Nprm

Tuesday,
June 17, 2008

Part IV

Department of the
Treasury
Internal Revenue Service

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26 CFR Parts 1, 20, 25, et al.
Tax Return Preparer Penalties Under
Sections 6694 and 6695; Proposed Rule

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Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / Proposed Rules
Paperwork Reduction Act

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, 25, 26, 31, 40, 41,
44, 53, 54, 55, 56, 156, 157, and 301
[REG–129243–07]
RIN 1545–BG83

Tax Return Preparer Penalties Under
Sections 6694 and 6695
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.

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AGENCY:

SUMMARY: This document contains
proposed regulations implementing
amendments to the tax return preparer
penalties under sections 6694 and 6695
of the Internal Revenue Code (Code) and
related provisions under sections 6060,
6107, 6109, 6696, and 7701(a)(36)
reflecting amendments to the Code
made by section 8246 of the Small
Business and Work Opportunity Tax
Act of 2007. The proposed regulations
affect tax return preparers and provide
guidance regarding the amended
provisions. This document also
provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by August 18, 2008.
Outlines of topics to be discussed at the
public hearing scheduled for Monday,
August 18, 2008, must be received by
Monday, August 4, 2008.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–129243–07), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–129243–07),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC, or sent
electronically via the Federal
eRulemaking Portal at http://
www.regulations.gov/Regs (IRS REG–
129243–07). The public hearing will be
held in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Michael E. Hara, (202) 622–4910, and
Matthew S. Cooper, (202) 622–4940;
concerning submissions of comments,
the hearing, and/or to be placed on the
building access list to attend the
hearing, Regina Johnson, (202) 622–
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:

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The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by
August 18, 2008. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the IRS,
including whether the information will
have practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The collection of information in this
proposed regulation is in §§ 1.6060–
1(a)(1), 1.6107–1, 1.6694–2(c)(3),
20.6060–1(a)(1), 20.6107–1, 25.6060–
1(a)(1), 25.6107–1, 26.6060–1(a)(1),
26.6107–1, 31.6060–1(a)(1), 31.6107–1,
40.6060–1(a)(1), 40.6107–1, 41.6060–
1(a)(1), 41.6107–1, 44.6060–1(a)(1),
44.6107–1, 53.6060–1(a)(1), 53.6107–1,
54.6060–1(a)(1), 54.6107–1, 55.6060–
1(a)(1), 55.6107–1, 56.6060–1(a)(1),
56.6107–1, 156.6060–1(a)(1), 156.6107–
1, 157.6060–1(a)(1), and 157.6107–1.
This information is necessary to make
the record of the name, taxpayer
identification number, and principal
place of work of each tax return
preparer, make each return or claim for
refund prepared available for inspection
by the Commissioner of Internal
Revenue, and to document that the tax
return preparer advised the taxpayer of
the penalty standards applicable to the
taxpayer in order for the tax return
preparer to avoid penalties under
section 6694. The collection of

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information is required to comply with
the provisions of section 8246 of the
Small Business and Work Opportunity
Tax Act of 2007. The likely respondents
are tax return preparers and their
employers.
Estimated total annual reporting
burden: 10,679,320 hours.
Estimated average annual burden per
respondent: 15.6 hours.
Estimated number of respondents:
684,268.
Estimated frequency of responses:
127,801,426.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Background
This document contains proposed
amendments to the Income Tax
Regulations (26 CFR part 1), the Estate
Tax Regulations (26 CFR part 20), the
Gift Tax Regulations (26 CFR part 25),
the Generation-Skipping Transfer Tax
Regulations (26 CFR part 26), the
Employment Tax and Collection of
Income Tax at Source Regulations (26
CFR part 31), the Excise Tax Procedural
Regulations (26 CFR part 40), the
Highway Use Tax Regulations, (26 CFR
part 41), the Wagering Tax Regulations
(26 CFR part 44), the Foundation and
Similar Excise Tax Regulations (26 CFR
part 53), the Pension Excise Tax
Regulations (26 CFR part 54), the Excise
Tax on Real Estate Investment Trusts
and Regulated Investment Companies
Regulations (26 CFR part 55), the Public
Charity Excise Tax Regulations (26 CFR
part 56), the Excise Tax on Greenmail
Regulations (26 CFR part 156), the
Excise Tax on Structured Settlement
Factoring Transactions Regulations (26
CFR part 157), and the Regulations on
Procedure and Administration (26 CFR
part 301) implementing the
amendments to tax return preparer
penalties under sections 6694 and 6695
(and the related provisions under
sections 6060, 6107, 6109, 6696, and
7701(a)(36)) made by section 8246 of the
Small Business and Work Opportunity
Tax Act of 2007, Public Law 110–28
(121 Stat. 190) (May 25, 2007) (the 2007
Act).
In accordance with the 2007 Act,
these proposed regulations amend
existing regulations defining income tax
return preparers to broaden the scope of
that definition to include preparers of
estate, gift, and generation-skipping
transfer tax returns, employment tax
returns, excise tax returns, and returns
of exempt organizations. These
proposed regulations also revise current

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

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regulations to amend the standards of
conduct that must be met to avoid
imposition of the tax return preparer
penalty under section 6694. In addition,
these proposed regulations reflect
changes to the computation of the
section 6694 tax return preparer penalty
made by the 2007 Act. These regulations
also amend current regulations under
the penalty provisions of section 6695 to
conform them with changes made by the
2007 Act expanding the scope of that
statute beyond income tax returns. The
Treasury Department and the IRS intend
to finalize these proposed regulations by
the end of 2008, with the expectation
that the final regulations will be
applicable to returns and claims for
refund filed (and advice given) after the
date that final regulations are published
in the Federal Register, but in no event
sooner than December 31, 2008.
History of the Tax Return Preparer
Penalty Provisions
The 2007 Act amended section 6694
to expand the definition of tax return
preparer, broaden the scope of the tax
return preparer penalties to include
preparers of returns other than income
tax returns, revise the standards of
conduct that tax return preparers must
meet to avoid imposition of penalties,
and change the computation of the tax
return preparer penalties. The 2007 Act
did not amend a number of other Code
sections related to tax return preparer
conduct, nor did it directly address the
tax regulations, published guidance, and
case law that have developed since
enactment of the preparer penalty
regime as part of the Tax Reform Act of
1976, Public Law 94–455 (90 Stat. 1688)
(October 4, 1976) (the 1976 Act).
The Treasury Department and the IRS
believe that the recent amendments to
the tax return preparer penalty
provisions necessitate a comprehensive
review and overhaul of all the tax return
preparer penalties and related
regulatory provisions. These proposed
regulations are the first significant step
in this process. Because the proposed
regulations were drafted with
consideration of the existing regulations
and the legislative history of the
statutory provisions that were amended
by the 2007 Act, a brief review of the
legislative and regulatory history
leading up to the recent amendments is
appropriate in order to place the
proposed regulatory changes reflecting
the 2007 Act amendments in context.
The Tax Reform Act Of 1976
The provisions in section 7701(a)(36)
defining income tax return preparers,
and the provisions in sections 6694, and
6695, imposing various penalties on

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income tax return preparers, were first
enacted by the 1976 Act. Sections 6107
and 6109, imposing an obligation on
return preparers to furnish and maintain
copies of returns and include an
identifying number on those returns,
were also enacted by the 1976 Act.
As originally enacted, section
7701(a)(36)(A) defined the term income
tax return preparer to mean any person
who prepared for compensation, or who
employed one or more persons to
prepare for compensation, any income
tax return or income tax claim for
refund, or a ‘‘substantial portion’’ of
such return or claim. Section
7701(a)(36)(B) excluded from the
definition of income tax return preparer
persons who merely provided
mechanical assistance in the
preparation of a return or claim for
refund, or who prepared returns and
claims as an employee of the taxpayer
or in a fiduciary capacity. The
legislative history to the 1976 Act
explained that whether or not a portion
of a return constituted a substantial
portion of a tax return was to be
determined by examining both the
length and complexity of that particular
portion of the return and the amount of
tax liability involved. The legislative
history noted, however, that the filling
out of a single schedule would generally
not be considered a substantial portion
of that return unless that particular
schedule was the dominant portion of
the entire tax return. The legislative
history also provided that a person who
prepared a return for compensation may
be an income tax return preparer even
though that person did not actually
place figures on a taxpayer’s return. See
S. Rep. No. 94–938, 94th Cong., 2d Sess.
349–359 (1976).
As originally enacted, section 6694(a)
imposed a ‘‘first tier’’ penalty of $100 if
any part of an understatement was due
to the negligent or intentional disregard
of rules or regulations by an income tax
return preparer. Section 6694(b)
imposed a ‘‘second tier’’ penalty of $500
if any part of an understatement was
due to a willful attempt in any manner
to understate tax liability by an income
tax return preparer. Section 6695(b)
imposed a penalty of $25 if an income
tax return preparer failed to sign a
return or claim for refund in the manner
prescribed by regulations. Sections
6695(a), (c), (d), and (e) also imposed
penalties of $25 if an income tax return
preparer failed to comply with the
various identification rules in sections
6107(a), 6109(a)(4), 6107(b) and 6060.
The House and Senate Reports to the
1976 Act, H. Rep. No. 94–658, 94th
Cong., 1st Sess. at 274 (1975) and S.
Rep. No. 94–938 at 349–50, and the

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Joint Committee on Taxation’s General
Explanation of the Tax Reform Act of
1976, 94th Cong., 2d Sess. at 346 (1976),
explained the need for the new tax
return preparer penalty regime by
noting the significant number of
fraudulent returns and tax return
preparers engaged in abusive practices.
The legislative history further explained
that, under prior law, it was often
difficult for the IRS to detect any
individual case of improper return
preparation. This was because the IRS
generally had no way of knowing
whether the return was prepared by the
taxpayer or by a tax return preparer who
may have engaged in abusive practices
involving a number of returns. Further,
even when the IRS could trace the
improper preparation of tax returns to
an individual tax return preparer, the
only sanctions available were criminal
penalties, which were often considered
inappropriate, cumbersome, and
ineffective deterrents because of the cost
and length of time involved in
prosecuting those cases. The legislative
history makes clear that Congress
intended the tax return preparer
penalties to aid the IRS in detecting
returns that were incorrectly prepared
and to deter tax return preparers from
engaging in improper conduct. See S.
Rep. No. 94–938, at 350–51 (1976).
Regulations implementing certain of
the amendments made by the 1976 Act
were published on December 29, 1976,
as TD 7451, 41 FR 56631, and later
amended on March 31, 1977, by TD
7473, 42 FR 17124. Additional
regulations were published on April 1,
1977, as TD 7475, 42 FR 17452, and
November 23, 1977, as TD 7519, 42 FR
17452 (the November 1977 final
regulations).
The November 1977 final regulations
applied the tax return preparer penalty
provisions to persons who did not sign
the return or claim for refund, or make
or control the entries on the return or
claim for refund, including tax
professionals who rendered advice that
was directly related to the
determination of the existence,
characterization, or amount, of an entry
on a return or claim for refund. By
including a broad definition of tax
return preparer, the Treasury
Department and the IRS intended the
regulations to increase advisor care and
to monitor careless or deceptive
members of the profession. The
November 1977 final regulations
reflected the considered view that
excluding nonsigning tax professionals
from the reach of section 6694 could
result in a lack of accountability for
positions taken on a return, as taxpayers
could escape penalty liability because

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

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

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Omnibus Budget Reconciliation Act of
1989
Sections 6694 and 6695 were
amended by the Improved Penalty
Administration and Compliance Tax
Act of 1989, enacted as title G of the
Omnibus Budget Reconciliation Act of
1989 (OBRA 1989), Public Law 101–239
(103 Stat. 2106) (December 19, 1989).
The OBRA 1989 amended section
6694(a) to remove the prior link to
negligence or intentional disregard of
rules or regulations and instead impose
a $250 penalty on an income tax return
preparer who understated a taxpayer’s
tax liability on an income tax return or
claim for refund if the understatement
was due to a position for which there
was not a ‘‘realistic possibility’’ of being
sustained on its merits, and the tax
return preparer knew or reasonably
should have known of such position.
The revised section 6694(a) penalty did
not apply, however, if the position was
‘‘not frivolous’’ and was adequately
disclosed, or if there was reasonable
cause for the position taken and the tax
return preparer acted in good faith. The
OBRA 1989 also amended section
6694(b) to impose a $1,000 penalty on
a tax return preparer who understated a
taxpayer’s tax liability on an income tax
return or claim for refund if the
understatement was due to the tax
return preparer’s willful attempt to
understate tax liability or the tax return
preparer’s reckless or intentional
disregard of rules or regulations.

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The OBRA 1989 also made uniform
the tax return preparer penalties that
apply for each failure by a tax return
preparer to: (1) Furnish a copy of a
return or claim for refund to the
taxpayer under section 6695(a); (2) sign
the return or claim for refund under
section 6695(b); (3) furnish his or her
identification number under section
6695(c); or (4) file a correct information
return under section 6695(e). The
unified penalty amount was $50 for
each failure, with a limit of $25,000 for
the total amount of penalties that could
be imposed for any single type of
failure.
The OBRA 1989 also consolidated the
negligence, substantial understatement
and valuation misstatement penalties
applicable to taxpayers. These penalties
were consolidated into a single
accuracy-related penalty regime under
section 6662. The new accuracy-related
penalty for a substantial understatement
of income tax generally would not be
imposed, however, if (1) there was
‘‘substantial authority’’ for the
taxpayer’s treatment of the item giving
rise to the understatement, or (2)
relevant facts affecting the tax treatment
of the item were adequately disclosed in
the return or in a statement attached to
the return and there was a ‘‘reasonable
basis’’ for the tax treatment of the item.
By adopting the ‘‘realistic possibility’’
standard for tax return preparers, and
the higher ‘‘substantial authority’’
standard for taxpayers with respect to
undisclosed positions, OBRA 1989
created a disparity between the penalty
treatment of tax return preparers and
most taxpayers subject to income tax.
Regulations were published on
December 31, 1991, as TD 8382, 56 FR
67509, which amended the regulations
under section 6694 to conform the
income tax return preparer regulations
with the statutory changes made by
OBRA 1989 and to make other changes.
The Small Business and Work
Opportunity Tax Act of 2007
Section 8246 of the 2007 Act
amended sections 6694 and 7701(a)(36)
and made conforming changes to other
Code provisions to make tax return
preparer penalties applicable to a
broader range of tax returns. The 2007
Act’s amendments to section 6694 also
changed the standards of conduct that
tax return preparers must meet in order
to avoid imposition of penalties in the
event that a return prepared results in
an understatement of tax. For
undisclosed positions, the 2007 Act
replaced the ‘‘realistic possibility’’
standard with a standard requiring the
tax return preparer to ‘‘reasonably
believe that the tax treatment of the

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position is more likely than not’’ the
proper treatment. For disclosed
positions, the 2007 Act replaced the
‘‘not-frivolous’’ standard with a
standard requiring the tax return
preparer to have a ‘‘reasonable basis’’ for
the tax treatment of the position.
The 2007 Act also increased the firsttier penalty under section 6694(a) from
$250 to the greater of $1,000 or 50
percent of the income derived (or to be
derived) by the tax return preparer from
the preparation of a return or claim for
refund with respect to which the
penalty was imposed. In addition, the
2007 Act increased the second-tier
penalty under section 6694(b) from
$1,000 to the greater of $5,000 or 50
percent of the income derived (or to be
derived) by the tax return preparer. The
amendments made by the 2007 Act are
effective for tax returns prepared after
the date of enactment, May 25, 2007.
Notice 2008–13
Notice 2008–13 (2008–3 IRB 282) was
released on December 31, 2007 and
provided interim guidance under the
2007 Act regarding: (1) The relevant
categories of tax returns or claims for
refund for purposes of applying the
penalty under section 6694(a); (2) the
definition of ‘‘tax return preparer’’
under sections 6694 and 7701(a)(36); (3)
the date a return is deemed prepared; (4)
the standards of conduct applicable to
tax return preparers for disclosed and
undisclosed positions taken on tax
returns; and (5) the penalty compliance
obligations applicable to tax return
preparers. Additional guidance was
provided in Notice 2008–12 (2008–3
IRB 280) with respect to the
implementation of the tax return
preparer signature requirement of
section 6695(b), and in Notice 2008–11
(2008–3 IRB 279), which clarified the
earlier transition relief provided in
Notice 2007–54 (2007–27 IRB 12 (July 2,
2007)). Notice 2008–46 (2008–18 IRB
868) was released on April 16, 2008 and
added certain returns and documents to
Exhibits 1, 2, and 3 of Notice 2008–13.
Explanation of Provisions
In developing these proposed
regulations, the Treasury Department
and the IRS recognize that the majority
of tax return preparers serve the
interests of their clients and the tax
system by preparing complete and
accurate returns. Tax return preparers
are critical to ensuring compliance with
the Federal tax laws and are an
important component in the IRS’s
administration of those laws. The
proposed regulations intend to balance
the interests of the IRS in curtailing the
activities of noncompliant tax return

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Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / Proposed Rules
preparers against the burden imposed
on all tax return preparers in complying
with the requirements imposed by the
2007 Act and these proposed
regulations.
The Treasury Department and the IRS
also recognize that the government has
a number of tools to monitor and
sanction tax return preparers, and will
continue to coordinate the application
of penalties under sections 6694, 6695,
6695A, 6700, 6701, 6702, and Circular
230, as well as other applicable
penalties and criminal sanctions.
The IRS will assess penalties under
section 6694 in appropriate cases. In
keeping with a balanced enforcement
program for tax return preparers, the IRS
intends to modify its internal guidance
so that a referral by revenue agents to
the IRS Office of Professional
Responsibility (OPR) will not be per se
mandatory when the IRS assesses a tax
return preparer penalty under section
6694(a) against a tax return preparer
who is also a practitioner within the
meaning of Circular 230. This change is
consistent with the general
administrative recommendations made
in the legislative history of the
amendments made by OBRA 1989 to the
section 6694 penalty. See H.R. Conf.
Rep. 101–386, 101st Cong., 1st Sess. at
662 (1989). In matters involving nonwillful conduct, the IRS will generally
look for a pattern of failing to meet the
required penalty standards under
section 6694(a) before making a referral
to OPR, although any egregious conduct
subjecting a tax return preparer to
penalty may also form a basis for a
referral to OPR.

