it is 
reasonable to believe 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 and 
information and advice furnished by another advisor, another tax return 
preparer, or other party (including another advisor or tax return 
preparer at the tax return preparer's firm), as provided in Sec. Sec.  
1.6694-1(e) and 1.6694-2(e)(5).
    (2) 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).
    (3) 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).
    (4) Taxpayer's jurisdiction. The applicability of court cases to 
the taxpayer by reason of the taxpayer's residence in a particular 
jurisdiction is not taken into account in determining whether it is 
reasonable to believe that the position would more likely than not be 
sustained on the merits. Notwithstanding the preceding sentence, the 
tax return preparer may reasonably believe that the position would more 
likely than not be sustained on the merits if the position is supported 
by controlling precedent of a United States Court of Appeals to which 
the taxpayer has a right of appeal with respect to the item.
    (5) 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) [Reserved].
    (d) 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 (other than a 
position with respect to a tax shelter or a reportable transaction to 
which section 6662A applies) 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 
and information and advice furnished by another advisor, another tax 
return preparer, or other party (including another advisor or tax 
return preparer at the tax return preparer's firm), as provided in 
Sec. Sec.  1.6694-1(e) and 1.6694-2(d)(5).
    (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 (other than 
a position with respect to a tax shelter or a reportable transaction to 
which section 6662A applies) for which there is a reasonable basis but 
for which there is not substantial authority is

[[Page 78444]]

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) The tax return preparer provides the taxpayer with the prepared 
tax return that includes the disclosure in accordance with Sec.  
1.6662-4(f); or
    (C) For returns or claims for refund that are subject to penalties 
pursuant to section 6662 other than the accuracy-related penalty 
attributable to a substantial understatement of income tax under 
section 6662(b)(2) and (d), the tax return preparer advises the 
taxpayer of 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.
    (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 (other than a position with 
respect to a tax shelter or a reportable transaction to which section 
6662A applies) that satisfies the reasonable basis standard but does 
not satisfy the substantial authority 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 applicable, 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 (other than 
a position with respect to a tax shelter or a reportable transaction to 
which section 6662A applies) for which there is a reasonable basis but 
for which there is not substantial authority, 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. The contemporaneous documentation should reflect that the 
affected taxpayer has been advised by a tax return preparer in the firm 
of the potential penalties and the opportunity to avoid penalty through 
disclosure.
    (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 (other than a position with respect to a tax 
shelter or a reportable transaction to which section 6662A applies) for 
which there is a reasonable basis but for which there is not 
substantial authority, 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. The contemporaneous documentation should 
reflect that the tax return preparer outside the firm has been advised 
that disclosure under section 6694(a) may be required. If the advice is 
to another nonsigning tax return preparer within the same firm, 
contemporaneous documentation is satisfied if there is a single 
instance of contemporaneous documentation within the firm.
    (iii) Requirements for advice. For purposes of satisfying the 
disclosure standards of paragraphs (d)(3)(i)(C) and (ii) of this 
section, each return position for which there is a reasonable basis but 
for which there is not substantial authority 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. A 
general disclaimer will not satisfy the requirement that the tax return 
preparer provide and contemporaneously document advice regarding the 
likelihood that a position will be sustained on the merits and the 
potential application of penalties as a result of that position. Tax 
return preparers, however, may rely on established forms or templates 
in advising clients regarding the operation of the penalty provisions 
of the Internal Revenue Code. A tax return preparer may choose to 
comply with the documentation standard in one document addressing each 
position or in multiple documents addressing 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 (d)(3)(i) or 
(ii) of this section.
    (v) Examples. The provisions of paragraph (d)(3) of this section 
are illustrated by the following examples:

