Tax Return Preparer Penalties Under Section 6695, 62689-62692 [2011-26247]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 196 (Tuesday, October 11, 2011)]
[Proposed Rules]
[Pages 62689-62692]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26247]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-140280-09]
RIN 1545-BK16


Tax Return Preparer Penalties Under Section 6695

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations that would modify 
existing regulations related to the tax return preparer penalties under 
section 6695 of the Internal Revenue Code (Code). These proposed 
regulations are necessary to monitor and to improve compliance with the 
tax return preparer due diligence requirements of section 6695(g). The 
proposed regulations affect tax return preparers. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by November 10, 
2011. Outlines of topics to be discussed at the public hearing 
scheduled for November 7, 2011, must be received by November 1, 2011.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-140280-09), room 
5205, 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-
140280-09), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov/Regs (IRS REG-140280-
09). 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, 
Spence Hanemann, (202) 622-4940; concerning submissions of comments, 
the hearing, or to be placed on the building access list to attend the 
hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers) or 
richard.a.hurst@irscounsel.treas.gov.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these proposed 
regulations was previously reviewed and approved by the Office of 
Management and Budget in accordance with the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)) under control number 1545-1570. 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 November 10, 
2011. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the IRS, including whether the information will 
have practical utility;
    The accuracy of the estimated burden associated with the proper 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced; and
    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.
    The collection of information is in Sec.  1.6695-2(b)(1) and (b)(4) 
of these proposed regulations, and is an increase in the total annual 
burden from the burden in the current regulations. The collection of 
this information will improve the IRS' ability to enforce compliance 
with the due diligence requirements under section 6695(g) with respect 
to determining eligibility for, or the amount of, the earned income 
credit (EIC) under section 32.
    Currently, the IRS estimates that there are 550,000 persons who are 
tax return preparers with respect to determining the eligibility for, 
or the amount of, EIC.
    This collection of information is mandatory. The likely respondents 
are individuals and businesses.
    Estimated total annual recordkeeping and reporting burden is 
3,025,000 hours.
    Estimated annual burden per tax return preparer varies from 30 
minutes to 10 hours, depending on individual circumstances, with an 
estimated average of 5 hours and 30 minutes.
    Estimated number of affected practitioners is 550,000.
    Estimated annual frequency of responses is one time per tax return 
or claim for refund on which EIC is reported.

[[Page 62690]]

    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.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law.

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 6695 of the Code.
    The Treasury Department and the IRS published final regulations in 
the Federal Register on December 22, 2008, as TD 9436, 73 FR 78430 (the 
December 2008 final regulations). The December 2008 final regulations 
were a product of a comprehensive review and overhaul of the 
regulations related to tax return preparer penalties, including those 
under section 6695. These proposed regulations introduce additional 
measures intended to improve compliance with the tax return preparer 
EIC due diligence requirements of section 6695(g).

Explanation of Provisions

    The following is a summary of the proposed changes to the existing 
regulations affecting tax return preparers.

Tax Return Preparers Subject to Due Diligence Requirements

    Section 301.7701-15(a) of the Procedure and Administration 
regulations defines a ``tax return preparer'' as ``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 * * *.'' Proposed Sec.  1.6695-2(a) 
changes ``signing tax return preparer'' to ``tax return preparer.'' 
Consequently, under the proposed regulations, all tax return preparers 
(whether an individual or firm) who determine eligibility for, or 
amount of, EIC under section 32 of the Code and who fail to satisfy the 
due diligence requirements of paragraph (b) of these proposed 
regulations are subject to the penalty under section 6695(g). Under the 
proposed regulations, a firm that employs a person to prepare for 
compensation a tax return or claim for refund may be subject to the 
penalty for its employee's failure to comply with the due diligence 
requirements.
    Because a firm might not have direct knowledge of an employee's 
failure to comply with the due diligence requirements, however, 
proposed Sec.  1.6695-2(c) provides additional requirements that must 
be met before the penalty will be imposed on a firm. Proposed Sec.  
1.6695-2(c)(1) provides that a firm will be subject to the penalty if a 
member of its principal management or the principal management of a 
branch office participated in or knew of the failure to comply with the 
due diligence requirements. Proposed Sec.  1.6695-2(c)(2) also provides 
that a firm will be subject to the penalty if it failed to establish 
reasonable and appropriate procedures to ensure compliance with the due 
diligence requirements. Finally, proposed Sec.  1.6695-2(c)(2) provides 
that, even if a firm has established reasonable and appropriate 
compliance procedures, it will be subject to the penalty if it 
disregarded its compliance procedures through willfulness, 
recklessness, or gross indifference in the preparation of the tax 
return or claim for refund for which the penalty is imposed. A firm has 
demonstrated gross indifference if it ignores facts that would lead a 
person of reasonable prudence and competence to investigate or 
ascertain whether an employee is complying with the due diligence 
requirements.

