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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 6. Preparer, Promoter Penalties (Cont. 2)

20.1.6  Preparer, Promoter Penalties (Cont. 2)

20.1.6.6 
Penalties for Aiding and AbettingIRC Section 6701Legislative Overview

20.1.6.6.3  (02-08-2008)
How to Identify, Develop, and Assert the Penalty: Investigative Responsibilities

  1. Persons subject to penalty under IRC section 6701 may be identified by the following IRS employees:

    1. field examiners through the examination process, or

    2. Campus correspondence examiners, or

    3. appraisers/engineers, or

    4. any other IRS employee who determines that the penalty might apply.

  2. If a penalty under IRC section 6701 might be appropriate, the employee should provide relevant information in a referral to the Lead Development Center for SB/SE taxpayers or to LMSB OTSA for LMSB taxpayers to determine if an IRC section 6701 investigation should be authorized.

    Note:

    Many of these cases will be discovered during an examination of an LMSB taxpayer. However, the referral should be based on the taxpayer under penalty investigation, in most cases, an SB/SE taxpayer.

  3. The referral should be sent to the Appraisal Issues Professional Responsibility Committee if it concerns any appraisal or valuation issue. The 6701 Appraiser Committee will make a recommendation to OTSA or the LDC, as appropriate, as to whether the 6701 referral should be approved for investigation. After the referral is approved for investigation, the Appraisal Issues Professional Responsibility Committee will:

    1. Ensure that an appropriate IRS Field Specialist is assigned to each referral approved for investigation,

    2. Approve and monitor the investigatory procedures of the IRS Field Specialist.

    3. Consider retaining the services of an outside expert/consultant.

    4. Recommend IRC section 6701 penalty assessments for approval by OTSA or the LDC, as appropriate.

  4. The two types of investigation are:

    1. A penalty investigation involving a small number of tax returns. While these investigations may require extensive research in order to assert the penalty, the small number of returns does not warrant a promoter investigation.

    2. A promoter investigation involving a large number of tax returns. These investigations include consideration of program action cases (see IRM 20.1.6.1.6), or injunctive relief (see IRM 20.1.6.8.1).

20.1.6.6.3.1  (02-08-2008)
Investigation Procedures

  1. Procedures for extensive investigations after Lead Development Center authorization and assignment to an examiner will parallel IRC section 6700 guidelines:

    1. Examiners meet with the coordinating attorney from Area Counsel, maintain a summary document of agreed-upon actions, and record quarterly meetings that also include the respective managers from Examination and Counsel. ( See Exhibit 20.1.6-2, Examination and Area Counsel.) When Criminal Investigation is involved, the special agent and the related manager also attend quarterly meetings.

    2. The person under investigation generally will be notified in writing at a time determined by the examiner and the attorney.( See Exhibit 20.1.6-2.) Information from third parties may be collected before notification.

    3. If the person is under a criminal investigation, the special agent assigned the case generally will issue the person a statement of rights before an interview with the examiner. In order to avoid adversely affecting the criminal investigation, all direct contact with the person will be coordinated with the special agent.

    4. Examiners will secure related tax returns and transcripts and obtain a Treasury Enforcement Communications System (TECS) inquiry report.

    5. After obtaining relevant background information on the person under investigation (including any record of prior civil or criminal actions taken) the examiners will meet with the person and carefully develop, and document, all factors with respect to the person's position and the defense of it.

    6. Examiners prepare a report of proposed adjustments and, with the assigned attorney, conducts a final meeting with the person under investigation. After this meeting, based upon the recommendation of the attorney and the examiner, a decision will be made regarding whether the penalty should be assessed.

    7. The examiner secures a copy of the assessment documentation from Case Processing Staff for the administrative file.

  2. Limited investigations not requiring Committee approval will be cleared through Area Counsel before the penalty is assessed.

  3. In addition to the procedures shown in this section, refer to IRM 4.32.2.7.3, Promoter Interviews, and 4.32.2.7.7,Closing Conferences, for more information about interviewing and investigative techniques.