    Example 1. An individual taxpayer hires Accountant R to prepare 
its income tax return. A particular position taken on the tax return 
does not have substantial authority although there is a reasonable 
basis for the position. The position is not with respect to a tax 
shelter or a reportable transaction to which section 6662A applies. 
R prepares and signs the tax return and provides the taxpayer with 
the prepared tax return that includes the Form 8275, ``Disclosure 
Statement,'' disclosing the position taken on the tax return. The 
individual taxpayer signs and files the tax return without 
disclosing the position. The IRS later challenges the position taken 
on the tax return, resulting in an understatement of liability. R is 
not subject to a penalty under section 6694.
    Example 2. Attorney S advises a large corporate taxpayer 
concerning the proper treatment of complex entries on the corporate 
taxpayer's tax return. S 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, S concludes that one 
position does not have substantial authority, although the position 
meets the reasonable basis standard. The position is not with 
respect to a tax shelter or a reportable transaction to which 
section 6662A applies. S advises the corporate taxpayer that the 
position lacks substantial authority and the taxpayer may be subject 
to an accuracy-related penalty under section 6662 unless the 
position is disclosed in a disclosure statement included in the 
return. S also documents the fact that this advice was 
contemporaneously provided to the corporate taxpayer at the time the 
advice was provided. Neither S nor any other attorney within S's 
firm signs the corporate taxpayer's return as a tax return preparer, 
but the advice by S constitutes preparation of a substantial portion 
of the tax return, and S is the individual with overall supervisory 
responsibility for the position giving rise to the understatement. 
Thus, S is a tax return preparer for purposes of section 6694. S, 
however, will not be subject to a penalty under section 6694.

    (e) 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

[[Page 78445]]

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 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 occur rarely 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 and 
information and advice furnished by another advisor, another tax return 
preparer or other party, as provided in Sec.  1.6694-1(e). The tax 
return preparer may 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), 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.
    (f) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after 
December 31, 2008.

0
Par. 8. Section 1.6694-3 is amended by revising paragraphs (a), (c)(2) 
and (3), (d), (e), (f), and (g) 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 by a tax return preparer to understate in any 
manner the liability for tax on the return or claim for refund; or
    (ii) Any reckless or intentional disregard of rules or regulations 
by a tax return preparer.
    (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) The corporation, partnership, or other firm entity 
disregarded its reasonable and appropriate review procedures 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) * * *
    (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. Sec.  1.6694-2(c)(3)(i)(A) or (C) or 1.6694-2(c)(3)(ii). 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. Sec.  1.6694-2(c)(3)(i)(A) or 
(C) or 1.6694-2(c)(3)(ii), the 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.

[[Page 78446]]

    (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 position meets the substantial 
authority standard described in Sec.  1.6662-4(d) and is not with 
respect to a reportable transaction to which section 6662A applies.
    (d) Examples. The provisions of paragraphs (b) and (c) of this 
section are illustrated by the following examples:

    Example 1. A taxpayer provided Preparer T 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. T knowingly deducted the expenses of 
the taxpayer's domestic help as wages paid in the taxpayer's 
business. T is subject to the penalty under section 6694(b).
    Example 2. A taxpayer provided Preparer U with detailed check 
registers to compute the taxpayer's expenses. U, however, knowingly 
overstated the expenses on the return. After adjustments by the 
examiner, the tax liability increased significantly. Because U 
disregarded information provided in the check registers, U is 
subject to the penalty under section 6694(b).
    Example 3. Preparer V prepares a taxpayer's return in 2009 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 
decided in 2006 has expressly invalidated that portion of the 
regulations. There are no courts that ruled favorably with respect 
to the validity of that portion of the regulations and there are no 
other authorities existing on the issue. Under these facts, V will 
have a reasonable basis for the position as defined in Sec.  1.6694-
2(d)(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 (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 position on a return or claim for refund.
    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after 
December 31, 2008.