Submission of Form 8867

    Current Sec.  1.6695-2(b)(1) requires a tax return preparer to 
complete Form 8867, ``Paid Preparer's Earned Income Credit Checklist,'' 
or otherwise record the information required by Form 8867 in the tax 
return preparer's files. In response to concerns over improper payments 
of EIC determined by tax return preparers, the Department of the 
Treasury and the IRS are proposing to require tax return preparers to 
submit the Form 8867 with the tax return or claim for refund claiming 
the EIC.
    Proposed Sec.  1.6695-2(b)(1)(i), therefore, requires that the Form 
8867 be submitted to the IRS in the manner required by forms, 
instructions, or other appropriate guidance. Comments are specifically 
requested regarding the best way for the Department of Treasury and the 
IRS to implement this submission requirement. Comments are also 
requested regarding how Form 8867 and Schedule EIC might be revised to 
reduce payments of improper EIC claims and to improve the IRS' ability 
to detect these claims.
    A tax return preparer has satisfied the due diligence requirements 
of current Sec.  1.6695-2(b)(1) if the tax return preparer records, in 
paper or electronic files, the information necessary to complete Form 
8867. Under proposed Sec.  1.6695-2(b)(1), the due diligence 
requirements of paragraph (b)(1) can only be satisfied by completion 
and submission of the Form 8867 (or its successor form) and, therefore, 
cannot be satisfied by submission of any other form or document.

Computation of Credit

    The amendments in proposed Sec.  1.6695-2(b)(2) are not 
substantive. The term ``tax return preparer'' has been substituted for 
the term ``preparer.'' Under the proposed regulations, tax return 
preparers would continue to complete the EIC Worksheet in the Form 1040 
Instructions or any other form prescribed by the IRS, or otherwise 
record in paper or electronic files their EIC computation, including 
the method and information used to make the computation. To improve 
clarity, however, the defined terms ``Computation Worksheet'' and 
``Alternative Computation Record'' have been replaced throughout the 
proposed regulation with descriptive language.

Retention of Records

    Under proposed Sec.  1.6695-2(b)(4)(i)(C), tax return preparers 
must still retain a record of how and when the information used to 
complete Form 8867 and the EIC Worksheet (or other record of the tax 
return preparer's EIC computation permitted under Sec.  1.6695-
2(b)(2)(i)(B)) was obtained. Additionally, a tax return preparer must 
also retain a copy of any document that was provided by the taxpayer 
and on which the tax return preparer relied to complete Form 8867 or 
the EIC Worksheet (or other record of the tax return preparer's EIC 
computation permitted under Sec.  1.6695-2(b)(2)(i)(B)).
    Proposed Sec.  1.6695-2(b)(4)(ii) makes two changes. It substitutes 
``paragraph (b)(4)(i)'' for ``paragraph (b)(4)'' in order to account 
for prior restructuring of paragraph (b)(4). It also changes the date 
through which tax return preparers must retain the records required by 
this section. The current retention date is three years after the June 
30th following the date the return or claim for refund was presented to 
the taxpayer for signature. The proposed retention date is three years 
from the later of the due date of the return (determined without regard 
to any extension of time for filing) or the date the return or claim 
for refund was filed. This revision to the retention date will simplify 
the determination of the retention date for both the IRS and tax return 
preparers.

Exception to the Penalty Under Section 6695(g)

    Proposed Sec.  1.6695-2(d) retains the existing exception to the 
penalty, but excludes from the exception a firm that is subject to the 
penalty under the

[[Page 62691]]

special rules for firms in proposed Sec.  1.6695-2(c). Thus, in no case 
could a firm that is subject to the penalty under proposed Sec.  
1.6695-2(c) satisfy the facts and circumstances test provided in 
proposed Sec.  1.6695-2(d).

Proposed Effective and Applicability Dates

    Proposed Sec.  1.6695-2(e) provides that the rules in this notice 
of proposed rulemaking will apply to tax returns and claims for refund 
for tax years ending on or after December 31, 2011 that are filed after 
the date the final regulations are published in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. 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 (RFA) (5 U.S.C. chapter 6), requires the agency to 
``prepare and make available for public comment an initial regulatory 
flexibility analysis'' that will ``describe the impact of the proposed 
rule on small entities.'' (5 U.S.C. 603(a)). Section 605 of the RFA 
provides an exception to this requirement if the agency certifies that 
the proposed rulemaking will not have a significant economic impact on 
a substantial number of small entities.
    The proposed rules affect tax return preparers who determine the 
eligibility for, or the amount of, EIC. The NAICS code that relates to 
tax preparation services (NAICS code 541213) is the appropriate code 
for tax return preparers subject to this notice of proposed rulemaking. 
Entities identified as tax preparation services are considered small 
under the Small Business Administration size standards (13 CFR 121.201) 
if their annual revenue is less than $7 million. The IRS estimates that 
approximately 75 to 85 percent of the 550,000 persons who work at firms 
or are self-employed tax return preparers are operating as or employed 
by small entities. 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 current 
regulations under section 6695(g) already require tax return preparers 
to complete the Form 8867 or otherwise record in their files the 
information necessary to complete the form. Tax return preparers also 
must currently maintain records of the checklists and EIC computations, 
as well as a record of how and when the information used to compute the 
EIC was obtained by the tax return preparer. The amount of time 
necessary to submit, record, and retain the additional information 
required in these proposed regulations, therefore, should be minimal 
for these tax return preparers.
    Based on these facts, the IRS hereby certifies that the collection 
of information contained in this notice of proposed rulemaking 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 Internal Revenue Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on the 
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 Treasury Department and the IRS request comments on the 
clarity of the proposed regulations and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying at https://www.regulations.gov or upon request.
    A public hearing has been scheduled for November 7, 2011, 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 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 November 1, 2011. 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 author of these proposed regulations is Spence 
Hanemann, Office of the Associate Chief Counsel (Procedure and 
Administration).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.6695-2 also issued under 26 U.S.C. 6695(g). * * *