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Proposed Changes
The following is a summary of the
proposed changes to the existing
regulations affecting tax return
preparers. The changes included in
these proposed regulations are
discussed in order of the Code sections
to which they relate. When appropriate,
cross-references to definitional sections
are included. Significantly, the
definition of tax return preparer, which
maintains the concepts in the existing
regulations of signing and nonsigning
tax return preparers, is located at the
end of these proposed regulations in
§ 301.7701–15, and that section is crossreferenced in the relevant sections of the
regulations under sections 6694 and
6695.
Furnishing of Copy of the Tax Return
Section 1.6107–1(a), which requires
signing tax return preparers to furnish
the taxpayer a copy of the prepared
return, is proposed to be amended to
provide that for electronically filed

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Forms 1040EZ, ‘‘Income Tax Return for
Single Filers and Joint Filers With No
Dependents,’’ and Forms 1040A, ‘‘U.S.
Individual Income Tax Return,’’ filed for
the 2009, 2010 and 2011 taxable years,
the return information may be provided
on a replica of a Form 1040, ‘‘U.S.
Individual Income Tax Return,’’ that
provides all of the return information.
For other electronically filed returns,
the information may be provided on a
replica of an official form that provides
all of the information. This amendment
addresses the IRS’ transitional issues in
implementing the Modernized e-File
platform for the Form 1040 series of
returns.
Date Return Is Prepared
Proposed § 1.6694–1(a)(2) defines the
date a return or claim for refund is
prepared as the date it is signed by the
tax return preparer, and also provides
that if the tax return preparer fails to
sign the return when otherwise required
to do so, the date the return is deemed
prepared is the date the return is filed.
In the case of a nonsigning tax return
preparer, the relevant date is the date
the person provides the advice on the
position that results in the
understatement. This date will be
determined based on all the facts and
circumstances.
Defining the Preparer Within a Firm
Current § 1.6694–1(b)(1) provides a
‘‘one preparer per firm’’ rule.
Specifically, if a signing tax return
preparer is associated with a firm, that
individual, and no other individual in
the firm, is treated as a tax return
preparer with respect to the return or
claim for purposes of section 6694.
Under the current regulations, if two or
more individuals associated with a firm
are tax return preparers with respect to
a return or claim for refund, and none
of them is the signing tax return
preparer, only one of the individuals is
a nonsigning tax return preparer with
respect to that return or claim for
purposes of section 6694. In such a case,
ordinarily, the individual who is a tax
return preparer for purposes of section
6694 is the individual with overall
supervisory responsibility for the advice
given by the firm with respect to the
return or claim. The ‘‘one preparer per
firm’’ rule and the corollary rule
included in § 1.6694–2(d)(5) of the
current regulations precluding a tax
return preparer from relying on the
advice of an individual associated with
the tax return preparer’s same firm for
purposes of penalty protection were
intended to eliminate the administrative
difficulty of attempting to apply the

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section 6694 penalty on an intra-firm
basis.
The Treasury Department and the IRS
believe that the amendments to section
6694 made by the 2007 Act, together
with the evolution in existing business
practices and the increased complexity
of the Federal tax law that has created
an increased need for specialization,
require reconsideration of the ‘‘one
preparer per firm’’ rule. Specifically, the
Treasury Department and the IRS
believe this evolution requires the
adoption of a framework that centers on
the return or claim for refund on a
position-by-position basis, with the
focus of any penalty on the position(s)
giving rise to the understatement on the
return or claim for refund and any
responsible parties with respect to such
position(s). Thus the Treasury
Department and the IRS believe that the
‘‘one preparer per firm’’ rule is no
longer appropriate and have proposed to
adopt a framework defining a preparerper-position within a firm.
Under both the current and the
proposed regulations, an individual is a
tax return preparer subject to section
6694 if the individual is primarily
responsible for the position on the
return or claim for refund giving rise to
the understatement.
Under proposed § 6694–1(b)(1), only
one person within a firm will be
considered primarily responsible for
each position giving rise to an
understatement and, accordingly, be
subject to the penalty. In the course of
identifying the individual who is
primarily responsible for the position,
the IRS may advise multiple individuals
within the firm that it may be concluded
that they are the individual within the
firm who is primarily responsible. In
some circumstances, there may be more
than one tax return preparer who is
primarily responsible for the position(s)
giving rise to an understatement if
multiple tax return preparers are
employed by, or associated with,
different firms.
Proposed § 1.6694–1(b)(2) provides
that the individual who signs the return
or claim for refund as the tax return
preparer will generally be considered
the person that is primarily responsible
for all of the positions on the return or
claim for refund giving rise to an
understatement. The ‘‘one preparer per
firm’’ rule, however, is revised by these
proposed regulations if it is concluded
based upon information received from
the signing tax return preparer (or other
relevant information from a source other
than the signing tax return preparer)
that another person within the signing
tax return preparer’s same firm was
primarily responsible for the position(s)

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giving rise to the understatement. In this
situation, the ‘‘one preparer per firm’’
rule in the current regulations could
unduly limit the IRS to assessing the
penalty against a person who may have
overall responsibility in terms of signing
the return, but who may lack detailed
knowledge of, or responsibility for, a
problematic return position, and who
reasonably relied on another
professional at the same firm with
greater knowledge of, and responsibility
for, the accuracy of a position giving rise
to the understatement.
The Treasury Department and the IRS
believe that amending the regulations to
better target the person or persons
responsible for the position(s) giving
rise to the understatement will further
compliance and result in more equitable
administration of the tax return preparer
penalty regime.
Proposed § 1.6694–1(b)(3) establishes
a similar rule for situations when there
are one or more nonsigning tax return
preparers at the same firm. If there are
one or more nonsigning tax return
preparers at the firm and no signing tax
return preparer within the firm, the
individual within the firm with overall
supervisory responsibility for the
position(s) giving rise to the
understatement is the tax return
preparer who is primarily responsible
for the position for purposes of section
6694. Additionally, if after the
application of proposed § 1.6694–1(b)(2)
it is concluded that the signer is not
primarily responsible for the position or
the IRS cannot conclude which
individual (as between the signing tax
return preparer and other persons
within the firm) is primarily responsible
for the position, the individual
nonsigning tax return preparer within
the firm with overall supervisory
responsibility for the position(s) is the
tax return preparer who is primarily
responsible for the position(s) giving
rise to the understatement.
This rule in proposed § 1.6694–1(b)(3)
is intended to address the potential for
uncertainty regarding the identification
of the primarily responsible tax return
preparer prior to the time of the
expiration of the period of limitations
on making an assessment under section
6694(a). The proposed rule is
distinguished from the current ‘‘one
preparer per firm’’ rule in the current
regulations because under the proposed
rule the IRS may assess the penalty
against either the signing tax return
preparer or the nonsigning tax return
preparer with overall supervisory
responsibility for the position(s) giving
rise to an understatement depending on
the facts and circumstances.
Specifically, when the facts indicate

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that the signing tax return preparer is
the primarily responsible tax return
preparer under proposed § 1.6694–
1(b)(1) and (b)(2), the IRS may assess the
section 6694 penalty against that
individual when appropriate under the
statute and regulations. In situations
when the facts indicate that the
nonsigning tax return preparer with
overall supervisory responsibility is the
primarily responsible tax return
preparer under proposed § 1.6694–
1(b)(1) and (b)(3), the IRS may assess the
section 6694 penalty against that
individual when appropriate. In
situations when it is unclear which
individual, as between the signer and
other nonsigning tax return preparers at
the firm, the IRS may assess the section
6694 penalty against the nonsigning tax
return preparer with overall supervisory
responsibility with respect to the
position giving rise to the
understatement when appropriate. The
Treasury Department and the IRS
specifically request comments regarding
the approach taken in these proposed
regulations and any recommendations
to improve this rule.
As described in this preamble,
conforming rules are included in
§ 1.6694–1(f) of the proposed
regulations regarding computation of
the ‘‘income derived (or to be derived)’’
from the firm and the individual(s)
associated with the firm, in order to
ensure that the same income is not
counted twice in determining the
amount of income subject to the section
6694 penalty.
Reliance on Information Provided
Section 1.6694–1(e) of the current
regulations allows a tax return preparer
generally to rely in good faith without
verification upon information furnished
by the taxpayer. Proposed § 1.6694–1(e)
allows similar reliance, but provides
that a tax return preparer may not rely
on information provided by taxpayers
with respect to legal conclusions on
Federal tax issues.
The proposed regulations expand on
the current regulations to provide that a
tax return preparer may rely in good
faith and without verification on
information furnished by another
advisor, another tax return preparer, or
other party (even when the advisor or
tax return preparer is within the tax
return preparer’s same firm). Similarly,
a tax return preparer may rely in good
faith without verification upon a tax
return that has been previously
prepared by a taxpayer or another tax
return preparer and filed with the IRS.
The tax return preparer, however, may
not ignore the implications of
information furnished to the tax return

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preparer or actually known by the tax
return preparer, and must make
reasonable inquiries if the information
as furnished appears to be incorrect or
incomplete. The Treasury Department
and the IRS believe that this expansion
of the current rules regarding reliance is
necessary given the heightened
standards imposed on tax return
preparers by the 2007 Act and the
increased complexity of the tax law,
which often requires signing and
nonsigning tax return preparers to rely
on the work of others in ensuring
compliance.
Income Derived Determination in
Computing Penalty Amount
Proposed § 1.6694–1(f) defines
‘‘income derived (or to be derived)’’
with respect to a return or claim for
refund as all compensation the tax
return preparer receives or expects to
receive with respect to the engagement
of preparing the return or claim for
refund or providing tax advice
(including research and consultation)
with respect to the position(s) taken on
the return or claim for refund that gave
rise to the understatement. In the
situation of a tax return preparer who is
not compensated directly by the
taxpayer, but rather by a firm that
employs the tax return preparer or with
whom the tax return preparer is
associated, income derived (or to be
derived) means all compensation the tax
return preparer receives from the firm
that can be reasonably allocated to the
engagement of preparing the return or
claim for refund or providing tax advice
(including research and consultation)
with respect to the position(s) taken on
the return or claim for refund that gave
rise to the understatement. In the
situation where a firm that employs the
individual tax return preparer (or the
firm with which the individual tax
return preparer is associated) is subject
to a penalty under section 6694(a) or (b),
income derived (or to be derived) means
all compensation the firm receives or
expects to receive with respect to the
engagement of preparing the return or
claim for refund or providing tax advice
(including research and consultation)
with respect to the position(s) taken on
the return or claim for refund that gave
rise to the understatement.
If the tax return preparer or the tax
return preparer’s firm has multiple
engagements related to the same return
or claim for refund, only those
engagements relating to the position(s)
taken on the return or claim for refund
that gave rise to the understatement are
considered for purposes of computing
the income derived (or to be derived). In
the situation of a tax return preparer

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

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and monetary penalties under 31 U.S.C.
section 330 with respect to the same
conduct.
Firm Liability
Proposed §§ 1.6694–2(a)(2) and
1.6694–3(a)(2) are the same as
§§ 1.6694–2(a)(2) and 1.6694–3(a)(2) of
the current regulations regarding when
a firm is liable for the section 6694(a) or
(b) penalty with one exception.
Proposed §§ 1.6694–2(a)(2)(iii) and
1.6694–3(a)(2)(iii) provide that a firm is
also subject to the penalty when the
firm’s review procedures were
disregarded by the firm through
willfulness, recklessness, or gross
indifference (including ignoring facts
that would lead a person of reasonable
prudence and competence to investigate
or ascertain) in the formulation of the
advice, or the preparation of the return
or claim for refund, that included the
position for which the penalty is
imposed.
Reasonable Belief of More Likely Than
Not
Proposed § 1.6694–2(b)(1) provides
that the ‘‘reasonable belief that the
position would more likely than not be
sustained on its merits’’ standard will be
satisfied if the tax return preparer
analyzes the pertinent facts and
authorities and, in reliance upon that
analysis, reasonably concludes in good
faith that the position has a greater than
50 percent likelihood of being sustained
on its merits. Whether a tax return
preparer meets this standard will be
determined based upon all facts and
circumstances, including the tax return
preparer’s due diligence. In determining
the level of diligence in a particular
case, the IRS will take into account the
tax return preparer’s experience with
the area of tax law and familiarity with
the taxpayer’s affairs, as well as the
complexity of the issues and facts in the
case. The proposed regulations also
provide that a tax return preparer may
meet the ‘‘reasonable belief that the
position would more likely than not be
sustained on its merits’’ standard if a
position is supported by a well-reasoned
construction of the applicable statutory
provision despite the absence of other
types of authority, or if the tax return
preparer relies on information or advice
furnished by a taxpayer, advisor,
another tax return preparer, or other
party (even when the advisor or tax
return preparer is within the tax return
preparer’s same firm), as provided in
proposed § 1.6694–1(e).
Proposed § 1.6694–2(b)(2) provides
that a tax return preparer may not rely
on unreasonable assumptions, while
proposed § 1.6694–2(b)(3) states that the

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authorities contained in § 1.6662–
4(d)(3)(iii) (or any successor provision)
are to be considered in determining
whether a position satisfies the ‘‘more
likely than not’’ standard. Proposed
§ 1.6694–2(b)(4) also provides examples
that illustrate positions meeting the
‘‘reasonable belief that the position
would more likely than not be sustained
on its merits’’ standard.
Reasonable Basis
Proposed §§ 1.6694–2(c)(1) and (2)
establish that the ‘‘reasonable basis’’
standard that must be met for disclosed
positions is the same standard as
defined in § 1.6662–3(b)(3) (or any
successor provision). The proposed
regulations also provide that, to meet
the ‘‘reasonable basis’’ standard, a tax
return preparer may rely in good faith,
without verification, upon information
furnished by a taxpayer, advisor,
another tax return preparer, or other
party (even when the advisor or tax
return preparer is within the tax return
preparer’s same firm), as provided in
proposed § 1.6694–1(e).
Adequate Disclosure
Section 1.6694–2(c)(3) builds on the
current regulations and the interim
guidance provided in Notice 2008–13
and provides the rules for disclosure of
a position for which there is a
‘‘reasonable basis’’ but for which the tax
return preparer does not have a
‘‘reasonable belief that the position
would more likely than not be sustained
on its merits.’’
For a signing tax return preparer
within the meaning of § 301.7701–
15(b)(1), the proposed regulations
provide that a position may be disclosed
in one of five ways. First, the position
may be disclosed on a properly
completed and filed Form 8275,
Disclosure Statement, or Form 8275–R,
Regulation Disclosure Statement, as
appropriate, or on the tax return in
accordance with the annual revenue
procedure. See Revenue Procedure
2008–14 (2008–7 IRB 435 (February 19,
2008)). Second, for income tax returns,
if the position does not meet the
‘‘substantial authority’’ standard
described in § 1.6662–4(d), disclosure of
the position is adequate if the tax return
preparer provides the taxpayer with a
prepared tax return that includes the
appropriate disclosure. Third, for
income tax returns, if the position meets
the ‘‘substantial authority’’ standard,
disclosure of the position is adequate if
the tax return preparer advises the
taxpayer of all of the penalty standards
applicable to the taxpayer under section
6662. Fourth, for income tax returns, if
the position may be described as a tax