0
Par. 9. Section 1.6694-4 is revised 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 (IRS) 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 either it was not reasonable to believe that the position would 
more likely than not be sustained on its merits under section 6694(a) 
or no substantial authority, as applicable (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).
    (2) Unless the period of limitations (if any) under section 6696(d) 
may expire without adequate opportunity for assessment, the IRS will 
also send, before assessment of either penalty, a 30-day letter to the 
tax return preparer notifying him of the proposed penalty or penalties 
and offering an opportunity to the tax return preparer to request 
further administrative consideration and a final administrative 
determination by the IRS concerning the assessment. If the tax return 
preparer then makes a timely request, assessment may not be made until 
the IRS makes a final administrative determination adverse to the tax 
return preparer.
    (3) If the IRS assesses either of the two penalties described in 
section 6694(a) and section 6694(b), it will send to the tax return 
preparer a statement of notice and demand, separate from any notice of 
a tax deficiency, for payment of the amount assessed.
    (4) Within 30 days after the day on which notice and demand of 
either of the two penalties described in section 6694(a) and section 
6694(b) is made against the tax return preparer, the tax return 
preparer must either--
    (i) Pay the entire amount assessed (and may file a claim for refund 
of the amount paid at any time not later than 3 years after the date of 
payment); or
    (ii) Pay an amount which is not less than 15 percent of the entire 
amount assessed with respect to each return or claim for refund and 
file a claim for refund of the amount paid.
    (5) If the tax return preparer pays an amount and files a claim for 
refund under paragraph (a)(4)(ii) of this section, the IRS may not 
make, begin, or prosecute a levy or proceeding in court for collection 
of the unpaid remainder of the amount assessed until the later of--
    (i) A date which is more than 30 days after the earlier of--
    (A) The day on which the tax return preparer's claim for refund is 
denied; or
    (B) The expiration of 6 months after the day on which the tax 
return preparer filed the claim for refund; and
    (ii) Final resolution of any proceeding begun as provided in 
paragraph (b) of this section.
    (6) The IRS may counterclaim in any proceeding begun as provided in 
paragraph (b) of this section for the unpaid remainder of the amount 
assessed. Final resolution of a proceeding includes any settlement 
between the IRS and the tax return preparer, any final determination by 
a court (for which the period for appeal, if any, has expired) and, 
generally, the types of determinations provided under section 1313(a) 
(relating to taxpayer deficiencies). Notwithstanding section 7421(a) 
(relating to suits to restrain assessment or collection), the beginning 
of a levy or proceeding in court by the IRS in contravention of 
paragraph (a)(5) of this section may be enjoined by a proceeding in the 
proper court.
    (b) Preparer must bring suit in district court to determine 
liability for penalty. The IRS may proceed with collection of the 
amount of the penalty not paid under paragraph (a)(4)(ii) of this 
section if the preparer fails to begin a proceeding for refund in the 
appropriate United States district court within 30 days after the 
earlier of--
    (1) The day on which the preparer's claim for refund filed under 
paragraph (a)(4)(ii) of this section is denied; or
    (2) The expiration of 6 months after the day on which the preparer 
filed the claim for refund.
    (c) Suspension of running of period of limitations on collection. 
The running of the period of limitations provided in section 6502 on 
the collection by levy or by a proceeding in court of the unpaid amount 
of a penalty or penalties described in section 6694(a) or section 
6694(b) is suspended for the period during which the IRS, under 
paragraph (a)(5) of this section, may not collect the

[[Page 78447]]

unpaid amount of the penalty or penalties by levy or a proceeding in 
court.
    (d) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after 
December 31, 2008.

0
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 to 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 signing tax 
return preparer as described in Sec.  301.7701-15(b)(1) of this chapter 
with respect to a return of tax or claim for refund of tax under the 
Code as described in Sec.  301.7701-15(b)(4) 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. If the signing 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 signing 
tax return preparer need not sign the return prior to presenting a 
completed copy of the return to the taxpayer. The signing tax return 
preparer, however, must furnish all of the information that will be 
transmitted as 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 signing tax return preparer shall electronically 
sign the return in the manner prescribed by the Commissioner in forms, 
instructions, or other appropriate guidance.
    (3) 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.
    (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 in order to not be subject to the section 6695(b) 
penalty.
    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 in order to not be subject to the section 
6695(b) penalty.
    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 in order to not be 
subject to the section 6695(b) penalty.
    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

[[Page 78448]]

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) Effective/applicability date. This paragraph (b) is applicable 
to returns and claims for refund filed after December 31, 2008.
    (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 taxpayers (or nontaxable entities) during each calendar year, 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 
(including an electronic version of 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. A tax return preparer 
will not be considered to have endorsed or otherwise negotiated a check 
for purposes of this paragraph (f)(1) solely as a result of having 
affixed the taxpayer's name to a refund check for the purpose of 
depositing the check into an account in the name of the taxpayer or in 
the joint names of the taxpayer and one or more other persons 
(excluding the tax return preparer) if authorized by the taxpayer or 
the taxpayer's recognized representative.
    (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 December 31, 2008.