20.1.6.6.3.2  (02-08-2008)
Evidence Supporting the Government's Burden of Proof

  1. The penalty under IRC section 6701 may be imposed on a broad range of persons. When a tax return preparer is involved, either IRC section 6694(a) or 6701 could apply.

    1. The government's burden of proof under IRC section 6694(b) and 6701 is not sustained by the mere fact of unreported income or overstated credits and deductions.

    2. The focus is on the information that establishes the knowledge, willfulness, or recklessness of the preparer (i.e., information conveyed by the taxpayer to the preparer, information known or reasonably known by the preparer, the inquiries or statements directed by the preparer to the taxpayer).

    3. For example, if the preparer fabricates deductions (without the taxpayer's knowledge), the preparer could be liable for a penalty under IRC section 6694(b) or 6701 because of willfully attempting to understate the tax and because of preparing a return based on information which is known by the preparer to result in an understatement of the taxpayer's tax liabilities.

  2. Even though a preparer may in good faith rely on the taxpayer to provide accurate information, the preparer may not ignore the implications of such information and must make reasonable inquiries when information furnished appears to be incorrect or incomplete. It must be shown that the preparer failed to make any reasonable inquiry under circumstances required by rule or regulation, and a deliberate act of omission prevails.

  3. The evidence must prove each of the three elements defined in IRM 20.1.6.6.2, Who Asserts the Penalty,above. In addition, the evidence should show the amount of understatement on each return related to IRC section 6701 activity. Examples of evidence to be collected include, but are not limited to:

    1. Tax returns or other documents which were prepared by the person under investigation. Although copies may be used during the investigation, originals or certified copies will be needed for introduction in court.

    2. Affidavits taken from taxpayers whose federal tax returns were prepared by the person under investigation. These affidavits should define the items falsely reported on the filed return as well as any other preparer violations. The affidavits are used for report purposes but the individuals must be available to testify if the case goes to court. (See IRM 20.1.6.1.7 Affidavits, above)

    3. Computation of loss to the government due to the understatement of tax attributable to the return preparer.

    4. False receipts or other documents to establish the involvement of the individual under investigation in aiding or assisting in the filing of false documents specified in IRC section 6701.

    5. Affidavits taken from third parties who can testify as to the preparer's tax knowledge and personal responsibility in the preparation of the tax returns or other factors bearing on the investigation.

  4. Refer also to IRM 4.32.2.7.6, Preserving Evidence.

20.1.6.6.4  (02-08-2008)
Coordination with Other Penalties

  1. The penalty under IRC section 6701 is not imposed on a person with respect to a federal tax document if a penalty with respect to such document has been assessed on such person under IRC section 6694, relating to income tax return preparers. The penalty may be imposed, however, with respect to any other federal tax document for which the penalty under IRC section 6694 has not been assessed, even though the document relates to the same taxpayer and taxable year as a document with respect to which the penalty under IRC section 6694 has been assessed. (See IRM 20.1.6.3.3.)

  2. A penalty under IRC section 6701 may not be applied to the same activities which result in the application of a penalty under IRC section 6700. Therefore, if a promoter develops promotional materials such as a prospectus and other documents which explain the promotion and those documents are used as the evidence supporting a penalty under IRC section 6700 for organizing and promoting an abusive tax shelter, a penalty under IRC section 6701 will not be assessed for those same documents. However, if the same promoter prepares a partnership tax return relating to the same tax plan or arrangement, a penalty can be assessed under IRC section 6701 for each Schedule K1 if an understatement of tax liability is reported on the investor's federal tax returns.

20.1.6.6.5  (02-08-2008)
Examples of IRC Section 6701 Activity

  1. Example 1: A tax advisor would not be subject to the penalty for suggesting an aggressive but supportable filing position to a client even though that position was later rejected by the courts and even though the client was subjected to the substantial understatement penalty.

  2. Example 2: However, if the tax advisor suggested a position which he or she knew could not be reasonably supported by statute or regulation, and the advisor prepared (or assisted in the preparation of) a document for the underlying tax return reflecting that insupportable position, the penalty could apply.