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shelter under section 6662(d)(2)(C) or a
reportable transaction to which section
6662A applies, disclosure of the
position is adequate if the tax return
preparer advises the taxpayer that there
needs to be at a minimum ‘‘substantial
authority’’ for the position, that the
taxpayer must possess a ‘‘reasonable
belief that the tax treatment was more
likely than not’’ the proper treatment,
and that disclosure will not protect the
taxpayer from assessment of an
accuracy-related penalty. Fifth, for tax
returns or claims for refund that are
subject to penalties other than the
accuracy-related penalty for substantial
understatements under sections
6662(b)(2) and (d), the tax return
preparer advises the taxpayer of the
penalty standards applicable to the
taxpayer under section 6662. This fifth
rule is intended to address the situation
when the penalty standard applicable to
the taxpayer is based on compliance
with requirements other than disclosure
on the return (for example, section
6662(e)). In order to establish that the
tax return preparer’s disclosure
obligation was satisfied, the tax return
preparer must document
contemporaneously in the tax return
preparer’s files that the information or
advice required by the proposed
regulations was provided.
In the case of a nonsigning tax return
preparer within the meaning of
§ 301.7701–15(b)(2), the position may be
disclosed in one of three ways. First, the
position may be disclosed on a properly
completed and filed Form 8275,
‘‘Disclosure Statement,’’ or Form 8275–
R, ‘‘Regulation Disclosure Statement,’’
as appropriate, or on the tax return in
accordance with the annual revenue
procedure. Second, a nonsigning tax
return preparer may meet the disclosure
standards if the nonsigning tax return
preparer advises the taxpayer of all
opportunities to avoid penalties under
section 6662 that could apply to the
position and advises the taxpayer of the
standards for disclosure to the extent
applicable. Third, disclosure of a
position is adequate if a nonsigning tax
return preparer advises another tax
return preparer that disclosure under
section 6694(a) may be required. The
nonsigning tax return preparer must
document contemporaneously in the tax
return preparer’s files that this advice
required by the proposed regulations
was provided.
In order to satisfy the disclosure
standards when the position is not
disclosed on or with the return, each
return position for which there is a
‘‘reasonable basis’’ but for which the tax
return preparer does not have a
‘‘reasonable belief that the position

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would more likely than not be sustained
on the merits’’ must be addressed by the
tax return preparer. Thus, the advice to
the taxpayer with respect to each
position must be particular to the
taxpayer and tailored to the taxpayer’s
facts and circumstances. No form of a
general boilerplate disclaimer will
satisfy these standards. Proposed
§ 1.6694–2(c)(iv) provides that
disclosure in the case of items
attributable to a pass-through entity is
adequate if made at the entity level in
accordance with the rules in § 1.6662–
4(f)(5). For example, a tax return
preparer of a partnership tax return
need only advise the partnership in
order to satisfy any of the above
disclosure rules and does not need to
advise each individual partner in the
partnership of the applicable penalties.
Reasonable Cause
Proposed § 1.6694–2(d) maintains the
rules in the current regulations
regarding reasonable cause and good
faith, except that § 1.6694–2(d) is
proposed to be revised to provide that
whether a position is supported by a
generally accepted administrative or
industry practice is an additional factor
to consider in determining whether the
tax return preparer acted with
reasonable cause and good faith. This
provision is intended to address
situations in the absence of published
guidance when administrative or
industry practice has developed that
would not reasonably be subject to
challenge by the IRS.
The reasonable cause factor regarding
reliance on advice of another tax return
preparer is also expanded to allow a tax
return preparer to reasonably rely on
information or advice furnished by a
taxpayer, advisor, another tax return
preparer, or other party (even when the
advisor or tax return preparer is within
the tax return preparer’s same firm), as
provided in proposed § 1.6694–1(e).
Electronically Signed Returns
Proposed § 1.6695–1(b)(2) provides
that, in the case of an electronically
signed tax return, a tax return preparer
need not sign the return prior to
presenting a completed copy of the
return to the taxpayer. The tax return
preparer, however, must furnish all of
the information to the taxpayer
contemporaneously with furnishing the
Form 8879, IRS e-file Signature
Authorization, or similar IRS e-file
signature form. The information may be
furnished on a replica of an official form
that provides all of the information.

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Due Diligence for Earned Income Credit
Proposed § 1.6695–2(b)(3) establishes
a reasonableness standard for signing
tax return preparers’ due diligence
requirements with respect to
determining eligibility for the earned
income credit and adds examples.
Claims for Refund or Credit by Tax
Return Preparers or Appraisers
Proposed § 1.6696–1, discussing the
procedures for filing claims for credit or
refund for penalties assessed against tax
return preparers under sections 6694 or
6695, is revised to also cover the new
appraiser penalty under section 6695A.
Section 6695A was enacted by section
1219 of the Pension Protection Act of
2006 (Pub. L. 109–280 (120 Stat. 780,
1084–86) (August 17, 2006)), as
amended by the Tax Technical
Corrections Act of 2007 (Public Law
110–172 (121 Stat. 2473, 2474)
December 29, 2007)). A separate
regulation project will provide guidance
under section 6695A.
Definition of Tax Return Preparer
Proposed §§ 301.7701–15(b)(1) and (2)
add to the section 7701 regulations the
definitions of ‘‘signing tax return
preparer’’ and ‘‘nonsigning tax return
preparer’’ that are included in § 1.6694–
1 of the current regulations. Proposed
§ 301.7701–15(b)(1) provides that a
signing tax return preparer is any tax
return preparer who signs or who is
required to sign a return or claim for
refund as a tax return preparer pursuant
to § 1.6695–1(b).
Proposed § 301.7701–15(b)(2)
provides that a nonsigning tax return
preparer is any tax return preparer who
is not a signing tax return preparer but
who prepares all or a substantial portion
of a return or claim for refund within
the meaning of § 301.7701–15(b)(3) with
respect to events that have occurred at
the time the advice is rendered. In
determining whether an individual is a
nonsigning tax return preparer, the
proposed regulations provide that any
time spent on advice that is given with
respect to events that have occurred,
which is less than 5 percent of the
aggregate time incurred by the person
with respect to the position(s) giving
rise to the understatement will not be
taken into account in determining
whether an individual is a nonsigning
tax return preparer. The Treasury
Department and the IRS believe that this
less than 5 percent test will encourage
tax professionals who principally
rendered advice regarding events that
had not yet occurred to provide followup advice requested by a taxpayer
without the concern that, by providing

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

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the section 6694 penalties even though
the documents may not themselves give
rise to an understatement. Accordingly,
the Treasury Department and the IRS
believe that including a list of returns or
other documents, the preparation of
which may subject a tax return preparer
to penalties, will further compliance by
not unduly increasing the burden on
persons preparing information returns
and other documents.
Cross-References
Conforming changes are made in
§§ 1.6060–1, 1.6107–1, 1.6109–2,
1.6694–0, 1.6694–1, 1.6694–4, 1.6695–1,
1.6695–2, 1.6696–1, and 301.7701–15 to
replace references to income tax return
preparers with references to tax return
preparers, consistent with the
provisions of the 2007 Act. Conforming
cross references are also made to Part
20, Estate Tax; Estates of Decedents
Dying After August 16, 1954; Part 25,
Gift Tax; Gifts Made After December 31,
1954; Part 26, Generation-Skipping
Transfer Tax Under the Tax Reform Act
of 1986; Part 31, Employment Taxes and
Collection of Income Tax at Source; Part
40, Procedural Excise Tax; Part 41,
Highway Use Tax; Part 44, Wagering
Tax; Part 53, Foundation and Similar
Excise Taxes; Part 54, Pension Excise
Taxes; Part 55, Excise Tax on Real Estate
Investment Trusts and Regulated
Investment Company Taxes; Part 56,
Public Charity Excise Taxes; Part 156,
Excise Tax on Greenmail; and Part 157,
Excise Tax on Structured Settlement
Factoring Transactions; to conform
these parts with the provisions in Parts
1 and 301, consistent with the
provisions of the 2007 Act.
Availability of IRS Documents
The IRS notices referred to in this
preamble are published in the Internal
Revenue Bulletin and are available at
http://www.irs.gov.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations.
When an agency issues a rulemaking
proposal, the Regulatory Flexibility Act
(5 U.S.C. chapter 6), requires the agency
to ‘‘prepare and make available for
public comment an initial regulatory
flexibility analysis’’ that will ‘‘describe
the impact of the proposed rule on small
entities.’’ (5 U.S.C. 603(a)). Section 605
of the RFA provides an exception to this

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requirement if the agency certifies that
the proposed rulemaking will not have
a significant economic impact on a
substantial number of small entities.
The proposed rules affect tax return
preparers. The IRS estimates there are
38,566 tax return preparation firms and
260,338 self-employed tax return
preparers that qualify as small entities.
Therefore, the IRS has determined that
these proposed rules will have an
impact on a substantial number of small
entities.
The IRS has determined, however,
that the impact on entities affected by
the proposed rule will not be
significant. The statute and proposed
regulations would require entities that
employ tax return preparers to retain a
record of the name, taxpayer
identification number and principal
place of work of each tax return
preparer employed. The IRS estimates
that this would not require purchase of
additional software and would take five
minutes per tax return preparer
employed. The statute and proposed
regulations would also require tax
return preparers to retain a complete
copy of a return (or claim for refund) or
a list of the name, taxpayer
identification number and taxable year
for each return (or claim for refund) and
the name of the tax return preparer
required to sign the return or claim for
refund. Many tax return preparers have
copying machines or scanners and
already make copies of the returns
prepared, and the IRS estimates this
would not require the purchase of
additional equipment. The IRS
estimates that it would take an average
of five minutes to make copies or
prepare a record of the returns prepared.
Accordingly, the burden on employers
of tax return preparers to make a record
of the name, taxpayer identification
number, and principal place of work of
each employed tax return preparer, and
a copy of each return or claim for refund
prepared, or a record, is insignificant.
The proposed regulations also allow
the tax return preparer to generally
avoid imposition of the tax return
preparer penalties under section 6694 in
cases when a tax return position meets
the ‘‘substantial authority’’ standard but
not the ‘‘reasonable belief that the
position would more likely than not be
sustained on its merits’’ standard if the
tax return preparer advises the taxpayer
of the penalty standards applicable to
the taxpayer, and contemporaneously
documents in the tax return preparer’s
files that this information or advice was
provided. Often, tax return preparers
will choose not to advise the taxpayer
of the applicable penalty standards and
will instead disclose the position on a

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properly completed and filed Form
8275, ‘‘Disclosure Statement,’’ or Form
8275–R, ‘‘Regulation Disclosure
Statement,’’ as appropriate, or on the tax
return in accordance with the annual
revenue procedure. In those instances
when the tax return preparer elects to
advise the taxpayer of the penalty
standards, the IRS estimates that it
would take an average of 15 minutes to
document this advice. Accordingly, the
burden on those who choose this option
is insignificant.
Although the proposed regulations
also conform the standards of conduct
and tax return preparer penalties to the
provisions of the 2007 Act, tax return
preparers already enroll in educational
seminars or training programs to keep
up to date with the latest changes to the
Code, and the provisions of the 2007
Act and the proposed regulations will
generally be part of that training.
Moreover, these proposed regulations
are required to comply with the
provisions of section 8246 of the 2007
Act and flow directly from amendments
to the Code contained in the 2007 Act.
Based on these facts, the IRS hereby
certifies that the collection of
information contained in these
regulations will not have a significant
economic impact on a substantial
number of small entities. Accordingly, a
Regulatory Flexibility Analysis is not
required.
Pursuant to section 7805(f) of the
Code, these regulations have been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS. The IRS
and the Treasury Department request
comments on the clarity of the proposed
regulations and how they can be made
easier to understand. Comments are
requested on the examples in the
proposed regulations, and
commentators are specifically invited to
suggest changes to these examples or to
suggest new examples that they believe
would better illustrate the principles
that should be included in the final
regulations. The IRS and the Treasury
Department also request comments on
the accuracy of the certification that the
regulations in this document will not
have a significant economic impact on
a substantial number of small entities.
All comments will be available for
public inspection and copying.

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A public hearing has been scheduled
for Monday, August 18, 2008, at 10 a.m.
in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue,
NW., Washington, DC. Due to building
security procedures, visitors must enter
at the Constitution Avenue entrance. In
addition, all visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written or electronic
comments by August 18, 2008 and an
outline of the topics to be discussed and
the time to be devoted to each topic (a
signed original and eight (8) copies) by
Monday, August 4, 2008. A period of 10
minutes will be allotted to each person
for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for
receiving outlines has passed. Copies of
the agenda will be available free of
charge at the hearing.
Drafting Information
The principal authors of these
proposed regulations are Matthew S.
Cooper and Michael E. Hara, Office of
the Associate Chief Counsel (Procedure
and Administration).
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 20
Estate taxes, Reporting and
recordkeeping requirements.

26 CFR Part 26
Estate taxes, Reporting and
recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad
Retirement, Reporting and
recordkeeping requirements, Social
security, Unemployment compensation.

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26 CFR Part 44
Excise, Gambling, Reporting and
recordkeeping requirements.
26 CFR Part 53
Excise taxes, Foundations,
Investments, Lobbying, Reporting and
recordkeeping requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and
recordkeeping requirements.
26 CFR Part 55
Excise taxes, Investments, Reporting
and recordkeeping requirements.
26 CFR Part 56
Excise taxes, Lobbying, Nonprofit
organizations, Reporting and
recordkeeping requirements.
26 CFR Part 156
Excise taxes, Reporting and
recordkeeping requirements.
26 CFR Part 157
Excise taxes, Reporting and
recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 20, 25,
26, 31, 40, 41, 44, 53, 54, 55, 56, 156,
157, and 301 are proposed to be
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read in part as
follows:

26 CFR Part 25
Gift taxes, Reporting and
recordkeeping requirements.

26 CFR Part 40
Excise taxes, Reporting and
recordkeeping requirements.

26 CFR Part 41
Excise, Motor vehicles, Reporting and
recordkeeping requirements.

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

Par. 2. Section 1.6060–1 is amended
by revising the section heading and
paragraphs (a) and (c) and adding
paragraph (d) to read as follows:
§ 1.6060–1 Reporting requirements for tax
return preparers.