0
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. Taxpayer asks Preparer C to prepare his tax return 
and wants to claim his niece and nephew as qualifying children for 
the EIC. Preparer C should make reasonable

[[Page 78449]]

inquiries to determine whether the children meet EIC qualifying 
child requirements and ensure possible duplicate claim situations 
involving the parents or other relatives are properly considered.
    Example 4. Taxpayer asks Preparer D 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. D 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 December 31, 2008.

0
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 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 campus or 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 campus or 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.  301.6402-2(c) of 
this

[[Page 78450]]

chapter, Form 6118, ``Claim for Refund of Tax Return Preparer and 
Promoter Penalties,'' is the form prescribed for making a claim as 
provided in this section with respect to penalties under sections 6694 
and 6695. Form 843, Claim for Refund and Request for Abatement, is the 
form prescribed for making a claim as provided in this section with 
respect to a penalty under section 6695A.
    (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.  1.6694-4(a)(4)(ii) and (5), 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 an 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 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-
4(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 
December 31, 2008.

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

0
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). * * *


0
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 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 December 31, 2008.

0
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 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 December 31, 2008.

0
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 December 31, 
2008.

0
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

[[Page 78451]]

refund filed, and advice provided, after December 31, 2008.
0
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 
December 31, 2008.
0
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 
December 31, 2008.

0
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 
December 31, 2008.
0
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 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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

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

0
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). * * *


0
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 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 December 31, 2008.

0
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 December 31, 2008.

0
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 December 31, 
2008.

0
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 December 31, 2008.

0
Par. 29. Section 25.6694-2 is added to read as follows:

[[Page 78452]]

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 
December 31, 2008.

0
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 
December 31, 2008.

0
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, 
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 
December 31, 2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

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

0
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). * * *


0
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 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 December 31, 2008.

0
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 
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 December 31, 2008.

0
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 December 31, 
2008.

0
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.  1.6694-1 of this chapter.
    (b) Effective/applicability date. Paragraph (a) of this section is 
applicable to returns and claims for

[[Page 78453]]

refund filed, and advice provided, after December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

0
Par. 42. Section 26.6694-4 is added to read as follows:


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 
December 31, 2008.

0
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 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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

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

0
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). * * *


0
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 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 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 December 31, 2008.

0
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 December 31, 2008.

0
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 December 31, 
2008.

0
Par. 50. Section 31.6694-1 is added to read as follows:

[[Page 78454]]

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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

0
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). * * *


0
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 one or more tax return 
preparers to prepare a return or claim for refund of excise tax of any 
tax to which this part 40 applies 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 December 31, 2008.

0
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 of any tax to which this 
part 40 applies 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 December 31, 2008.

0
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 of 
any tax to which this part 40 applies 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 December 31, 2008.

0
Par. 61. Section 40.6694-1 is added to read as follows:

[[Page 78455]]

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 of any tax to which this part 40 applies, 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 
December 31, 2008.

0
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 of any tax to which this part 40 
applies shall be subject to penalties under section 6694(a) 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 
December 31, 2008.

0
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 return or 
claim for refund of excise tax of any tax to which this part 40 applies 
shall be subject to penalties under section 6694(b) 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 
December 31, 2008.

0
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 return or claim for 
refund of excise tax of any tax to which this part 40 applies 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 
December 31, 2008.

0
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 return or 
claim for refund of excise tax of any tax to which this part 40 applies 
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), failure to retain a copy or list under 
section 6695(d), failure to file a correct information return under 
section 6695(e), and negotiation of a check under section 6695(f), 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 December 31, 2008.

0
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. The rules under Sec.  1.6696-1 of this chapter will 
apply for claims for credit or refund by a tax return preparer who 
prepared a return or claim for refund of excise tax of any tax to which 
this part 40 applies.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after 
December 31, 2008.

0
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 
December 31, 2008.

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

0
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). * * *


0
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 one or more tax return 
preparers to prepare a return or claim for refund of excise tax under 
section 4481, 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 December 31, 2008.