    1. Thus, if a person prepares a return (or a schedule or other portion of a return) for a client reflecting a deduction of an amount the preparer knows is not deductible, the preparer could be subject to the penalty.

    2. However, if a person prepares a schedule or other portion of a return which portion reflects positions which are reasonably supported by rules or regulations, the person will not be subject to an IRC section 6701 penalty even if other portions of the return are erroneous or fraudulent.

  3. Example 3: Taxpayer B was given a winning horse race ticket at a race course by taxpayer A, the ticket owner. The race course, using information supplied by Taxpayer B, prepared a Form 1099 in Taxpayer B's name. Taxpayer B received the proceeds from the winning ticket and returned the proceeds to Taxpayer A for a 6 percent fee.

    1. Taxpayer B is a person who has aided, assisted in the preparation of, or procured a document (the Form 1099) that Taxpayer B knows, or has reason to know, will be used in connection with material matters under the Internal Revenue laws.

    2. Taxpayer B knows that, if used, the document would result in an understatement of Taxpayer A's income tax liability. Thus, Taxpayer B is liable for the IRC section 6701 penalty.

  4. Example 4: Mr. C, an accountant, prepared a 2000 return for Taxpayer D, a client. Mr. C knowingly overstated D's expenses on the return, thereby creating a NOL for the year. Mr. C prepared amended returns for Taxpayer D for 1998 and 1999, claiming refunds for those years based on the 2000 NOL carryback. The carryback was not exhausted in 1999. Mr. E, another accountant, prepared Taxpayer D's 2001 return using the information presented to Mr. E by Taxpayer D, including copies of the document prepared by Mr. C. Mr. E is unaware of the overstatement of expenses by Mr. C and deducted the remaining unused NOL on Taxpayer D's 2001 return.

    1. Mr. C is liable for three separate IRC section 6701 penalties for his role in preparing Taxpayer D's 1998, 1999, and 2000 returns, which Mr. C knew, or had reason to know would result in understatements of Taxpayer's D's 1998, 1999, and 2000 federal income tax liabilities.

    2. Mr. E, however, was unaware of the overstatement of expenses on the 2000 return and is unaware of the understatement of tax liability on the 2001 return. Thus, Mr. E is not liable for an IRC section 6701 penalty.

  5. Example 5: On January 15, 2000, A, an individual, offers to donate a painting to museum X. B, the curator of the museum, agrees to accept the painting. B offers to backdate a receipt for the donation to December 30, 1999. B knows that the receipt will be used to substantiate A's charitable deduction. A uses the backdated receipt to claim a charitable deduction for 1999.

    1. B has aided in the preparation of a federal tax document knowing that it will be used in connection with a material tax matter and that it will result in an understatement of tax.

    2. Thus, B is liable for the IRC section 6701 penalty.

  6. Example 6: Taxpayer F retains Mr. G., an appraiser, to appraise rare books that she wishes to donate to a university. Mrs. F tells Mr. G. that she needs the appraisal to substantiate a charitable contribution deduction for federal income tax purposes. Mr. G. knows that the fair market value of the books may be any amount between $50,000 and $75,000. Mr. G. offers to provide Mrs. F an appraisal, for a fee, indicating the books are worth $100,000. Mr. G. indicates to Mrs. F that if the IRS challenges the valuation, the appraisal of $100,000 can be used to negotiate a fair market value of $75,000.

    1. Mrs. F agrees to pay the fee for the appraisal indicating the books are worth $100,000, and Mr. G. prepares the appraisal.

    2. Mr. G. has aided in the preparation of a document knowing that it will be used in connection with a material tax matter and that it will result in the understatement of tax liability. Thus, Mr. G. is liable for the IRC section 6701 penalty.

  7. Example 7: Mrs. H, an accountant, overstates the value of depreciable property on an estate tax return. Mrs. H knows there is no reasonable basis for the valuation. Mrs. H also knows that the valuation claimed on the estate tax return will not understate the tax liability of the estate because of the application of the unified credit. Mrs. H, however, intends that the value claimed on the return will be used by the beneficiary of the estate in computing depreciation deductions. Mrs. H has aided in the preparation of a tax document and knows that the estate tax return will result in an understatement of the tax liability of the beneficiary. The IRC section 6701 penalty therefore applies.