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

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preparers to prepare any return of tax or
claim for refund of tax, other than for
the person, at any time during a return
period shall satisfy the requirements of
section 6060 of the Internal Revenue
Code by—
(i) Retaining a record of the name,
taxpayer identification number, and
principal place of work during the
return period of each tax return preparer
employed by the person at any time
during that period; and
(ii) Making that record available for
inspection upon request by the
Commissioner.
(2) The record described in this
paragraph (a) must be retained and kept
available for inspection for the 3-year
period following the close of the return
period to which that record relates.
(3) The person may choose any form
of documentation to be used under this
section as a record of the signing tax
return preparers employed during a
return period. However, the record must
disclose on its face which individuals
were employed as tax return preparers
during that period.
(4) For the definition of the term
‘‘signing tax return preparer,’’ see
section 7701(a)(36) and § 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
§ 1.6695–1(e).
(d) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 3. Section 1.6107–1 is revised to
read as follows:

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

(a) Furnishing copy to taxpayer. A
person who is a signing tax return
preparer of any return of tax or claim for
refund of tax under the Internal
Revenue Code shall furnish a completed
copy of the return or claim for refund
to the taxpayer (or nontaxable entity)
not later than the time the return or
claim for refund is presented for the
signature of the taxpayer (or nontaxable
entity). For electronically filed Forms
1040EZ, ‘‘Income Tax Return for Single
Filers and Joint Filers With No
Dependents,’’ and Form 1040A, ‘‘U.S.
Individual Income Tax Return,’’ filed for
the 2009, 2010 and 2011 taxable years,
the information may be provided on a
replica of a Form 1040, ‘‘U.S. Individual
Income Tax Return,’’ that provides all of
the information. For other electronically
filed returns, the information may be
provided on a replica of an official form
that provides all of the information. The
signing tax return preparer may, at its
option, request a receipt or other
evidence from the taxpayer (or
nontaxable entity) sufficient to show
satisfaction of the requirement of this
paragraph (a).
(b) Copy or record to be retained. (1)
A person who is a signing tax return
preparer of any return or claim for
refund shall—
(i)(A) Retain a completed copy of the
return or claim for refund; or
(B) Retain a record, by list, card file,
or otherwise of the name, taxpayer
identification number, and taxable year
of the taxpayer (or nontaxable entity) for
whom the return or claim for refund
was prepared, and the type of return or
claim for refund prepared;
(ii) Retain a record, by retention of a
copy of the return or claim for refund,
maintenance of a list or card file, or
otherwise, for each return or claim for
refund presented to the taxpayer (or
nontaxable entity), of the name of the
individual tax return preparer required
to sign the return or claim for refund
pursuant to § 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

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during which the return was presented
for signature, the material shall be
retained and kept available for
inspection for the 3-year period
following the close of the later return
period in which the return became due.
For the definition of ‘‘return period,’’
see section 6060(c). If the person subject
to the record retention requirement of
this paragraph (b) is a corporation or a
partnership that is dissolved before
completion of the 3-year period, then all
persons who are responsible for the
winding up of the affairs of the
corporation or partnership under state
law shall be subject, on behalf of the
corporation or partnership, to these
record retention requirements until
completion of the 3-year period. If state
law does not specify any person or
persons as responsible for winding up,
then, collectively, the directors or
general partners shall be subject, on
behalf of the corporation or partnership,
to the record retention requirements of
this paragraph (b). For purposes of the
penalty imposed by section 6695(d),
such designated persons shall be
deemed to be the tax return preparer
and will be jointly and severally liable
for each failure.
(c) Tax return preparer. For the
definition of ‘‘signing tax return
preparer,’’ see section 7701(a)(36) and
§ 301.7701–15(b)(1) of this chapter. For
purposes of applying this section, in the
case of—
(1) An arrangement between two or
more signing tax return preparers, the
person who employs one or more other
signing tax return preparers to prepare
any return or claim for refund for
compensation other than for the person
shall be considered to be the sole
signing tax return preparer; and
(2) A partnership arrangement for the
preparation of returns and claims for
refund, the partnership shall be
considered to be the sole signing tax
return preparer.
(d) Penalties. (1) For the civil penalty
for failure to furnish a copy of the return
or claim for refund to the taxpayers (or
nontaxable entity) as required under
paragraph (a) of this section, see section
6695(a) and § 1.6695–1(a).
(2) For the civil penalty for failure to
retain a copy of the return or claim for
refund, or to retain a record as required
under paragraph (b) of this section, see
section 6695(d) and § 1.6695–1(d).
(e) Effective/applicability date. This
section is applicable to returns and
claims for refund filed on the date that
final regulations are published in the
Federal Register.
Par. 4. Section 1.6109–2 is amended
by revising the section heading and
paragraphs (a) and (d) to read as follows:

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

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

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This section lists the captions that
appear in §§ 1.6694–1 through 1.6694–
4.
§ 1.6694–1 Section 6694 penalties
applicable to tax return preparers.
(a) Overview.
(1) In general.
(2) Date return is deemed prepared.
(b) Tax return preparer.
(1) In general.
(2) Responsibility of signing tax return
preparer.
(3) Responsibility of nonsigning tax return
preparer.
(4) Tax return preparer and firm
responsibility.
(5) Examples.
(c) Understatement of liability.

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(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.
§ 1.6694–2 Penalty for understatement due
to an unreasonable position.
(a) In general.
(1) Proscribed conduct.
(2) Special rule for corporations,
partnerships, and other firms.
(b) Reasonable belief that the position
would more likely than not be sustained on
its merits.
(1) In general.
(2) No unreasonable assumptions.
(3) Authorities.
(4) Examples.
(5) Written determinations.
(6) When more likely than not standard
must be satisfied.
(c) Exception for adequate disclosure of
positions with a reasonable basis.
(1) In general.
(2) Reasonable basis.
(3) Adequate disclosure.
(i) Signing tax return preparers.
(ii) Nonsigning tax return preparers.
(A) Advice to taxpayers.
(B) Advice to another tax return preparer.
(iii) Requirements for advice.
(iv) Pass-through entities.
(v) Examples.
(d) Exception for reasonable cause and
good faith.
(1) Nature of the error causing the
understatement.
(2) Frequency of errors.
(3) Materiality of errors.
(4) Tax return preparer’s normal office
practice.
(5) Reliance on advice of others.
(6) Reliance on generally accepted
administrative or industry practice.
(e) Burden of proof.
(f) Effective/applicability date.
§ 1.6694–3 Penalty for understatement due
to willful, reckless, or intentional
conduct.
(a) In general.
(1) Proscribed conduct.
(2) Special rule for corporations,
partnerships, and other firms.
(b) Willful attempt to understate liability.
(c) Reckless or intentional disregard.
(d) Examples.
(e) Rules or regulations.
(f) Section 6694(b) penalty reduced by
section 6694(a) penalty.
(g) Burden of proof.
(h) Effective/applicability date.
§ 1.6694–4 Extension of period of collection
when tax return preparer pays 15

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percent of a penalty for understatement
of taxpayer’s liability and certain other
procedural matters.
(a) In general.
(b) Tax return preparer must bring suit in
district court to determine liability for
penalty.
(c) Suspension of running of period of
limitations on collection.
(d) Effective/applicability date.

Par. 6. Section 1.6694–1 is revised to
read as follows:
§ 1.6694–1 Section 6694 penalties
applicable to tax return preparers.

(a) Overview—(1) In general. Sections
6694(a) and (b) impose penalties on tax
return preparers for conduct giving rise
to certain understatements of liability
on a return (including an amended or
adjusted return) or claim for refund. The
section 6694(a) penalty is imposed in an
amount equal to the greater of $1,000, or
50 percent of the income derived (or to
be derived) by the tax return preparer
for an understatement of liability with
respect to tax that is due to an
undisclosed position for which the tax
return preparer did not have a
reasonable belief that the position
would more likely than not be sustained
on its merits (or due to a disclosed
position for which there is no
reasonable basis). The section 6694(b)
penalty is imposed in an amount equal
to the greater of $5,000, or 50 percent of
the income derived (or to be derived) by
the tax return preparer for an
understatement of liability with respect
to tax that is due to a willful attempt to
understate tax liability or that is due to
reckless or intentional disregard of rules
or regulations. See § 1.6694–2 for rules
relating to the penalty under section
6694(a). See § 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 § 301.7701–15(b)(1) of
this chapter fails to sign the return, the
return is deemed prepared on the date
the return is filed. See § 1.6695–1 of this
section. In the case of a nonsigning tax
return preparer within the meaning of
§ 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

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§ 301.7701–15 of this chapter. An
individual is a tax return preparer
subject to section 6694 if the individual
is primarily responsible for the
position(s) on the return or claim for
refund giving rise to an understatement.
There is only one individual within a
firm who is primarily responsible for
each position on the return or claim for
refund giving rise to an understatement.
In the course of identifying the
individual who is primarily responsible
for the position, the Internal Revenue
Service may advise multiple individuals
within the firm that it may be concluded
that they are the individual within the
firm who is primarily responsible. In
some circumstances, there may be more
than one tax return preparer who is
primarily responsible for the position(s)
giving rise to an understatement if
multiple tax return preparers are
employed by, or associated with,
different firms.
(2) Responsibility of signing tax return
preparer. The signing tax return
preparer within the meaning of
§ 301.7701–15(b)(1) of this chapter will
generally be considered the person who
is primarily responsible for all of the
positions on the return or claim for
refund giving rise to an understatement.
It may be concluded, however, based
upon information received from the
signing tax return preparer (or other
relevant information from a source other
than the signing tax return preparer)
that another person within the signing
tax return preparer’s same firm was
primarily responsible for the position(s)
on the return or claim for refund giving
rise to an understatement.
(3) Responsibility of nonsigning tax
return preparer. If there are one or more
individuals within a firm who are
nonsigning tax return preparers within
the meaning of § 301.7701–15(b)(2) of
this chapter and there is no signing tax
return preparer within the meaning of
§ 301.7701–15(b)(1) of this chapter for
the return or claim for refund within
that firm, the individual within the firm
with overall supervisory responsibility
for the position(s) giving rise to the
understatement is the tax return
preparer who is primarily responsible
for the position for purposes of section
6694. Additionally, if, after the
application of paragraph (b)(2) of this
section, it is concluded that the signing
tax return preparer is not primarily
responsible for the position or the IRS
cannot conclude which individual (as
between the signing tax return preparer
and other persons within the firm) is
primarily responsible for the position,
the individual within the firm with
overall supervisory responsibility for
the position(s) giving rise to the

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understatement is the tax return
preparer who is primarily responsible
for the position for purposes of section
6694.
(4) Tax return preparer and firm
responsibility. To the extent provided in
§§ 1.6694–2(a)(2) and 1.6694–3(a)(2), an
individual and the firm that employs
the individual, or the firm of which the
individual is a partner, member,
shareholder, or other equity holder, may
both be subject to penalty under section
6694 with respect to the position(s) on
the return or claim for refund giving rise
to an understatement. If an individual
(other than the sole proprietor) who is
employed by a sole proprietorship is
subject to penalty under section 6694,
the sole proprietorship is considered a
‘‘firm’’ for purposes of this paragraph
(b).
(5) Examples. The provisions of
paragraph (b) of this section are
illustrated by the following examples:
Example 1. Attorney A provides advice to
Client C concerning the proper treatment of
an item with respect to which all events have
occurred on C’s income tax return. In
preparation for providing that advice, A
seeks advice regarding the proper treatment
of the item from Attorney B, who is within
the same firm as A, but A is the attorney who
signs C’s return as a tax return preparer. B
provides advice on the treatment of the item
upon which A relies. B’s advice is reflected
on C’s income tax return but no disclosure
was made in accordance with § 1.6694–
2(c)(3). The advice constitutes preparation of
a substantial portion of the return within the
meaning of § 301.7701–15(b)(3) and the IRS
later challenges the position taken on the tax
return, giving rise to an understatement of
liability. For purposes of the regulations
under section 6694, A is initially considered
the tax return preparer with respect to C’s
return and the IRS advises A that A may be
subject to the penalty under section 6694
with respect to C’s return. Based upon
information received from A or another
source, it may be concluded that B had
primary responsibility for the position taken
on the return that gave rise to the
understatement because B had overall
supervisory responsibility for the position
giving rise to an understatement.
Example 2. Same as Example 1, except that
neither Attorney A nor any other attorney
within A’s firm signs Client C’s return as a
tax return preparer. Attorney B is the
nonsigning tax return preparer within the
firm with overall supervisory responsibility
for the position giving rise to an
understatement. Accordingly, B is the tax
return preparer who is primarily responsible
for the position on C’s return giving rise to
an understatement and is subject to penalty
under section 6694.
Example 3. Same as Example 1, except
Attorney D, who works for a different firm
than A, also provides advice on the same
position upon which A relies. It may be
concluded that D is also primarily
responsible for the position on the return.

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34571

(c) Understatement of liability. For
purposes of this section, an
‘‘understatement of liability’’ exists if,
viewing the return or claim for refund
as a whole, there is an understatement
of the net amount payable with respect
to any tax imposed by the Internal
Revenue Code (Code), or an
overstatement of the net amount
creditable or refundable with respect to
any tax imposed by the Code. The net
amount payable in a taxable year with
respect to the return for which the tax
return preparer engaged in conduct
proscribed by section 6694 is not
reduced by any carryback. Tax imposed
by the Code does not include additions
to the tax, additional amounts, and
assessable penalties imposed by
subchapter 68 of the Code. Except as
provided in paragraph (d) of this
section, the determination of whether an
understatement of liability exists may be
made in a proceeding involving the tax
return preparer that is separate and
apart from any proceeding involving the
taxpayer.
(d) Abatement of penalty where
taxpayer’s liability not understated. If a
penalty under section 6694(a) or (b)
concerning a return or claim for refund
has been assessed against one or more
tax return preparers, and if it is
established at any time in a final
administrative determination or a final
judicial decision that there was no
understatement of liability relating to
the position(s) on the return or claim for
refund, then—
(1) The assessment shall be abated;
and
(2) If any amount of the penalty was
paid, that amount shall be refunded to
the person or persons who so paid, as
if the payment were an overpayment of
tax, without consideration of any period
of limitations.
(e) Verification of information
furnished by taxpayer or other party—
(1) In general. For purposes of sections
6694(a) and (b) (including meeting the
reasonable belief that the position
would more likely than not be sustained
on its merits and reasonable basis
standards in §§ 1.6694–2(b) and (c)(2),
and demonstrating reasonable cause and
good faith under § 1.6694–2(d)), the tax
return preparer generally may rely in
good faith without verification upon
information furnished by the taxpayer.
A tax return preparer, however, may not
rely on information provided by a
taxpayer with respect to legal
conclusions on Federal tax issues. A tax
return preparer may also rely in good
faith and without verification upon
information furnished by another
advisor, another tax return preparer or
other party (including another advisor

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or tax return preparer at the tax return
preparer’s firm). The tax return preparer
is not required to audit, examine or
review books and records, business
operations, or documents or other
evidence to verify independently
information provided by the taxpayer,
advisor, other tax return preparer, or
other party. The tax return preparer,
however, may not ignore the
implications of information furnished to
the tax return preparer or actually
known by the tax return preparer. The
tax return preparer must make
reasonable inquiries if the information
as furnished appears to be incorrect or
incomplete. Additionally, some
provisions of the Code or regulations
require that specific facts and
circumstances exist (for example, that
the taxpayer maintain specific
documents) before a deduction or credit
may be claimed. The tax return preparer
must make appropriate inquiries to
determine the existence of facts and
circumstances required by a Code
section or regulation as a condition of
the claiming of a deduction or credit.
(2) Verification of information on
previously filed returns. For purposes of
section 6694(a) and (b) (including
meeting the reasonable belief that the
position would more likely than not
would be sustained on its merits and
reasonable basis standards in §§ 1.6694–
2(b) and (c)(2), and demonstrating
reasonable cause and good faith under
§ 1.6694–2(d)), a tax return preparer
may rely in good faith without
verification upon a tax return that has
been previously prepared by a taxpayer
or another tax return preparer and filed
with the IRS. For example, a tax return
preparer who prepares an amended
return (including a claim for refund)
need not verify the positions on the
original return. The tax return preparer,
however, may not ignore the
implications of information furnished to
the tax return preparer or actually
known by the tax return preparer. The
tax return preparer must make
reasonable inquiries if the information
as furnished appears to be incorrect or
incomplete. The tax return preparer
must confirm that the position being
relied upon has not been adjusted by
examination or otherwise.
(3) Examples. The provisions of this
paragraph (e) are illustrated by the
following examples:
Example 1. During an interview conducted
by Preparer E, a taxpayer stated that he had
made a charitable contribution of real estate
in the amount of $50,000 during the tax year,
when in fact he had not made this charitable
contribution. E did not inquire about the
existence of a qualified appraisal or complete
a Form 8283, Noncash Charitable

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

(f) Income derived (or to be derived)
with respect to the return or claim for
refund—(1) In general. For purposes of
sections 6694(a) and (b), income derived
(or to be derived) means all
compensation the tax return preparer
receives or expects to receive with
respect to the engagement of preparing
the return or claim for refund or
providing tax advice (including research
and consultation) with respect to the
position(s) taken on the return or claim
for refund that gave rise to the
understatement. In the situation of a tax
return preparer who is not compensated
directly by the taxpayer, but rather by a
firm that employs the tax return
preparer or with whom the tax return
preparer is associated, income derived
(or to be derived) means all
compensation the tax return preparer
receives from the firm that can be
reasonably allocated to the engagement
of preparing the return or claim for

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refund or providing tax advice
(including research and consultation)
with respect to the position(s) taken on
the return or claim for refund that gave
rise to the understatement. In the
situation where a firm that employs the
individual tax return preparer (or the
firm of which the individual tax return
preparer is a partner, member,
shareholder, or other equity holder) is
subject to a penalty under section
6694(a) or (b) pursuant to the provisions
in §§ 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

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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 §§ 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

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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 § 301.7701–15(b) of this chapter.
I is the nonsigning tax return preparer within
the firm with overall supervisory
responsibility for the position on the
taxpayer’s return giving rise to an
understatement. Thus, I is the tax return
preparer who is primarily responsible for the
position on the taxpayer’s return giving rise
to the understatement. Because K’s signature
as the signing tax return preparer is on the
return, the IRS advises K that K may be
subject to the section 6694(a) penalty against
K to the understatement. K provides
information that I is the tax return preparer
with primary responsibility for the position
that gave rise to the understatement and K
formed a reasonable belief that the position
would more likely than not be sustained on
the merits by relying on the advice provided
by I. Furthermore, K has reasonable cause
because K relied on I for the advice on the
corporate tax matter. The IRS, therefore,
assesses the section 6694 penalty against I.
The portion of the total amount of the
penalty allocable to I does not exceed that
part of I’s compensation that is attributable
to the corporate tax advice engagement. In
the event that Firm L is also liable under the
provisions in § 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
§ 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
§ 301.7701–15(b)(2) or (3) of this chapter. K
has reasonable cause because K relied on I for
the advice on the corporate tax matter and K
is not limited to reliance on persons who
provide post-transactional advice if such
reliance is reasonable and in good faith. I, K
and Firm L are not liable for the section 6694
penalty.