    Par. 2. In Sec.  1.6695-2, paragraphs (a), (b)(1), (b)(2), (b)(4), 
(c), and (d) are revised and new paragraph (e) is added to read as 
follows:


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

    (a) Penalty for failure to meet due diligence requirements. A 
person who is a 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) * * *
    (1) Completion and submission of Form 8867--(i) The tax return 
preparer must complete Form 8867, ``Paid Preparer's Earned Income 
Credit Checklist,'' or such other form and such other information as 
may be prescribed by the Internal Revenue Service (IRS), and submit it 
in the manner required by forms, instructions, or other appropriate 
guidance.
    (ii) The tax return preparer's completion of Form 8867 (or 
successor form) must be based on information provided by the taxpayer 
to the tax return preparer or otherwise reasonably obtained by the tax 
return preparer.

[[Page 62692]]

    (2) Computation of credit--(i) The tax return preparer must 
either--
    (A) Complete the Earned Income Credit Worksheet in the Form 1040 
instructions or such other form and such other information as may be 
prescribed by the IRS; or
    (B) Otherwise record in one or more documents in the tax return 
preparer's paper or electronic files the tax return preparer's EIC 
computation, including the method and information used to make the 
computation.
    (ii) The tax return preparer's completion of the Earned Income 
Credit Worksheet (or other record of the tax return preparer's EIC 
computation permitted under paragraph (b)(2)(i)(B) of this section) 
must be based on information provided by the taxpayer to the tax return 
preparer or otherwise reasonably obtained by the tax return preparer.
* * * * *
    (4) Retention of records--(i) The tax return preparer must retain--
    (A) A copy of the completed Form 8867 (or successor form);
    (B) A copy of the completed Earned Income Credit Worksheet (or 
other record of the tax return preparer's EIC computation permitted 
under paragraph (b)(2)(i)(B) of this section); and
    (C) A record of how and when the information used to complete Form 
8867 (or successor form) and the Earned Income Credit Worksheet (or 
other record of the tax return preparer's EIC computation permitted 
under paragraph (b)(2)(i)(B) of this section) was obtained by the tax 
return preparer, including the identity of any person furnishing the 
information, as well as a copy of any document that was provided by the 
taxpayer and on which the tax return preparer relied to complete Form 
8867 (or successor form) or the Earned Income Credit Worksheet (or 
other record of the tax return preparer's EIC computation permitted 
under paragraph (b)(2)(i)(B) of this section).
    (ii) The items in paragraph (b)(4)(i) of this section must be 
retained for three years from the due date of the return (determined 
without regard to any extension of time for filing) or the date the 
return or claim for refund was filed, whichever date is later, and may 
be retained on paper or electronically in the manner prescribed in 
applicable regulations, revenue rulings, revenue procedures, or other 
appropriate guidance (see Sec.  601.601(d)(2) of this chapter).
    (c) Special rule for firms. A firm that employs a tax return 
preparer subject to a penalty under section 6695(g) is also subject to 
penalty if, and only if--
    (1) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or knew of the 
failure to comply with the due diligence requirements of this section;
    (2) The firm failed to establish reasonable and appropriate 
procedures to ensure compliance with the due diligence requirements of 
this section; or
    (3) The firm disregarded its reasonable and appropriate compliance 
procedures through willfulness, recklessness, or gross indifference 
(including ignoring facts that would lead a person of reasonable 
prudence and competence to investigate or ascertain) in the preparation 
of the tax return or claim for refund with respect to which the penalty 
is imposed.
    (d) 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. The preceding sentence does not apply to 
a firm that is subject to the penalty as a result of paragraph (c) of 
this section.
    (e) Effective/applicability date. This section is effective for tax 
returns and claims for refund filed after the date that these 
regulations are published as final regulations in the Federal Register, 
and applies to tax returns and claims for refund for tax years ending 
on or after December 31, 2011.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-26247 Filed 10-6-11; 11:15 am]
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