0
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 under section 4481 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 December 31, 2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

[[Page 78456]]


0
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 shall be subject 
to penalties under section 6694(a) 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 
December 31, 2008.

0
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 shall be subject 
to penalties under section 6694(b) 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 
December 31, 2008.

0
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 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 
December 31, 2008.

0
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 shall be subject 
to penalties for failure to furnish a copy to the taxpayer under 
section 6695(a), failure to sign a return under section 6695(b), 
failure to furnish an identification number under section 6695(c), 
failure to retain a copy or list under section 6695(d), failure to file 
a correct information return under section 6695(e) of the Code, and 
negotiation of a check under section 6695(f), 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 December 31, 2008.

0
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, 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 
December 31, 2008.

0
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 
December 31, 2008.

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

0
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). * * *


0
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 one or more tax return 
preparers to prepare a return or claim for refund of tax on wagers 
under sections 4401 or 4411, 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 December 31, 2008.

0
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 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 December 31, 2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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 shall 
be subject to penalties under section 6694(a) in the manner stated in 
Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section is applicable to 
returns and

[[Page 78457]]

claims for refund filed, and advice provided, after December 31, 2008.

0
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 shall 
be subject to penalties under section 6694(b) 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 
December 31, 2008.

0
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 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 
December 31, 2008.

0
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 shall 
be subject to penalties for failure to furnish a copy to the taxpayer 
under section 6695(a), failure to sign the return under section 
6695(b), failure to furnish an identification number under section 
6695(c), failure to retain a copy or list under section 6695(d), 
failure to file a correct information return under section 6695(e), and 
negotiation of a check under section 6695(f), 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 December 31, 2008.

0
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, 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 
December 31, 2008.

0
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 
December 31, 2008.

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
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). * * *

0
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 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 claims for refund filed after December 31, 2008.

0
Par. 92. Section 53.6107-1 is added to read as follows:


Sec.  53.6107-1  Tax return preparer must furnish copy of return or 
claim for refund 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 December 31, 2008.

0
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 December 31, 
2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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

[[Page 78458]]

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 
December 31, 2008.

0
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 
December 31, 2008.

0
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 or claims for refund 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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

PART 54--PENSION EXCISE TAXES

0
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). * * *



0
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 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 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 December 31, 2008.

0
Par. 103. Section 54.6107-1 is added to read as follows:


Sec.  54.6107-1  Tax return preparer must furnish copy of return or 
claims for refund 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 December 31, 2008.

0
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 December 31, 
2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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.

[[Page 78459]]

    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after 
December 31, 2008.

0
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 
December 31, 2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

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

0
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). * * *
    Section 55.6695-2 also issued under 26 U.S.C. 6695(g). * * *


0
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 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 December 31, 2008.

0
Par. 114. Section 55.6107-1 is added to read as follows:


Sec.  55.6107-1  Tax return preparer must furnish copy of return or 
claim for refund 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 December 31, 2008.

0
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 December 31, 
2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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

[[Page 78460]]

claims for refund filed, and advice provided, after December 31, 2008.

0
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 
December 31, 2008.

0
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 or claims for refund 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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

PART 56--PUBLIC CHARITY EXCISE TAXES

0
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). * * *

0
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 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 December 31, 2008.

0
Par. 125. Section 56.6107-1 is added to read as follows:


Sec.  56.6107-1  Tax return preparer must furnish copy of return and 
claim for refund 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 public charity 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 December 31, 2008.

0
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 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 December 31, 
2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

[[Page 78461]]

0
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 
December 31, 2008.

0
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 or claims for refund 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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

PART 156--EXCISE TAX ON GREENMAIL

0
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). * * *


0
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 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 December 31, 2008.

0
Par. 136. Section 156.6107-1 is added to read as follows:


Sec.  156.6107-1  Tax return preparer must furnish copy of return and 
claim for refund 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 December 31, 2008.

0
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 December 31, 
2008.
0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

0
Par. 141. Section 156.6694-4 is added to read as follows:

[[Page 78462]]

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 
December 31, 2008.

0
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 or claims for refund 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 December 31, 2008.

0
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.
    (b) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after 
December 31, 2008.

0
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 
December 31, 2008.