34573

section, a tax return preparer is liable
for a penalty under section 6694(a)
equal to the greater of $1,000 or 50
percent of the income derived (or to be
derived) by the tax return preparer for
any return or claim for refund that it
prepares that results in an
understatement of liability due to a
position if the tax return preparer knew
(or reasonably should have known) of
the position and either—
(i) The position was not disclosed as
provided in this section and there was
not a reasonable belief that the position
would more likely than not be sustained
on its merits; or
(ii) The position was disclosed as
provided in this section but there was
no reasonable basis for the position.
(2) Special rule for corporations,
partnerships, and other firms. A firm
that employs a tax return preparer
subject to a penalty under section
6694(a) (or a firm of which the
individual tax return preparer is a
partner, member, shareholder or other
equity holder) is also subject to penalty
if, and only if—
(i) One or more members of the
principal management (or principal
officers) of the firm or a branch office
participated in or knew of the conduct
proscribed by section 6694(a);
(ii) The corporation, partnership, or
other firm entity failed to provide
reasonable and appropriate procedures
for review of the position for which the
penalty is imposed; or
(iii) Such review procedures were
disregarded by the corporation,
partnership, or other firm entity through
willfulness, recklessness, or gross
indifference (including ignoring facts
that would lead a person of reasonable
prudence and competence to investigate
or ascertain) in the formulation of the
advice, or the preparation of the return
or claim for refund, that included the
position for which the penalty is
imposed.
(b) Reasonable belief that the position
would more likely than not be sustained
on its merits—(1) In general. A tax
return preparer may ‘‘reasonably believe
that a position would more likely than
not be sustained on its merits’’ if the tax
return preparer analyzes the pertinent
(g) Effective/applicability date. This
facts and authorities, and in reliance
section is applicable to returns and
upon that analysis, reasonably
claims for refund filed, and advice
concludes in good faith that the position
provided, after the date that final
has a greater than 50 percent likelihood
regulations are published in the Federal
of being sustained on its merits. In
Register.
reaching this conclusion, the possibility
Par. 7. Section 1.6694–2 is revised to
that the position will not be challenged
read as follows:
by the Internal Revenue Service (IRS)
§ 1.6694–2 Penalty for understatement due (for example, because the taxpayer’s
to an unreasonable position.
return may not be audited or because
(a) In general—(1) Proscribed conduct. the issue may not be raised on audit) is
not to be taken into account. The
Except as otherwise provided in this

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analysis prescribed by § 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 wellreasoned construction of the applicable
statutory provision. For purposes of
determining whether the tax return
preparer has a reasonable belief that the
position would more likely than not be
sustained on the merits, a tax return
preparer may rely in good faith without
verification upon information furnished
by the taxpayer, advisor, other tax
return preparer, or other party
(including another advisor or tax return
preparer at the tax return preparer’s
firm), as provided in § 1.6694–1(e).
(2) No unreasonable assumptions. A
position must not be based on
unreasonable factual or legal
assumptions (including assumptions as
to future events) and must not
unreasonably rely on the
representations, statements, findings, or
agreements of the taxpayer or any other
person. For example, a position must
not be based on a representation or
assumption that the tax return preparer
knows, or has reason to know, is
inaccurate.
(3) Authorities. The authorities
considered in determining whether a
position satisfies the more likely than
not standard are those authorities
provided in § 1.6662–4(d)(3)(iii) (or any
successor provision).
(4) Examples. The provisions of
paragraphs (b)(1) through (b)(3) of this
section are illustrated by the following
examples:
Example 1. A new statute is silent as to
whether the taxpayer may take advantage of
certain tax benefits. The Treasury
Department and the IRS have not issued any
interpretative guidance for the newly enacted
provision. A well-reasoned construction of
the statutory text supports the position that
a taxpayer may claim the tax benefits.
Preparer M may avoid the section 6694(a)
penalty by taking the position that M
reasonably believed that the taxpayer’s

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

(5) Written determinations. The tax
return preparer may avoid the section
6694(a) penalty by taking the position
that the tax return preparer reasonably
believed that the taxpayer’s position
satisfies the ‘‘more likely than not’’
standard if the taxpayer is the subject of

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

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authority), the tax return preparer
advises the taxpayer of all the penalty
standards applicable to the taxpayer
under section 6662. The tax return
preparer must also contemporaneously
document the advice in the tax return
preparer’s files.
(D) For income tax returns, if section
6662(d)(2)(B) does not apply because
the position may be described in section
6662(d)(2)(C) or section 6662A (a tax
shelter, reportable transaction with a
significant purpose of tax avoidance or
evasion, or a listed transaction), the tax
return preparer advises the taxpayer that
there needs to be at a minimum
substantial authority for the position,
that the taxpayer must possess a
reasonable belief that the tax treatment
was more likely than not the proper
treatment in order to avoid a penalty
under section 6662(d) or section 6662A
as applicable, and that disclosure will
not protect the taxpayer from
assessment of an accuracy-related
penalty if either section 6662(d)(2)(C) or
6662A applies to the position. The tax
return preparer must also
contemporaneously document the
advice in the tax return preparer’s files.
(E) For returns or claims for refund
that are subject to penalties pursuant to
section 6662 other than the substantial
understatement penalty under section
6662(b)(2) and (d), the tax return
preparer advises the taxpayer of the
penalty standards applicable to the
taxpayer under sections 6662. The tax
return preparer must also
contemporaneously document the
advice in the tax return preparer’s files.
(ii) Nonsigning tax return preparers.
In the case of a nonsigning tax return
preparer within the meaning of
§ 301.7701–15(b)(2) of this chapter,
disclosure of a position that satisfies the
reasonable basis standard but does not
satisfy the reasonable belief that a
position would more likely than not be
sustained on its merits standard is
adequate if the position is disclosed in
accordance with § 1.6662–4(f) (which
permits disclosure on a properly
completed and filed Form 8275 or Form
8275–R, as appropriate, or on the return
in accordance with an annual revenue
procedure described in § 1.6662–4(f)(2)).
In addition, disclosure of a position is
adequate in the case of a nonsigning tax
return preparer if, with respect to that
position, the tax return preparer
complies with the provisions of
paragraph (c)(3)(ii)(A) or (B) of this
section, whichever is applicable.
(A) Advice to taxpayers. If a
nonsigning tax return preparer provides
advice to the taxpayer with respect to a
position for which there is a reasonable
basis but for which the nonsigning tax

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return preparer does not have a
reasonable belief that the position
would more likely than not be sustained
on the merits, disclosure of that position
is adequate if the tax return preparer
advises the taxpayer of any opportunity
to avoid penalties under section 6662
that could apply to the position, if
relevant, and of the standards for
disclosure to the extent applicable. The
tax return preparer must also
contemporaneously document the
advice in the tax return preparer’s files.
(B) Advice to another tax return
preparer. If a nonsigning tax return
preparer provides advice to another tax
return preparer with respect to a
position for which there is a reasonable
basis but for which the nonsigning tax
return preparer does not have a
reasonable belief that the position
would more likely than not be sustained
on the merits, disclosure of that position
is adequate if the tax return preparer
advises the other tax return preparer
that disclosure under section 6694(a)
may be required. The tax return
preparer must also contemporaneously
document the advice in the tax return
preparer’s files.
(iii) Requirements for advice. For
purposes of satisfying the disclosure
standards of paragraphs (c)(3)(i) and (ii)
of this section, each return position for
which there is a reasonable basis but for
which the tax return preparer does not
have a reasonable belief that the
position would more likely than not be
sustained on the merits must be
addressed by the tax return preparer.
The advice to the taxpayer with respect
to each position, therefore, must be
particular to the taxpayer and tailored to
the taxpayer’s facts and circumstances.
The tax return preparer is required to
contemporaneously document the fact
that the advice was provided. There is
no general pro forma language or special
format required for a tax return preparer
to comply with these rules. No form of
a general boilerplate disclaimer,
however, is sufficient to satisfy these
standards. A tax return preparer may
choose to comply with the
documentation standard in one
document covering each position, or in
multiple documents covering all of the
positions.
(iv) Pass-through entities. Disclosure
in the case of items attributable to a
pass-through entity is adequate if made
at the entity level in accordance with
the rules in § 1.6662–4(f)(5) or at the
entity level in accordance with the rules
in paragraphs (c)(3)(i) or (ii) of this
section.
(v) Examples. The provisions of
paragraph (c)(3) of this section are
illustrated by the following examples:

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

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

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apply to an error that would have been
apparent from a general review of the
return or claim for refund by the tax
return preparer.
(2) Frequency of errors. The
understatement was the result of an
isolated error (such as an inadvertent
mathematical or clerical error) rather
than a number of errors. Although the
reasonable cause and good faith
exception generally applies to an
isolated error, it does not apply if the
isolated error is so obvious, flagrant, or
material that it should have been
discovered during a review of the return
or claim for refund. Furthermore, the
reasonable cause and good faith
exception does not apply if there is a
pattern of errors on a return or claim for
refund even though any one error, in
isolation, would have qualified for the
reasonable cause and good faith
exception.
(3) Materiality of errors. The
understatement was not material in
relation to the correct tax liability. The
reasonable cause and good faith
exception generally applies if the
understatement is of a relatively
immaterial amount. Nevertheless, even
an immaterial understatement may not
qualify for the reasonable cause and
good faith exception if the error or
errors creating the understatement are
sufficiently obvious or numerous.
(4) Tax return preparer’s normal
office practice. The tax return preparer’s
normal office practice, when considered
together with other facts and
circumstances, such as the knowledge of
the tax return preparer, indicates that
the error in question would rarely occur
and the normal office practice was
followed in preparing the return or
claim for refund in question. Such a
normal office practice must be a system
for promoting accuracy and consistency
in the preparation of returns or claims
for refund and generally would include,
in the case of a signing tax return
preparer, checklists, methods for
obtaining necessary information from
the taxpayer, a review of the prior year’s
return, and review procedures.
Notwithstanding these rules, the
reasonable cause and good faith
exception does not apply if there is a
flagrant error on a return or claim for
refund, a pattern of errors on a return or
claim for refund, or a repetition of the
same or similar errors on numerous
returns or claims for refund.
(5) Reliance on advice of others. For
purposes of demonstrating reasonable
cause and good faith, a tax return
preparer may rely without verification
upon advice and information furnished
by the taxpayer or other party, as
provided in § 1.6694–1(e). The tax

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return preparer may reasonably rely in
good faith on the advice of, or schedules
or other documents prepared by, the
taxpayer, another advisor, another tax
return preparer, or other party
(including another advisor or tax return
preparer at the tax return preparer’s
firm), and who the tax return preparer
had reason to believe was competent to
render the advice or other information.
The advice or information may be
written or oral, but in either case the
burden of establishing that the advice or
information was received is on the tax
return preparer. A tax return preparer is
not considered to have relied in good
faith if—
(i) The advice or information is
unreasonable on its face;
(ii) The tax return preparer knew or
should have known that the other party
providing the advice or information was
not aware of all relevant facts; or
(iii) The tax return preparer knew or
should have known (given the nature of
the tax return preparer’s practice), at the
time the return or claim for refund was
prepared, that the advice or information
was no longer reliable due to
developments in the law since the time
the advice was given.
(6) Reliance on generally accepted
administrative or industry practice. The
tax return preparer reasonably relied in
good faith on generally accepted
administrative or industry practice in
taking the position that resulted in the
understatement. A tax return preparer is
not considered to have relied in good
faith if the tax return preparer knew or
should have known (given the nature of
the tax return preparer’s practice), at the
time the return or claim for refund was
prepared, that the administrative or
industry practice was no longer reliable
due to developments in the law or IRS
administrative practice since the time
the practice was developed.
(e) Burden of proof. In any proceeding
with respect to the penalty imposed by
section 6694(a), the issues on which the
tax return preparer bears the burden of
proof include whether—
(1) The tax return preparer knew or
reasonably should have known that the
questioned position was taken on the
return;
(2) There is reasonable cause and
good faith with respect to such position;
and
(3) The position was disclosed
adequately in accordance with
paragraph (c) of this section.
(f) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.

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Par. 8. Section 1.6694–3 is amended
by revising paragraphs (a), (c)(2) and (3),
(d), (e), (f), (g) and (h) to read as follows:
§ 1.6694–3 Penalty for understatement due
to willful, reckless, or intentional conduct.

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

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

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

(e) Rules or regulations. The term
rules or regulations includes the
provisions of the Internal Revenue
Code, temporary or final Treasury
regulations issued under the Code, and
revenue rulings or notices (other than
notices of proposed rulemaking) issued
by the Internal Revenue Service and
published in the Internal Revenue
Bulletin.
(f) Section 6694(b) penalty reduced by
section 6694(a) penalty. The amount of
any penalty to which a tax return
preparer may be subject under section
6694(b) for a return or claim for refund

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is reduced by any amount assessed and
collected against the tax return preparer
under section 6694(a) for the same
return or claim for refund.
(g) Burden of proof. In any proceeding
with respect to the penalty imposed by
section 6694(b), the government bears
the burden of proof on the issue of
whether the tax return preparer
willfully attempted to understate the
liability for tax. See section 7427. The
tax return preparer bears the burden of
proof on such other issues as whether—
(1) The tax return preparer recklessly
or intentionally disregarded a rule or
regulation;
(2) A position contrary to a regulation
represents a good faith challenge to the
validity of the regulation; and
(3) Disclosure was adequately made in
accordance with § 1.6694–3(c)(2).
(h) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 9. Section 1.6694–4 is amended
by revising paragraph (a) to read as
follows:
§ 1.6694–4 Extension of period of
collection when tax return preparer pays 15
percent of a penalty for understatement of
taxpayer’s liability and certain other
procedural matters.