  8. Example 8: Mr. A, an attorney, knowingly understates an item of partnership income in preparing a partnership return for calendar year 2000. Mr. A prepares and transmits to the partners Schedules K1 for the 10 individual partners for the same calendar year reflecting the understated income. Mr. A is subject to ten separate $1,000 IRC section 6701 penalties for his preparation of ten Schedules K1 which Mr. A knew would, if used, result in understatements of the federal tax liabilities of the ten partners on their federal income tax returns. Mr. A will not be subject to an eleventh penalty in connection with the partnership return itself, since the partnership itself is not liable for income tax and the only understatements of tax liability are the understatements of tax liability on the ten partners' individual returns.

  9. Example 9: Mrs. B, an officer of an S corporation under section 1361(a)(1), prepares the corporation's tax return for calendar year 2000. Mrs. B intentionally understates the corporation's net capital gain for the taxable year, resulting in an understatement of the corporation's tax liability under section 1374. Mrs. B also prepares Schedules K1 for the individual shareholders for the same calendar year reflecting the understated capital gain. Mrs. B is subject to a $10,000 penalty for her aid in the preparation of the small business corporation return and a $1,000 penalty for each Schedule K1 prepared.

    Note:

    If Mrs. B intentionally understated operating income rather than net capital gains, Mrs. B is subject to a $1,000 penalty for each Schedule K1 prepared, but is not subject to a penalty for the S corporation return since under these facts the S corporation is not subject to tax.

  10. Example 10: Mrs. C, an accountant, prepares false income and gift tax returns for client Mr. D. Each of the returns is prepared for calendar year 2000. The calendar year 2000, however, relates to a period for which different taxes are imposed. Thus, there are two taxable periods for purposes of application of the penalty under IRC section 6701: the calendar year 2000 which is the period for which the income tax is imposed, and the calendar year 2000 which is the period for which the gift tax is imposed. Mrs. C is subject to a penalty of $2,000.

20.1.6.6.6  (02-08-2008)
Appeal Rights

  1. See IRM 20.1.6.1.4, Appeal Rights, above.

20.1.6.6.7  (02-08-2008)
Statute of Limitations on Assessment

  1. There is no statute of limitation on assessment of penalties under IRC section 6701 because the penalty does not depend on the filing of a return.

20.1.6.6.8  (02-08-2008)
Office of Professional Responsibility

  1. When the IRC section 6701 penalty is asserted against a practitioner or an appraiser, an information referral to the Office of Professional Responsibility is mandatory. See IRM 20.1.6.2.1,Referral to the Office of Professional Responsibility, above.

20.1.6.7  (02-08-2008)
Penalty for Unauthorized Preparer Disclosure or UseIRC Section 6713Legislative Overview

  1. IRC section 6713 imposes a penalty of $250 for each unauthorized disclosure or use of information connected with an income tax return or the preparation of an income tax return. The penalty may be asserted against a preparer or any person providing services in connection with the preparation of an income tax return.

20.1.6.7.1  (02-08-2008)
Asserting the Penalty

  1. Examiners in Area Examination assert the penalty.

  2. If disclosure or use of return or return related information was made pursuant to court order or one of the provisions of the Code that permits disclosure, then the penalty will not be asserted.

  3. If any person prepares a return for compensation or provides services in connection with the preparation of an income tax return, and knowingly or recklessly discloses or uses return information improperly, the examiner should consider making a criminal referral under IRC section 7216, Disclosure or Use of Information by Preparers of Returns, to the Treasury Inspector General for Tax Administration (TIGTA).

20.1.6.7.2  (02-08-2008)
Computing the Penalty

  1. For each unauthorized disclosure or use of return information, a penalty of $250 may be asserted. The total amount cannot exceed $10,000 per person per calendar year.