PART 157--EXCISE TAX ON STRUCTURED SETTLEMENT FACTORING 
TRANSACTIONS

0
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). * * *

0
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 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 December 31, 2008.

0
Par. 147. Section 157.6107-1 is added to read as follows:


Sec.  157.6107-1  Tax return preparer must furnish copy of return or 
claim for refund 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 December 31, 2008.

0
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 December 31, 
2008.

0
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 December 31, 2008.

0
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 
December 31, 2008.

0
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 
December 31, 2008.

0
Par. 152. Section 157.6694-4 is added to read as follows:

[[Page 78463]]

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 
December 31, 2008.

0
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 or claims for refund 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 December 31, 2008.

0
Par. 154. Section 157.6696-1 is added to read as follows:


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 
December 31, 2008.

0
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 
December 31, 2008.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 156. The authority citation for part 301 continues to read in part 
as follows:

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


0
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 the individual tax return preparer who has the 
primary responsibility for the overall substantive accuracy of the 
preparation of such return or claim for refund.
    (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. Notwithstanding the preceding sentence, time spent on advice 
before the events have occurred will be taken into account if all facts 
and circumstances show that the position(s) giving rise to the 
understatement is primarily attributable to the advice, the advice was 
substantially given before events occurred primarily to avoid treating 
the person giving the advice as a tax return preparer, and the advice 
given before events occurred was confirmed after events had occurred 
for purposes of preparing a tax return. 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 leads to a position or entry that 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 
leads to a position(s) or entry that 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 nonsigning 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. Attorney B did not 
provide advice before the corporate transaction occurred with the 
primary intent to avoid being treated as a tax return preparer. 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

[[Page 78464]]

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, the schedule or other portion 
is not considered to be a substantial portion 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).
    (B) If more than one schedule, entry or other portion is involved, 
all schedules, entries or other portions shall be aggregated in 
applying the de minimis rule in paragraph (b)(3)(ii)(A) of this 
section.
    (C) The de minimis rule in paragraph (b)(3)(ii)(A) of this section 
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 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 nonsigning 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 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 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 and claims for refund 
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 (f)(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 
taxpayer, or an officer, a general partner, member, shareholder, or 
employee of a taxpayer, by whom the individual is regularly and

[[Page 78465]]

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 individual 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 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 
December 31, 2008.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 158. The authority citation for part 602 continues to read in part 
as follows:

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

0
Par. 159. In Sec.  602.101, paragraph (b) is amended by adding the 
following entries to the table in numerical order to read in part as 
follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
 CFR part or section where identified and
                described                     Current OMB control No.
------------------------------------------------------------------------
 
                                * * * * *
1.6060-1(a)(1)...........................  1545-1231
1.6107-1.................................  1545-1231
1.6694-2(c)(3)...........................  1545-1231
20.6060-1(a)(1)..........................  1545-1231
20.6107-1................................  1545-1231
25.6060-1(a)(1)..........................  1545-1231
25.6107-1................................  1545-1231
26.6060-1(a)(1)..........................  1545-1231
26.6107-1................................  1545-1231
31.6060-1(a)(1)..........................  1545-1231
31.6107-1................................  1545-1231
40.6060-1(a)(1)..........................  1545-1231
40.6107-1................................  1545-1231
41.6060-1(a)(1)..........................  1545-1231
41.6107-1................................  1545-1231
44.6060-1(a)(1)..........................  1545-1231
44.6107-1................................  1545-1231
53.6060-1(a)(1)..........................  1545-1231
53.6107-1................................  1545-1231
54.6060-1(a)(1)..........................  1545-1231
54.6107-1................................  1545-1231
55.6060-1(a)(1)..........................  1545-1231
55.6107-1................................  1545-1231
56.6060-1(a)(1)..........................  1545-1231
56.6107-1................................  1545-1231
156.6060-1(a)(1).........................  1545-1231
156.6107-1...............................  1545-1231
157.6060-1(a)(1).........................  1545-1231
157.6107-1...............................  1545-1231
 
                                * * * * *
------------------------------------------------------------------------


Linda M. Kroening,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: December 10, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-29750 Filed 12-15-08; 4:15 pm]
BILLING CODE 4830-01-P