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

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§ 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 § 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 § 1.6107–1(a) to
furnish a copy of the return or claim for
refund to the taxpayer (or nontaxable
entity), shall be subject to a penalty of
$50 for such failure, with a maximum
penalty of $25,000 per person imposed
with respect to each calendar year,
unless it is shown that the failure is due
to reasonable cause and not due to
willful neglect.
(2) No penalty may be imposed under
section 6695(a) and paragraph (a)(1) of
this section upon a tax return preparer
who furnishes a copy of the return or
claim for refund to taxpayers who—
(i) Hold an elected or politically
appointed position with the government
of the United States or a state or
political subdivision thereof; and
(ii) In order faithfully to carry out
their official duties, have so arranged
their affairs that they have less than full
knowledge of the property that they
hold or of the debts for which they are
responsible, if information is deleted
from the copy in order to preserve or
maintain this arrangement.
(b) Failure to sign return. (1) An
individual who is a tax return preparer
as described in § 301.7701–15 of this
chapter with respect to a return of tax
or claim for refund of tax under the
Code that is not signed electronically
shall sign the return or claim for refund
after it is completed and before it is
presented to the taxpayer (or nontaxable
entity) for signature. For rules covering
electronically signed returns, see
paragraph (b)(2) of this section. For
purposes of this paragraph (b), a return
of tax shall not include information
returns under subpart B and subpart C
of Part III of Subtitle F. If the tax return
preparer is unavailable for signature,
another tax return preparer shall review
the entire preparation of the return or
claim for refund, and then shall sign the
return or claim for refund. The tax
return preparer shall sign the return in
the manner prescribed by the
Commissioner in forms, instructions, or
other appropriate guidance.
(2) In the case of electronically signed
tax returns, the tax return preparer need
not sign the return prior to presenting a
completed copy of the return to the
taxpayer. The tax return preparer,
however, must furnish all of the
information that will be transmitted as

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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) efile signature form. The information
may be furnished on a replica of an
official form. The tax return preparer
shall electronically sign the return in
the manner prescribed by the
Commissioner in forms, instructions, or
other appropriate guidance.
(3) If more than one tax return
preparer is involved in the preparation
of the return or claim for refund, the
individual tax return preparer who has
the primary responsibility as between or
among the tax return preparers for the
overall substantive accuracy of the
preparation of such return or claim for
refund shall be considered to be the
signing tax return preparer for purposes
of this paragraph (b) and § 301.7701–
15(b)(1) of this chapter. Any other tax
return preparer as described in
§ 301.7701–15(b)(2) of this chapter is
not required to sign the return or claim
for refund.
(4) Examples. The application of this
paragraph (b) is illustrated by the
following examples:
Example 1. Law Firm A employs B, a
lawyer, to prepare for compensation estate
tax returns and claims for refund of taxes.
Firm A is engaged by C to prepare a Federal
estate tax return. Firm A assigns B to prepare
the return. B obtains the information
necessary for completing the return from C
and makes determinations with respect to the
proper application of the tax laws to such
information in order to determine the estate’s
tax liability. B then forwards such
information to D, a computer tax service that
performs the mathematical computations and
prints the return by means of computer
processing. D then sends the completed
estate tax return to B who reviews the
accuracy of the return. B is the individual tax
return preparer who is primarily responsible
for the overall accuracy of the estate tax
return. B must sign the return as tax return
preparer.
Example 2. Partnership E is a national
accounting firm that prepares returns and
claims for refund of taxes for compensation.
F and G, employees of Partnership E, are
involved in preparing the Form 990–T,
Exempt Organization Business Income Tax
Return, for H, a tax exempt organization.
After they complete the return, including the
gathering of the necessary information,
analyzing the proper application of the tax
laws to such information, and the
performance of the necessary mathematical
computations, I, a supervisory employee of
Partnership E, reviews the return. As part of
this review, I reviews the information
provided and the application of the tax laws
to this information. The mathematical
computations and carried-forward amounts
are reviewed by J, an employee of
Partnership E. The policies and practices of

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Partnership E require that K, a partner,
finally review the return. The scope of K’s
review includes reviewing the information
provided and applying to this information
his knowledge of H’s affairs, observing that
Partnership E’s policies and practices have
been followed, and making the final
determination with respect to the proper
application of the tax laws to determine H’s
tax liability. K may or may not exercise these
responsibilities, or may exercise them to a
greater or lesser extent, depending on the
degree of complexity of the return, his
confidence in I (or F and G), and other
factors. K is the individual tax return
preparer who is primarily responsible for the
overall accuracy of H’s return. K must sign
the return as tax return preparer.
Example 3. L corporation maintains an
office in Seattle, Washington, for the purpose
of preparing partnership returns for
compensation. L makes compensatory
arrangements with individuals (but provides
no working facilities) in several states to
collect information from partners of a
partnership and to make decisions with
respect to the proper application of the tax
laws to the information in order to prepare
the partnership return and calculate the
partnership’s distributive items. M, an
individual, who has such an arrangement in
Los Angeles with L, collects information
from N, the general partner of a partnership,
and completes a worksheet kit supplied by L
that is stamped with M’s name and an
identification number assigned to M by L. In
this process, M classifies this information in
appropriate categories for the preparation of
the partnership return. The completed
worksheet kit signed by M is then mailed to
L. O, an employee in L’s office, reviews the
worksheet kit to make sure it was properly
completed. O does not review the
information obtained from N for its validity
or accuracy. O may, but did not, make the
final decision with respect to the proper
application of tax laws to the information
provided. The data from the worksheet is
entered into a computer and the return form
is completed. The return is prepared for
submission to N with filing instructions. M
is the individual tax return preparer
primarily responsible for the overall accuracy
of the partnership return. M must sign the
return as tax return preparer.
Example 4. P employs R, S, and T to
prepare gift tax returns for taxpayers. After R
and S have collected the information from a
taxpayer and applied the tax laws to the
information, the return form is completed by
a computer service. On the day the returns
prepared by R and S are ready for their
signatures, R is away from the city for 1 week
on another assignment and S is on detail to
another office in the same city for the day.
T may sign the gift tax returns prepared by
R, provided that T reviews the information
obtained by R relative to the taxpayer, and T
reviews the preparation of each return
prepared by R. T may not sign the returns
prepared by S because S is available.

(5) An individual required by this
paragraph (b) to sign a return or claim
for refund shall be subject to a penalty
of $50 for each failure to sign, with a

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maximum of $25,000 per person
imposed with respect to each calendar
year, unless it is shown that the failure
is due to reasonable cause and not due
to willful neglect. If the tax return
preparer asserts reasonable cause for
failure to sign, the IRS will require a
written statement to substantiate the tax
return preparer’s claim of reasonable
cause. For purposes of this paragraph
(b), reasonable cause is a cause that
arises despite ordinary care and
prudence exercised by the individual
tax return preparer.
(6) Effective/applicability date. This
paragraph (b) is applicable to returns
and claims for refund filed after the date
that final regulations are published in
the Federal Register.
(c) Failure to furnish identifying
number. (1) A person who is a signing
tax return preparer as described in
§ 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 § 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 § 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
§ 1.6107–1(b) and (c) (other than the
record requirement described in both
§ 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

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taxpayers (or nontaxable entities) during
any single return period, be subject to
more than $25,000 in penalties under
section 6695(d) and paragraph (d)(1) of
this section.
(e) Failure to file correct information
returns. A person who is subject to the
reporting requirements of section 6060
and § 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 § 301.7701–15 of this
chapter may endorse or otherwise
negotiate, directly or through an agent,
a check for the refund of tax under the
Code that is issued to a taxpayer other
than the tax return preparer if the
person was a tax return preparer of the
return or claim for refund which gave
rise to the refund check.
(2) Section 6695(f) and paragraphs
(f)(1) and (3) of this section do not apply
to a tax return preparer-bank that—
(i) Cashes a refund check and remits
all of the cash to the taxpayer or accepts
a refund check for deposit in full to a
taxpayer’s account, so long as the bank
does not initially endorse or negotiate
the check (unless the bank has made a
loan to the taxpayer on the basis of the
anticipated refund); or
(ii) Endorses a refund check for
deposit in full to a taxpayer’s account
pursuant to a written authorization of
the taxpayer (unless the bank has made
a loan to the taxpayer on the basis of the
anticipated refund).
(3) A tax return preparer-bank may
also subsequently endorse or negotiate a
refund check as a part of the checkclearing process through the financial
system after initial endorsement or
negotiation.
(4) The tax return preparer shall be
subject to a penalty of $500 for each
endorsement or negotiation of a check
prohibited under section 6695(f) and
paragraph (f)(1) of this section.
(g) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 11. Section 1.6695–2 is amended
by revising the section heading and
paragraphs (a), (b)(3), (c) and (d) to read
as follows:
§ 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

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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:

additional reasonable inquiries to determine
Mrs. D’s proper filing status.
Example 4. Taxpayer asks Preparer E to
prepare her tax return and tells D that she has
a Schedule C business, that she has two
qualifying children and that she wants to
claim the EIC. Taxpayer indicates that she
earned $10,000 from her Schedule C
business, but that she has no expenses. This
information appears incomplete because it is
very unlikely that someone who is selfemployed has no business expenses. E must
make additional reasonable inquiries
regarding taxpayer’s business to determine
whether the information regarding both
income and expenses is correct.

Example 1. A 22 year-old taxpayer wants
to claim two sons, ages 10 and 11, as
qualifying children for purposes of the EIC.
Preparer A must make additional reasonable
inquiries regarding the relationship between
the taxpayer and the children as the age of
the taxpayer appears inconsistent with the
ages of the children claimed as sons.
Example 2. An 18 year-old female taxpayer
with an infant has $3,000 in earned income
and states that she lives with her parents.
Taxpayer wants to claim the infant as a
qualifying child for the EIC. This information
appears incomplete and inconsistent because
the taxpayer lives with her parents and earns
very little income. Preparer B must make
additional reasonable inquires to determine if
the taxpayer is the qualifying child of her
parents and, therefore, ineligible to claim the
EIC.
Example 3. In March 2008, Mr. D has
Preparer C prepare his tax year 2007 return
using Married Filing Separate filing status,
and an address of 25 Main Street, Mytown,
Mystate. Two weeks later Mrs. D has C
prepare her tax year 2007 return, and she
asks C to use the Head of Household filing
status, claiming two qualifying children, and
the EIC. She tells C that her address is 25
Main Street, Mytown, Mystate. Mrs. D’s filing
status appears incorrect based on the filing
status used by Mr. D. Therefore, C must make

§ 1.6696–1 Claims for credit or refund by
tax return preparers or appraisers.

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

(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 § 1.6694–1, under section
6695 and § 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 § 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
§ 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
§ 1.6694–1, under section 6695 and
§ 1.6695–1, or under section 6695A (and

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any subsequently issued regulations)
may be filed under this section only by
the tax return preparer or the appraiser
(or the tax return preparer’s or
appraiser’s estate) against whom the
penalty (or penalties) is assessed and
not by, for example, the tax return
preparer’s or appraiser’s employer. This
paragraph (b) is not intended, however,
to impose any restrictions on the
preparation of this claim for credit or
refund. The claim may be prepared by
the tax return preparer’s or appraiser’s
employer or by other persons. In all
cases, however, the claim for credit or
refund shall contain the information
specified in paragraph (d) of this section
and, as required by paragraph (d) of this
section, shall be verified by a written
declaration by the tax return preparer or
appraiser that the information is
provided under penalty of perjury.
(c) Separation and consolidation of
claims. (1) Unless paragraph (c)(2) of
this section applies, a tax return
preparer shall file a separate claim for
each penalty assessed in each statement
of notice and demand issued to the tax
return preparer.
(2) A tax return preparer may file one
or more consolidated claims for any or
all penalties imposed on the tax return
preparer by a single IRS Office under
section 6695(a) and § 1.6695–1(a)
(relating to failure to furnish copy of
return to taxpayer), section 6695(b) and
§ 1.6695–1(b) (relating to failure to sign),
section 6695(c) and § 1.6695–1(c)
(relating to failure to furnish identifying
number), or under section 6695(d) and
§ 1.6695–1(d) (relating to failure to
retain copy of return or record), whether
the penalties are asserted on a single or
on separate statements of notice and
demand. In addition, a tax return
preparer may file one consolidated
claim for any or all penalties imposed
on the tax return preparer by a single
IRS Office under section 6695(e) and
§ 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 § 1.6694–1, or
under section 6695 and § 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.

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(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 § 301.6402(c) of this
chapter, Form 6118, ‘‘Claim for Refund
of Tax Return Preparer Penalties,’’ is the

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form prescribed for making a claim as
provided in this section.
(f) Place for filing claim. A claim filed
under this section shall be filed with the
IRS campus or office that issued to the
tax return preparer or appraiser the
statement (or statements) of notice and
demand for payment of the penalty (or
penalties) included in the claim.
(g) Time for filing claim. (1)(i) Except
as provided in section 6694(c)(1) and
§ 1.6694–2(a)(3)(ii) and (4), and in
section 6694(d) and § 1.6694–1(c):
(A) A claim for a penalty paid by a tax
return preparer under section 6694 and
§ 1.6694–1, or under section 6695 and
§ 1.6695–1, or by a appraiser under
section 6695A (and any subsequently
issued regulations) shall be filed within
three years from the date the payment
was made.
(B) A consolidated claim, permitted
under paragraph (c)(2) of this section,
shall be filed within three years from
the first date of payment of any penalty
included in the claim.
(ii) For purposes of this paragraph
(g)(1), payment is considered made on
the date payment is received by the IRS
or, if applicable, on the date an amount
is credited in satisfaction of the penalty.
(2) For purposes of determining
whether a claim is timely filed, the rules
under sections 7502 and 7503 and the
provisions of §§ 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 § 1.6694–1,
under section 6695 and § 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
§ 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 § 1.6694–1,
under section 6695 and § 1.6695–1, or
under section 6695A (and any
subsequently issued regulations).
(2) Section 6601 and § 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

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penalties) assessed against the tax return
preparer under section 6694 and
§ 1.6694–1, under section 6695 and
§ 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 § 1.6694–1, under section 6695 and
§ 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 § 1.6694–2(b), the
periods of limitation contained in
section 6532 and § 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 § 1.6694–1, under section 6695 and
§ 1.6695–1, or under section 6695A (and
any subsequently issued regulations).
(ii) The rules under section 7503 and
§ 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 § 1.6694–1, under
section 6695 and § 1.6695–1, or under
section 6695A (and any subsequently
issued regulations).
(k) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER AUGUST
16, 1954
Par. 13. The authority citation for part
20 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 20.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 20.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 20.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 20.6695–2 also issued under 26
U.S.C. 6695(g). * * *

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§ 20.6060–1 Reporting requirements for
tax return preparers.

(a) In general. A person that employs
(or engages) one or more tax return
preparers to prepare a return or claim
for refund of estate tax under chapter 11

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

(a) In general. A person who is a
signing tax return preparer of any return
or claim for refund of estate tax under
chapter 11 of subtitle B of the Internal
Revenue Code shall furnish a completed
copy of the return or claim for refund
to the estate, and retain a completed
copy or record in the manner stated in
§ 1.6107–1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 16. Section 20.6109–1 is added to
read as follows:
§ 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 § 1.6695–1(b) of
this chapter to sign the return or claim
for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 17. Section 20.6694–1 is added to
read as follows:
§ 20.6694–1 Section 6694 penalties
applicable to tax return preparer.

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

VerDate Aug<31>2005

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
§ 1.6060–1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 15. Section 20.6107–1 is added to
read as follows:

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

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§ 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 § 1.6694–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 19. Section 20.6694–3 is added to
read as follows:
§ 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 § 1.6694–3 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 20. Section 20.6694–4 is added to
read as follows:
§ 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 § 1.6694–4 of
this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 21. Section 20.6695–1 is added to
read as follows:
§ 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

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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 § 1.6695–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 22. Section 20.6696–1 is added to
read as follows:
§ 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 § 1.6696–1 of
this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 23. Section 20.7701–1 is added to
read as follows:
§ 20.7701–1

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 25—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954

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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). * * *

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Section 25.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 25. Section 25.6060–1 is added to
read as follows:
§ 25.6060–1 Reporting requirements for
tax return preparers.

(a) In general. A person that employs
(or engages) one or more tax return
preparers to prepare a return or claim
for refund of gift tax under chapter 12
of subtitle B of the Internal Revenue
Code, other than for the person, at any
time during a return period, shall satisfy
the record keeping and inspection
requirements in the manner stated in
§ 1.6060–1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 26. Section 25.6107–1 is added to
read as follows:
§ 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
§ 1.6107–1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 27. Section 25.6109–1 is added to
read as follows:
§ 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 § 1.6695–1(b) of
this chapter to sign the return or claim
for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 28. Section 25.6694–1 is added to
read as follows:
§ 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

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returns or claims see § 1.6694–1 of this
chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 29. Section 25.6694–2 is added to
read as follows:
§ 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 § 1.6694–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 30. Section 25.6694–3 is added to
read as follows:
§ 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 § 1.6694–3 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 31. Section 25.6694–4 is added to
read as follows:
§ 25.6694–4 Extension of period of
collection when tax return preparer pays 15
percent of a penalty for understatement of
taxpayer’s liability and certain other
procedural matters.