20.1.6.7.3  (02-08-2008)
Coordination with Other Penalties

  1. The IRC section 6713 penalty can be asserted in conjunction with any other preparer penalties.

20.1.6.7.4  (02-08-2008)
Appeal Rights

  1. See IRM 20.1.6.1.4, Appeal Rights,above.

20.1.6.7.5  (02-08-2008)
Statute of Limitations

  1. There is no statute of limitations for this penalty.

20.1.6.7.6  (02-08-2008)
Definitions

  1. See IRM 20.1.6.1.1, Definitions,above for definition of terms.

20.1.6.8  (02-08-2008)
Action to Enjoin Preparers-IRC Section 7407 and 7408-Legislative Overview

  1. Under IRC section 7407, Action to Enjoin Income Tax Return Preparers, the Service has the power to seek an injunction prohibiting an income tax return preparer from engaging in certain practices. The United States may bring a civil action in the U.S. District Court for the district of:

    1. The return preparer's residence,

    2. The return preparer's principal place of business, or

    3. The residence of the taxpayer with respect to whose return the action is brought.

  2. Income tax return preparer practices that may cause the Service to initiate injunctive action:

    1. Conduct subject to IRC section 6694 and IRC section 6695 penalties.

    2. Conduct subject to criminal penalties.

    3. Misrepresentation of the return preparer's eligibility to practice before the Service, or his or her experience and education as an income tax return preparer.

    4. Guarantee of payment of a tax refund or of allowance of a tax credit.

    5. Other fraudulent or deceptive conduct that substantially interferes with proper administration of the Internal Revenue laws.

  3. If the court finds that the income tax return preparer has engaged in one or more of the enumerated practices, it may enjoin him or her from further engaging in such conduct. If the court finds that the return preparer has continually or repeatedly engaged in those practices, it may enjoin him or her from acting as an income tax return preparer.

  4. The Committee Reports for the Tax Reform Act of 1976 (which enacted IRC section 7407) indicate that injunctive relief sought by the Service must be commensurate with the conduct which led to the seeking of the injunction. For example, if an income tax return preparer, who is only experienced in preparing individual returns, overstates his qualifications as a preparer by claiming expertise in the preparation of corporate returns, it was anticipated that any injunction would be directed toward the misrepresentation itself or the preparation of corporate returns and not toward preventing the preparer from preparing any returns at all. Furthermore, if some of an employer's employee-preparers have engaged in conduct leading to a request for an injunction against the further preparation of returns, any injunction is to be sought only against those preparers and not the employer (or other employees), unless the employer (or other employees) is actively involved in the improper conduct.

  5. Actions to Enjoin Specific Conduct Related to Tax Shelters and Reportable Transactions. A civil action may be brought under IRC section 7408, to enjoin specified conduct. The action may be brought in the U.S. district court for the district in which the individual resides, has his principal place of business, or has engaged in specified conduct.

  6. The term "specified conduct" means any action, or failure to take action, that is:

    1. Subject to penalty under IRC section 6700, 6701, 6707, or 6708; or

    2. In violation of Circular 230.

  7. The court may grant injunctive relief against any person if it finds:

    1. That the person has engaged in any specified conduct .

    2. That injunctive relief is appropriate to prevent recurrence of such conduct.

  8. See IRM 4.32.2.9, Injunctive Action, and IRM 4.32.3.6.1,Steps in an Injunctive Case, for additional information.

20.1.6.8.1  (02-08-2008)
Action on Injunctions: Seeking an Injunction

  1. Any examiner conducting an investigation under IRC section 6694, IRC section 6695, IRC section 6700, IRC section 6701, IRC section 6707, or IRC section 6708 will consider whether an injunction should be sought under IRC sections 7407 or 7408. In addition, an injunction may be sought by an examiner to whom an investigation is assigned for activities specified in IRC section 7407 or other specified conduct under IRC section 7408.

20.1.6.8.1.1  (02-08-2008)
Identifying Persons Subject to an Injunction

  1. Service personnel who become aware of income tax return preparers engaged in activities identified in IRC section 7407(b)(1)(A) through (D) will notify the LDC or OTSA in writing of the facts and circumstances.

20.1.6.8.1.2  (02-08-2008)
Initiating an Investigation under IRC Sections 7407 / 7408

  1. An investigation under IRC section 7407 and IRC section 7408 will be conducted in the same fashion as an investigation under IRC section 6700 and 6701.

