IRS Examiners Directed to Review Estate and Gift Tax Returns for
Preparer Penalties
By Marianne R. Kayan, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
The Small Business and Work Opportunity Act of 2007 expanded the
application of return preparer penalties of §6694 and §6695
to preparers of estate and gift tax returns. As a result, the IRS
released an interim guidance memorandum on May 8, 2009, that directs
all IRS estate and gift tax attorneys to include in any transfer tax
examination an analysis of whether §6694 and §6695 penalties
may be warranted.1 These
procedures are scheduled for incorporation into the Internal Revenue
Manual at 4.25.1 by May 5, 2010. Preparers of estate and gift tax
returns filed after May 25, 2007, should anticipate scrutiny of such
returns for the possible imposition of §6694 and §6695
penalties.
Section 6694 applies in the event of an understatement of a
taxpayer's liability that is due to an unreasonable position. The
Emergency Economic Stabilization Act of 2008 provides as a general
matter that a position is unreasonable, unless there is substantial
authority for the position.2 More
specific rules govern whether certain positions, such as a disclosed
position or tax shelter or reportable transaction are unreasonable.
For disclosed positions, a position is unreasonable, unless there is a
reasonable basis for the
position.3 Tax shelters and
reportable transactions have an unreasonable position unless it is
reasonable to believe that the position would more likely than not be
sustained on its merits.4 Section
6694(a) applies a penalty of the greater of $1,000 or 50% of the
income derived by the tax return preparer with respect to the return
or claim. In addition, when the understatement is due to willful or
reckless conduct, §6694(b) provides for a penalty of the greater
of $5,000 or 50% of the income derived by the tax return preparer with
respect to the return or claim.
Section 6695 penalties are likely to be of less concern for the
preparers of estate and gift tax returns than the §6694
penalties. Section 6695 penalties are applied in situations including:
failure of the tax return preparer to furnish a copy of the return to
the taxpayer; failure of the tax return preparer to sign the return;
failure of the tax return preparer to furnish an identifying number;
failure of tax return preparer to retain a copy of the return or a
list of taxpayer's name and identification number; failure of the tax
return preparer to file correct information returns; and a tax return
preparer negotiating a check issued to the taxpayer.
The statute of limitations on the assessment of these penalties is
generally three years from the date the return is filed; there is,
however, no statute of limitation under §6694(b) for
understatements due to willful or reckless conduct. The time limits
for assessment are of note because the tax return preparer penalty
will not be proposed until the completion of the estate or gift
examination at the group level. At all times, the preparer penalty
case is separate from the estate or gift examination. Preparer
penalties will not be discussed with the taxpayer. However, the
examiner is directed to question the taxpayer and tax return preparer
as to issues that could lead to the assessment of the preparer
penalties. Questions the examiner may ask the taxpayer center around
compensation paid to the tax return preparer and the extent of
meetings with or documentation supplied to the return preparer. Tax
preparers should anticipate questions regarding documentation received
from the taxpayer, authorities relied upon, the length of the
relationship with the taxpayer, the extent of meetings with the
taxpayer, and whether the tax return preparer is aware of errors,
omissions or mistakes on the return.
This memorandum from the Service is a useful resource for tax
practitioners to solidify their understanding of the standards that
must be maintained in order to avoid tax return preparer
penalties.
For more information, in the Tax Management Portfolios, see
Peebles and Janes, 822 T.M., Estate, Gift and Generation Skipping
Tax Returns and Audits, and in Tax Practice Series, see ¶6290,
Valuation -- Generally.
1
IRS Small Business/Self-Employment (SB/SE) Memorandum, Interim Guidance on Return Preparer Penalty Procedures for Estate and Gift Preparer Penalty Cases (May 18, 2009).
2
§6694(a)(2)(A).
3
§6694(a)(2)(B).
4
§6694(a)(2)(C).
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