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

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claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 32. Section 25.6695–1 is added to
read as follows:
§ 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 § 1.6695–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 33. Section 25.6696–1 is added to
read as follows:
§ 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 § 1.6696–1 of
this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 34. Section 25.7701–1 is added to
read as follows:

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§ 25.7701–1

Tax return preparer.

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

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PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Par. 35. The authority citation for part
26 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 26.6060–1 also issued under 26
U.S.C. 6060(a).* * *
Section 26.6109–2 also issued under 26
U.S.C. 6109(a).* * *
Section 26.6695–1 also issued under 26
U.S.C. 6695(b).* * *
Section 26.6695–2 also issued under 26
U.S.C. 6695(g).* * *

Par. 36. Section 26.6060–1 is added to
read as follows:
§ 26.6060–1 Reporting requirements for
tax return preparers.

(a) In general. A person that employs
(or engages) one or more tax return
preparers to prepare a return or claim
for refund of generation-skipping
transfer tax under chapter 13 of subtitle
B of the Internal Revenue Code, other
than for the person, at any time during
a return period, shall satisfy the record
keeping and inspection requirements in
the manner stated in § 1.6060–1 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 37. Section 26.6107–1 is added to
read as follows:
§ 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 generationskipping transfer tax under chapter 13
of subtitle B of the Internal Revenue
Code shall furnish a completed copy of
the return or claim for refund to the
estate, and retain a completed copy or
record in the manner stated in § 1.6107–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 38. Section 26.6109–1 is added to
read as follows:
§ 26.6109–1 Tax return preparers
furnishing identifying numbers for returns
or claims for refund.

(a) In general. Each generationskipping transfer tax return or claim for
refund prepared by one or more signing
tax return preparers must include the

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identifying number of the preparer
required by § 1.6695–1(b) of this chapter
to sign the return or claim for refund in
the manner stated in § 1.6109–2 of this
chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 39. Section 26.6694–1 is added to
read as follows:
§ 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 generationskipping transfer tax returns or claims
see § 1.66994–1 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 40. Section 26.6694–2 is added to
read as follows:
§ 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 § 1.6694–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 41. Section 26.6694–3 is added to
read as follows:
§ 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 § 1.6694–3 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 42. Section 26.6694–4 is added to
read as follows:

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§ 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
§ 1.6694–4 of this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 43. Section 26.6695–1 is added to
read as follows:
§ 26.6695–1 Other assessable penalties
with respect to the preparation of tax
returns for other persons.

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

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§ 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 § 1.6696–1 of this chapter
will apply.

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(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 45. Section 26.7701–1 is added to
read as follows:
§ 26.7701–1

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 31—EMPLOYMENT TAXES AND
COLLECTION OF INCOME TAX AT THE
SOURCE
Par. 46. The authority citation for part
31 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 31.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 31.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 31.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 31.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 47. Section 31.6060–1 is added to
read as follows:
§ 31.6060–1 Reporting requirements for
tax return preparers.

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

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or claim for refund to the taxpayer, and
retain a completed copy or record in the
manner stated in § 1.6107–1 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 49. Section 31.6109–2 is added to
read as follows:
§ 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 § 1.6695–1(b) of
this chapter to sign the return or claim
for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 50. Section 31.6694–1 is added to
read as follows:
§ 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
§ 1.6694–1 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 51. Section 31.6694–2 is added to
read as follows:
§ 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 § 1.6694–2 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.

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Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / Proposed Rules
Par. 52. Section 31.6694–3 is added to
read as follows:
§ 31.6694–3 Penalty for understatement
due to willful, reckless, or intentional
conduct.

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of employment tax under
chapters 21 through 25 of subtitle C of
the Internal Revenue Code (Code) shall
be subject to penalties under section
6694(b) of the Code in the manner stated
in 1.6694–3 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 53. Section 31.6694–4 is added to
read as follows:
§ 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
§ 1.6694–4 of this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 54. Section 31.6695–1 is added to
read as follows:

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§ 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

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Code, in the manner stated in § 1.6695–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 55. Section 31.6696–1 is added to
read as follows:
§ 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 § 1.6696–1 of this chapter will
apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 56. Section 31.7701–1 is added to
read as follows:
§ 31.7701–1

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 40—EXCISE TAX PROCEDURAL
REGULATIONS
Par. 57. The authority citation for part
40 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 40.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 40.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 40.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 40.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 58. Section 40.6060–1 is added to
read as follows:
§ 40.6060–1 Reporting requirements for
tax return preparers.

(a) In general. A person that employs
(or engages) one or more tax return
preparers to prepare a return or claim
for refund of excise tax under chapters
31, 32 (other than section 4181), 33, 34,
36 (other than section 4461), 38, and 39
of subtitle D of the Internal Revenue
Code, other than for the person, at any
time during a return period, shall satisfy

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the recordkeeping and inspection
requirements in the manner stated in
§ 1.6060–1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 59. Section 40.6107–1 is added to
read as follows:
§ 40.6107–1 Tax return preparer must
furnish copy of return to taxpayer and must
retain a copy or record.

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

(a) In general. Each return or claim for
refund of excise tax under chapters 31,
32 (other than section 4181), 33, 34, 36
(other than section 4461), 38, and 39 of
subtitle D of the Internal Revenue Code
prepared by one or more signing tax
return preparers must include the
identifying number of the preparer
required by § 1.6695–1(b) of this chapter
to sign the return or claim for refund in
the manner stated in § 1.6109–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 61. Section 40.6694–1 is added to
read as follows:
§ 40.6694–1 Section 6694 penalties
applicable to tax return preparer.

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

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provided, after the date that final
regulations are published in the Federal
Register.
Par. 62. Section 40.6694–2 is added to
read as follows:
§ 40.6694–2 Penalties for understatement
due to an unreasonable position.

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

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

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

(a) In general. For rules relating to the
extension of period of collection when
a tax return preparer who prepared a
return or claim for refund for excise tax
under chapters 31, 32 (other than
section 4181), 33, 34, 36 (other than
section 4461), 38, and 39 of subtitle D
of the Internal Revenue Code pays 15
percent of a penalty for understatement
of taxpayer’s liability, and procedural
matters relating to the investigation,
assessment and collection of the
penalties under section 6694(a) and (b),
the rules under § 1.6694–4 of this
chapter will apply.

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(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 65. Section 40.6695–1 is added to
read as follows:
§ 40.6695–1 Other assessable penalties
with respect to the preparation of tax
returns for other persons.

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

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

Tax return preparer.

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

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PART 41—EXCISE TAX ON USE OF
CERTAIN HIGHWAY MOTOR
VEHICLES
(a) In general. For the definition of a
tax return preparer, see § 301.7701-15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 41—EXCISE TAX ON USE OF
CERTAIN HIGHWAY MOTOR
VEHICLES
Par. 68. The authority citation for part
41 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 41.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 41.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 41.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 41.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 69. Section 41.6060–1 is added to
read as follows:
§ 41.6060–1 Reporting requirements for
tax return preparers.

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

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

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Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / Proposed Rules
Par. 71. Section 41.6109–2 is added to
read as follows:
§ 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 § 1.6695–1(b) of this chapter
to sign the return or claim for refund in
the manner stated in § 1.6109–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable for returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 72. Section 41.6694–1 is added to
read as follows:
§ 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 § 1.6694–1 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 73. Section 41.6694–2 is added to
read as follows:
§ 41.6694–2 Penalties for understatement
due to an unreasonable position.

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

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§ 41.6694–3 Penalty for understatement
due to willful, reckless, or intentional
conduct.

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of excise tax under section
4481 of the Internal Revenue Code
(Code) shall be subject to penalties
under section 6694(b) of the Code in the
manner stated in § 1.6694–3 of this
chapter.

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(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 75. Section 41.6694–4 is added to
read as follows:
§ 41.6694–4 Extension of period of
collection when preparer pays 15 percent of
a penalty for understatement of taxpayer’s
liability and certain other procedural
matters.

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

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

34587

of the Internal Revenue Code, the rules
under § 1.6696–1 of this chapter will
apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 78. Section 41.7701–1 is added to
read as follows:
§ 41.7701–1

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 44—TAXES ON WAGERING;
EFFECTIVE JANUARY 1, 1955
Par. 79. The authority citation for part
44 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 44.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 44.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 44.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 44.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 80. Section 44.6060–1 is added to
read as follows:
§ 44.6060–1 Reporting requirements for
tax return preparers.

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

§ 41.6696–1 Claims for credit or refund by
tax return preparers.

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

(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

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

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34588

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

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 § 1.6107–1 of this chapter.
(b) Effective/applicability date. This
section is applicable for returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 82. Section 44.6109–1 is added to
read as follows:
§ 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 § 1.6695–1(b) of this chapter
to sign the return or claim for refund in
the manner stated in § 1.6109–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable for returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 83. Section 44.6694–1 is added to
read as follows:
§ 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 § 1.6694–1 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 84. Section 44.6694–2 is added to
read as follows:

jlentini on PROD1PC65 with PROPOSALS4

§ 44.6694–2 Penalties for understatement
due to an unreasonable position.

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

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§ 44.6694–3 Penalty for understatement
due to willful, reckless, or intentional
conduct.

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of tax on wagers under
sections 4401 or 4411 of the Internal
Revenue Code (Code) shall be subject to
penalties under section 6694(b) of the
Code in the manner stated in § 1.6694–
3 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 86. Section 44.6694–4 is added to
read as follows:
§ 44.6694–4 Extension of period of
collection when preparer pays 15 percent of
a penalty for understatement of taxpayer’s
liability and certain other procedural
matters.

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

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of tax on wagers under
sections 4401 or 4411 of the Internal
Revenue Code (Code) shall be subject to
penalties for failure to furnish a copy to
the taxpayer under section 6695(a) of
the Code, failure to sign the return
under section 6695(b) of the Code,
failure to furnish an identification
number under section 6695(c) of the
Code, failure to retain a copy or list
under section 6695(d) of the Code,
failure to file a correct information
return under section 6695(e) of the
Code, and negotiation of a check under
section 6695(f) of the Code, in the
manner stated in § 1.6695–1 of this
chapter.

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(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 88. Section 44.6696–1 is added to
read as follows:
§ 44.6696–1 Claims for credit or refund by
tax return preparers.

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

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 53—FOUNDATION AND SIMILAR
EXCISE TAXES
Par. 90. The authority citation for part
53 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 53.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 53.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 53.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 53.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 91. Section 53.6060–1 is added to
read as follows:
§ 53.6060–1 Reporting requirements for
tax return preparers.

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

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Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / Proposed Rules
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 92. Section 53.6107–1 is added to
read as follows:
§ 53.6107–1 Tax return preparer must
furnish copy of return to taxpayer and must
retain a copy or record.

(a) In general. A person who is a
signing tax return preparer of any return
or claim for refund of tax under Chapter
42 of the Internal Revenue Code shall
furnish a completed copy of the return
or claim for refund to the taxpayer, and
retain a completed copy or record in the
manner stated in § 1.6107–1 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 93. Section 53.6109–1 is added to
read as follows:
§ 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 § 1.6695–1(b)
of this chapter to sign the return or
claim for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 94. Section 53.6694–1 is added to
read as follows:
§ 53.6694–1 Section 6694 penalties
applicable to tax return preparer.

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(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
§ 1.6694–1 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 95. Section 53.6694–2 is added to
read as follows:
§ 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

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subject to penalties under section
6694(a) of the Code in the manner stated
in § 1.6694–2 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 96. Section 53.6694–3 is added to
read as follows:
§ 53.6694–3 Penalty for understatement
due to willful, reckless, or intentional
conduct.

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of tax under Chapter 42 of the
Internal Revenue Code (Code) shall be
subject to penalties under section
6694(b) of the Code in the manner stated
in § 1.6694–3 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 97. Section 53.6694–4 is added to
read as follows:
§ 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 § 1.6694–4 of
this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 98. Section 53.6695–1 is added to
read as follows:
§ 53.6695–1 Other assessable penalties
with respect to the preparation of tax
returns for other persons.

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of tax under Chapter 42 of the
Internal Revenue Code (Code) shall be
subject to penalties for failure to furnish
a copy to the taxpayer under section
6695(a) of the Code, failure to sign the
return under section 6695(b) of the
Code, failure to furnish an identification
number under section 6695(c) of the

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34589

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 § 1.6695–1 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 99. Section 53.6696–1 is added to
read as follows:
§ 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
§ 1.6696–1 of this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 100. Section 53.7701–1 is added
to read as follows:
§ 53.7701–1

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 54—PENSION EXCISE TAXES
Par. 101. The authority citation for
part 54 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 54.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 54.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 54.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 102. Section 54.6060–1 is added
to read as follows:
§ 54.6060–1 Reporting requirements for
tax return preparers.

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

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

(a) In general. A person who is a
signing tax return preparer of any return
or claim for refund of tax under Chapter
43 of subtitle D of the Internal Revenue
Code, shall furnish a completed copy of
the return or claim for refund to the
taxpayer, and retain a completed copy
or record in the manner stated in
§ 1.6107–1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 104. Section 54.6109–1 is added
to read as follows:
§ 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 § 1.6695–1(b) of
this chapter to sign the return or claim
for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 105. Section 54.6694–1 is added
to read as follows:

jlentini on PROD1PC65 with PROPOSALS4

§ 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 § 1.6694–1 of this
chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 106. Section 54.6694–2 is added
to read as follows:

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§ 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 § 1.6694–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 107. Section 56.6694–3 is added
to read as follows:
§ 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 § 1.6694–3 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 108. Section 54.6694–4 is added
to read as follows:
§ 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
§ 1.6694–4 of this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 109. Section 54.6695–1 is added
to read as follows:
§ 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

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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 § 1.6695–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 110. Section 54.6696–1 is added
to read as follows:
§ 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 § 1.6696–1 of this
chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 111. Section 54.7701–1 is added
to read as follows:
§ 54.7701–1

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 55—EXCISE TAX ON REAL
ESTATE INVESTMENT TRUSTS AND
REGULATED INVESTMENT
COMPANIES
Par. 112. The authority citation for
part 55 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 55.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 55.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 55.6695–1 also issued under 26
U.S.C. 6695(b). * * *

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

Par. 113. Section 55.6060–1 is added
to read as follows:
§ 55.6060–1 Reporting requirements for
tax return preparers.

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

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

jlentini on PROD1PC65 with PROPOSALS4

§ 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 § 1.6695–1(b) of
this chapter to sign the return or claim
for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 116. Section 55.6694–1 is added
to read as follows:
§ 55.6694–1 Section 6694 penalties
applicable to tax return preparer.

(a) In general. For general definitions
regarding section 6694 penalties

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34591

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

(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 120. Section 55.6695–1 is added
to read as follows:

§ 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 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 § 1.6695–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 121. Section 55.6696–1 is added
to read as follows:

(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 § 1.6694–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 118. Section 55.6694–3 is added
to read as follows:
§ 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 § 1.6694–3 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 119. Section 55.6694–4 is added
to read as follows:
§ 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 § 1.6694–4 of this
chapter will apply.

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

§ 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 § 1.6696–1 of this
chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 122. Section 55.7701–1 is added
to read as follows:
§ 55.7701–1

Tax return preparer.

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

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PART 56—PUBLIC CHARITY EXCISE
TAXES
Par. 123. The authority citation for
part 56 is amended by adding entries in
numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 56.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 56.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 56.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 56.6695–2 also issued under 26
U.S.C. 6695(g).* * *

§ 56.6694–1 Section 6694 penalties
applicable to tax return preparer.

Par. 124. Section 56.6060–1 is added
to read as follows:
§ 56.6060–1 Reporting requirements for
tax return preparers.

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

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

jlentini on PROD1PC65 with PROPOSALS4

§ 56.6109–1 Tax return preparers
furnishing identifying numbers for returns
or claims for refund.

(a) In general. Each tax return or claim
for refund for tax under chapter 41 of
subtitle D prepared by one or more tax
signing return preparers must include
the identifying number of the preparer
required by § 1.6695–1(b) of this chapter
to sign the return or claim for refund in

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the manner stated in § 1.6109–2 of this
chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 127. Section 56.6694–1 is added
to read as follows:

(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 § 1.6694–1 of this
chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 128. Section 56.6694–2 is added
to read as follows:
§ 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 § 1.6694–2 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 129. Section 56.6694–3 is added
to read as follows:
§ 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 § 1.6694–3 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 130. Section 56.6694–4 is added
to read as follows:

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§ 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
§ 1.6694–4 of this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 131. Section 56.6695–1 is added
to read as follows:
§ 56.6695–1 Other assessable penalties
with respect to the preparation of tax
returns for other persons.