20.1.6.8.2  (02-08-2008)
Coordination with Other Penalties

  1. The injunction authorized under IRC section 7407 is coordinated with civil penalties under IRC sections 6694 and IRC section 6695 and criminal tax provisions. In addition, IRC section 7407 can be used in conjunction with IRC section 7408, if appropriate.

  2. The injunction authorized under IRC section 7408 is coordinated with civil penalties under IRC section 6700, IRC section 6701, IRC section 6707 and IRC section 6708. In addition, IRC section 7408 can be used in conjunction with IRC section 7407, if appropriate.

  3. An injunction may be sought without regard to whether penalties have been or may be assessed against any income tax return preparer.

20.1.6.8.3  (02-08-2008)
Statute of Limitations

  1. The Code does not explicitly provide any limitation period for seeking an injunction under IRC sections 7407 and 7408.

20.1.6.8.4  (02-08-2008)
Office of Professional Responsibility

  1. See IRM 20.1.6.2.1, Referral to the Office of Professional Responsibility, above.

20.1.6.8.5  (02-08-2008)
Definitions

  1. See IRM 20.1.6.1.1, Definitions,above.

20.1.6.9  (02-08-2008)
Failure to Furnish Information Regarding Reportable Transactions - IRC Section 6707 (post AJCA)

  1. The American Jobs Creation Act amended the previous law with respect to registration of tax shelters. Current law requires each material advisor with respect to any reportable transaction (including any listed transaction) to timely file an information return under IRC section 6111(a) with the Secretary in the manner and on such date as prescribed by the Secretary.

  2. Under IRC section 6111(a), the return must include the following:

    1. information identifying and describing the transaction,

    2. information describing any potential tax benefits expected to result from the transaction, and

    3. such other information as the Secretary may prescribe.

  3. Under IRC section 6111(b), a material advisor is any person:

    1. who provides material aid, assistance or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and

    2. who directly or indirectly derives gross income in excess of $250,000 ($50,000 in the case of an individual), or such other amount as may be prescribed by the Secretary, for such advice or assistance.

20.1.6.9.1  (02-08-2008)
Penalty Computation under AJCA

  1. The amount of the penalty under section 6707 for reportable transactions, other that listed transactions, is $50,000.

  2. If the penalty is with respect to a listed transaction, the amount of the penalty is the greater of:

    1. $200,000, or

    2. 50% of the gross income derived by the material advisor with respect to aid, assistance, or advice which is provided before the date the information return is filed.

  3. In the case of intentional failure or act, subparagraph (2)(b) is applied by substituting "75%" for "50%" .

20.1.6.9.2  (02-08-2008)
Penalty Rescission - IRC 6707 - AJCA

  1. The penalty cannot be rescinded (abated) with respect to a listed transaction.

  2. As to reportable transactions, the penalty can be rescinded only in exceptional circumstances where rescinding the penalty would promote compliance with the tax laws and effective tax administration..

  3. The authority to rescind the penalty can only be exercised by the Commissioner or the Commissioner's delegate.

  4. There is no right to appeal a refusal to rescind a penalty.

20.1.6.9.3  (02-08-2008)
Effective Date under AJCA

  1. IRC section 6707 is effective for returns with a due date of October 23, 2004 or after.

20.1.6.10  (02-08-2008)
Failure to Furnish Information Regarding Tax Shelters IRC Section 6707 Prior to October 23, 2004

  1. For activities prior to October 23, 2004, IRC section 6707, Failure to Furnish Information Regarding Tax Shelters, imposes a penalty for failing to register a tax shelter as required under former IRC section 6111(a), Registration of Tax Shelters. The penalty was also imposed for filing a false or incomplete registration statement.

  2. For activities prior to October 23, 2004, IRC section 6707 also contained a special rule for participants required to register a shelter by reason of IRC section 6111(d)(3) (IRC section 6707(a)(3)(B).

  3. In addition, a failure to furnish the identification number of a tax shelter as required by IRC section 6111(b)(1), before October 23, 2004, was subject to a penalty (IRC section 6707(b)(2)).