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of tax under chapter 41 of
subtitle D of the Internal Revenue Code
(Code) shall be subject to penalties for
failure to furnish a copy to the taxpayer
under section 6695(a) of the Code,
failure to sign the return under section
6695(b) of the Code, failure to furnish an
identification number under section
6695(c) of the Code, failure to retain a
copy or list under section 6695(d) of the
Code, failure to file a correct
information return under section
6695(e) of the Code, and negotiation of
a check under section 6695(f) of the
Code, in the manner stated in § 1.6695–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 132. Section 56.6696–1 is added
to read as follows:
§ 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 § 1.6696–1 of this
chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.

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Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / Proposed Rules
Par. 133. Section 56.7701–1 is added
to read as follows:

Par. 137. Section 156.6109–1 is added
to read as follows:

§ 56.7701–1

§ 156.6109–1 Tax return preparers
furnishing identifying numbers for returns
or claims for refund.

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 156—EXCISE TAX ON
GREENMAIL
Par. 134. The authority citation for
part 156 is amended by adding entries
in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 156.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 156.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 156.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 156.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 135. Section 156.6060–1 is added
to read as follows:
§ 156.6060–1 Reporting requirements for
tax return preparers.

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

jlentini on PROD1PC65 with PROPOSALS4

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

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

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(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 § 1.6695–1(b)
of this chapter to sign the return or
claim for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 138. Section 156.6694–1 is added
to read as follows:
§ 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
§ 1.6694–1 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 139. Section 156.6694–2 is added
to read as follows:
§ 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 § 1.6694–2 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 140. Section 156.6694–3 is added
to read as follows:
§ 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 § 1.6694–3 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and

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claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 141. Section 156.6694–4 is added
to read as follows:
§ 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 § 1.6694–4 of
this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 142. Section 156.6695–1 is added
to read as follows:
§ 156.6695–1 Other assessable penalties
with respect to the preparation of tax
returns for other persons.

(a) In general. A person who is a tax
return preparer of any return or claim
for refund of tax under section 5881 of
the Internal Revenue Code (Code) shall
be subject to penalties for failure to
furnish a copy to the taxpayer under
section 6695(a) of the Code, failure to
sign the return under section 6695(b) of
the Code, failure to furnish an
identification number under section
6695(c) of the Code, failure to retain a
copy or list under section 6695(d) of the
Code, failure to file a correct
information return under section
6695(e) of the Code, and negotiation of
a check under section 6695(f) of the
Code, in the manner stated in § 1.6695–
1 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 143. Section 156.6696–1 is added
to read as follows:
§ 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
§ 1.6696–1 of this chapter will apply.

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

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 157—EXCISE TAX ON
STRUCTURED SETTLEMENT
FACTORING TRANSACTIONS
Par. 145. The authority citation for
part 157 is amended by adding entries
in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 157.6060–1 also issued under 26
U.S.C. 6060(a). * * *
Section 157.6109–2 also issued under 26
U.S.C. 6109(a). * * *
Section 157.6695–1 also issued under 26
U.S.C. 6695(b). * * *
Section 157.6695–2 also issued under 26
U.S.C. 6695(g). * * *

Par. 146. Section 157.6060–1 is added
to read as follows:
§ 157.6060–1 Reporting requirements for
tax return preparers.

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

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

(a) In general. A person who is a
signing tax return preparer of any return
or claim for refund of tax under section
5891 of the Internal Revenue Code shall
furnish a completed copy of the return
or claim for refund to the taxpayer, and
retain a completed copy or record in the

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manner stated in § 1.6107–1 of this
chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed after the date that
final regulations are published in the
Federal Register.
Par. 148. Section 157.6109–1 is added
to read as follows:
§ 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 § 1.6695–1(b)
of this chapter to sign the return or
claim for refund in the manner stated in
§ 1.6109–2 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed after the date that final
regulations are published in the Federal
Register.
Par. 149. Section 157.6694–1 is added
to read as follows:
§ 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
§ 1.6694–1 of this chapter.
(b) Effective/applicability date.
Paragraph (a) of this section is
applicable to returns and claims for
refund filed, and advice provided, after
the date that final regulations are
published in the Federal Register.
Par. 150. Section 157.6694–2 is added
to read as follows:
§ 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 § 1.6694–2 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 151. Section 157.6694–3 is added
to read as follows:
§ 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

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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 § 1.6694–3 of this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 152. Section 157.6694–4 is added
to read as follows:
§ 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 § 1.6694–4 of
this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 153. Section 157.6695–1 is added
to read as follows:
§ 157.6695–1 Other assessable penalties
with respect to the preparation of tax
returns for other persons.

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

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§ 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
§ 1.6696–1 of this chapter will apply.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
Par. 155. Section 157.7701–1 is added
to read as follows:
§ 157.7701–1

Tax return preparer.

(a) In general. For the definition of a
tax return preparer, see § 301.7701–15 of
this chapter.
(b) Effective/applicability date. This
section is applicable to returns and
claims for refund filed, and advice
provided, after the date that final
regulations are published in the Federal
Register.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 156. The authority citation for
part 301 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *

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

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§ 301.7701–15

Tax return preparer.

(a) In general. A tax return preparer
is any person who prepares for
compensation, or who employs one or
more persons to prepare for
compensation, all or a substantial
portion of any return of tax or any claim
for refund of tax under the Internal
Revenue Code (Code).
(b) Definitions—(1) Signing tax return
preparer. A signing tax return preparer
is any tax return preparer who signs or
who is required to sign a return or claim
for refund as a tax return preparer
pursuant to § 1.6695–1(b) of this
chapter.
(2) Nonsigning tax return preparer—
(i) In general. A nonsigning tax return
preparer is any tax return preparer who
is not a signing tax return preparer but
who prepares all or a substantial portion
of a return or claim for refund within
the meaning of paragraph(b)(3) of this
section with respect to events that have
occurred at the time the advice is
rendered. In determining whether an
individual is a nonsigning tax return
preparer, time spent on advice that is
given after events have occurred that
represents less than 5 percent of the
aggregate time incurred by such

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individual with respect to the
position(s) giving rise to the
understatement shall not be taken into
account. Examples of nonsigning tax
return preparers are tax return preparers
who provide advice (written or oral) to
a taxpayer (or to another tax return
preparer) when that advice constitutes a
substantial portion of the return within
the meaning of paragraph (b)(3) of this
section.
(ii) Examples. The provisions of this
paragraph (b)(2) are illustrated by the
following examples:
Example 1. Attorney A, an attorney in a
law firm, provides legal advice to a large
corporate taxpayer regarding a completed
corporate transaction. The advice provided
by A is directly relevant to the determination
of an entry on the taxpayer’s return and this
advice constitutes a substantial portion of the
return. A, however, does not prepare any
other portion of the taxpayer’s return and is
not the signing tax return preparer of this
return. A is considered a tax return preparer.
Example 2. Attorney B, an attorney in a
law firm, provides legal advice to a large
corporate taxpayer regarding the tax
consequences of a proposed corporate
transaction. Based upon this advice, the
corporate taxpayer enters into the
transaction. Once the transaction is
completed, the corporate taxpayer does not
receive any additional advice from B with
respect to the transaction. B did not provide
advice with respect to events that have
occurred and is not considered a tax return
preparer.
Example 3. The facts are the same as
Example 2, except that Attorney B provides
supplemental advice to the corporate
taxpayer on a phone call after the transaction
is completed. The time incurred on this
supplemental advice by B represented less
than 5 percent of the aggregate amount of
time spent by B providing tax advice on the
position. B is not considered a tax return
preparer.

(3) Substantial portion. (i) Only a
person who prepares all or a substantial
portion of a return or claim for refund
shall be considered to be a tax return
preparer of the return or claim for
refund. A person who renders tax
advice on a position that is directly
relevant to the determination of the
existence, characterization, or amount of
an entry on a return or claim for refund
will be regarded as having prepared that
entry. Whether a schedule, entry, or
other portion of a return or claim for
refund is a substantial portion is
determined based upon whether the
person knows or reasonably should
know that the tax attributable to the
schedule, entry, or other portion of a
return or claim for refund is a
substantial portion of the tax required to
be shown on the return or claim for
refund. A single tax entry may
constitute a substantial portion of the

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tax required to be shown on a return.
Factors to consider in determining
whether a schedule, entry, or other
portion of a return or claim for refund
is a substantial portion include but are
not limited to—
(A) The size and complexity of the
item relative to the taxpayer’s gross
income; and
(B) The size of the understatement
attributable to the item compared to the
taxpayer’s reported tax liability.
(ii)(A) For purposes of applying the
rules of paragraph (b)(3)(i) of this
section to a nonsigning tax return
preparer within the meaning of
paragraph (b)(2) of this section only, if
the schedule, entry, or other portion of
the return or claim for refund involves
amounts of gross income, amounts of
deductions, or amounts on the basis of
which credits are determined that are—
(1) Less than $10,000; or
(2) Less than $400,000 and also less
than 20 percent of the gross income as
shown on the return or claim for refund
(or, for an individual, the individual’s
adjusted gross income), then the
schedule or other portion is not
considered to be a substantial portion.
(B) If more than one schedule, entry
or other portion is involved, all
schedules, entries or other portions
shall be aggregated in applying this rule.
This paragraph shall not apply to a
signing tax return preparer within the
meaning of paragraph (b)(1) of this
section.
(iii) A tax return preparer with respect
to one return is not considered to be a
tax return preparer of another return
merely because an entry or entries
reported on the first return may affect an
entry reported on the other return,
unless the entry or entries reported on
the first return are directly reflected on
the other return and constitute a
substantial portion of the other return.
For example, the sole preparer of a
partnership return of income or small
business corporation income tax return
is considered a tax return preparer of a
partner’s or a shareholder’s return if the
entry or entries on the partnership or
small business corporation return
reportable on the partner’s or
shareholder’s return constitute a
substantial portion of the partner’s or
shareholder’s return.
(iv) Examples. The provisions of this
paragraph (b)(3) are illustrated by the
following examples:
Example 1. Accountant C prepares a Form
8886, ‘‘Reportable Transaction Disclosure
Statement’’, that is used to disclose
reportable transactions. C does not prepare
the tax return or advise the taxpayer
regarding the tax return reporting position of
the transaction to which the Form 8886

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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.

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

(4) Return and claim for refund—(i)
Return. For purposes of this section, a
return of tax is a return (including an
amended or adjusted return) filed by or
on behalf of a taxpayer reporting the
liability of the taxpayer for tax under the
Code, if the type of return is identified
in published guidance in the Internal
Revenue Bulletin. A return of tax also
includes any information return or other
document identified in published
guidance in the Internal Revenue
Bulletin, and that reports information
that is or may be reported on another
taxpayer’s return under the Code if the
information reported on the information
return or other document constitutes a
substantial portion of the taxpayer’s
return within the meaning of paragraph
(b)(3) of this section.
(ii) Claim for refund. For purposes of
this section, a claim for refund of tax
includes a claim for credit against any
tax that is included in published
guidance in the Internal Revenue
Bulletin. A claim for refund also
includes a claim for payment under
section 6420, 6421, or 6427.
(c) Mechanical or clerical assistance.
A person who furnishes to a taxpayer or
other tax return preparer sufficient
information and advice so that
completion of the return or claim for
refund is largely a mechanical or
clerical matter is considered a tax return
preparer, even though that person does
not actually place or review placement
of information on the return or claim for
refund. See also paragraph (b)(3) of this
section.
(d) Qualifications. A person may be a
tax return preparer without regard to
educational qualifications and
professional status requirements.
(e) Outside the United States. A
person who prepares a return or claim
for refund outside the United States is
a tax return preparer, regardless of the
person’s nationality, residence, or the
location of the person’s place of
business, if the person otherwise

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satisfies the definition of tax return
preparer. Notwithstanding the
provisions of § 301.6109–1(g), the
person shall secure an employer
identification number if the person is an
employer of another tax return preparer,
is a partnership in which one or more
of the general partners is a tax return
preparer, is a firm entity in which one
or more of the equity holders is a tax
return preparer, or is an individual not
employed by another tax return
preparer.
(f) Persons who are not tax return
preparers. (1) The following persons are
not tax return preparers:
(i) An official or employee of the
Internal Revenue Service (IRS)
performing their official duties.
(ii) Any individual who provides tax
assistance under a Volunteer Income
Tax Assistance (VITA) program
established by the IRS, but only with
respect to those returns prepared as part
of the VITA program.
(iii) Any organization sponsoring or
administering a VITA program
established by the IRS, but only with
respect to that sponsorship or
administration.
(iv) Any individual who provides tax
counseling for the elderly under a
program established pursuant to section
163 of the Revenue Act of 1978, but
only with respect to those returns
prepared as part of that program.
(v) Any organization sponsoring or
administering a program to provide tax
counseling for the elderly established
pursuant to section 163 of the Revenue
Act of 1978, but only with respect to
that sponsorship or administration.
(vi) Any individual who provides tax
assistance as part of a qualified LowIncome Taxpayer Clinic (LITC), as
defined by section 7526, subject to the
requirements of paragraphs (f)(2) and (3)
of this section, but only with respect to
those returns prepared as part of the
LITC program.
(vii) Any organization that is a
qualified LITC, as defined by section
7526, subject to the requirements of
paragraphs (h)(2) and (3) of this section.
(viii) An individual providing only
typing, reproduction, or other
mechanical assistance in the
preparation of a return or claim for
refund.
(ix) An individual preparing a return
or claim for refund of a person, or an
officer, a general partner, member,
shareholder, or employee of a person, by
whom the individual is regularly and
continuously employed or compensated
or in which the individual is a general
partner.
(x) An individual preparing a return
or claim for refund for a trust, estate, or

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other entity of which the person either
is a fiduciary or is an officer, general
partner, or employee of the fiduciary.
(xi) An individual preparing a claim
for refund for a taxpayer in response
to—
(A) A notice of deficiency issued to
the taxpayer; or
(B) A waiver of restriction on
assessment after initiation of an audit of
the taxpayer or another taxpayer if a
determination in the audit of the other
taxpayer affects, directly or indirectly,
the liability of the taxpayer for tax under
subtitle A.
(xii) A person who prepares a return
or claim for refund for a taxpayer with
no explicit or implicit agreement for
compensation, even if the person
receives an insubstantial gift, return
service, or favor.
(2) Paragraphs (f)(1) (vi) and (vii) of
this section apply only if any assistance
with a return of tax or claim for refund
is directly related to a controversy with
the IRS for which the qualified LITC is
providing assistance, or is an ancillary
part of an LITC program to inform
individuals for whom English is a
second language about their rights and
responsibilities under the Code.
(3) Notwithstanding paragraph (f)(2)
of this section, paragraphs (f)(1)(vi) and
(f)(1)(vii) of this section do not apply if
an LITC charges a separate fee or varies
a fee based on whether the LITC
provides assistance with a return of tax
or claim for refund under the Code, or
if the LITC charges more than a nominal
fee for its services.
(4) For purposes of paragraph (f)(1)(ix)
of this section, the employee of a
corporation owning more than 50
percent of the voting power of another
corporation, or the employee of a
corporation more than 50 percent of the
voting power of which is owned by
another corporation, is considered the
employee of the other corporation as
well.
(5) For purposes of paragraph (f)(1)(x)
of this section, an estate, guardianship,
conservatorship, committee, or any
similar arrangement for a taxpayer
under a legal disability (such as a minor,
an incompetent, or an infirm individual)
is considered a trust or estate.
(6) Examples. The mechanical
assistance exception described in
paragraph (f)(1)(viii) of this section is
illustrated by the following examples:
Example 1. A reporting agent received
employment tax information from a client
from the client’s business records. The
reporting agent did not render any tax advice
to the client or exercise any discretion or
independent judgment on the client’s
underlying tax positions. The reporting agent
processed the client’s information, signed the

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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

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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

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provided, after the date that final
regulations are published in the Federal
Register.
Linda E. Stiff,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. E8–12898 Filed 6–16–08; 8:45 am]
BILLING CODE 4830–01–P

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