  4. Failure to register a tax shelter:

    1. IRC section 6111(a), defined the parties required to register tax shelters and the time for the required registration.

    2. IRC section 6707(a), provided a penalty for failures to register or failures to register timely.

    3. Form 8264, Application for Registration of a Tax Shelter , was used for this purpose.

  5. Failure to furnish identifying number:

    1. IRC section 6111(b)(1) defined the requirements to furnish tax shelter identification numbers to authorized people on request.

    2. IRC section 6707(b)(1) provided a penalty for each failure to do so.

  6. Failure to include an identifying number on a return:

    1. IRC section 6111(b)(2) defined the requirement to include the identification number on any return as required.

    2. IRC section 6707(b)(2) provided a penalty for each failure to supply the number as required.

20.1.6.10.1  (02-08-2008)
When the Penalty Applies

  1. Organizers of tax shelters were required to file Form 8264, Application for Registration of a Tax Shelter,to register tax shelters with the IRS. See IRC section 6111,Registration of Tax Shelters . Form 8264 was filed with the Ogden Campus. Form 8264 was required to be filed no later than the day an interest in the tax shelter is first offered for sale (IRC section 6111(a)(1)). Organizers filing a properly completed Form 8264 received a tax shelter registration number from the IRS. They had to furnish the tax shelter registration number to investors in the shelter (IRC section 6111(b)(1)). Investors had to report the tax shelter registration number on their tax returns using Form 8271, Investor Reporting of Tax Shelter Registration Number. A tax shelter requiring registration had to meet the definition in either IRC section 6111(c) or IRC section 6111(d).

  2. An investment that met the following two requirements was considered a tax shelter under section 6111(c) for registration purposes, regardless of whether it was marketed or customarily designated as a tax shelter.

    1. An investment where a person could reasonably infer from representations made, or to be made, in connection with the offering for sale of an interest in the investment that the tax shelter ratio may be greater than 2 to 1 for any investor at the close of any of the first 5 years ending the day after the investment is offered for sale; and

    2. The investment was one that is required to be:

    3. Registered under a Federal or state law regulating securities, or

    (i) Sold under an exemption from registration for requiring the filing of a notice with a Federal or state agency regulating the offering or sale of securities, or

    (ii) That is a substantial investment. An investment is a substantial investment if the aggregate amount that may be offered for sale to all investors exceeds $250,000 and 5 or more investors are expected.

  3. An investment that meets each of the following three requirements was considered a confidential corporate tax shelter as defined by former IRC section 6111(d) and also required registration.

    1. A significant purpose of the structure of the investment was the avoidance or evasion of Federal income tax by a direct or indirect corporate participant. Avoidance or evasion of tax was considered a significant purpose if the investment consisted of either of the following:

      (i)Listed transactions. This category includes transactions that are the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These transactions are identified by the issuance of a notice, regulation, or other form of published guidance as a listed transaction for purposes of IRC section 6111.

      (ii) Other tax-structured transactions. This includes transactions that are structured to produce Federal income tax benefits as an important part of the intended results of the transaction and that the organizer reasonably expects to be presented to more than one potential participant in the same or substantially similar form.

    2. The investments offered to any potential participant under conditions of confidentiality, and

    3. Fees in excess of $100,000 (in the aggregate) may be received by organizers of the tax shelter and any person related to such person under IRC section 267, Losses, Expenses, and Interest with Respect to Transactions Between Related Taxpayers, and IRC section 707, Transactions Between Partner and Partnership. For this purpose, substantially similar transactions are treated as part of the same tax shelter and fees from the transaction must be combined.

    4. Former IRC section 6111(c) applied to interests first offered for sale after December 31,1986 and before October 23, 2004.

    5. Former IRC section 6111(d) was generally effective for interests offered for sale after February 28, 2004 and before October 23. 2004.

20.1.6.10.2  (02-08-2008)
Definitions

  1. Tax shelter ratio: For any year, the ratio that the aggregate amount of deductions and 200 percent of the credits that are, or will be, represented as potentially allowable to an investor under Subtitle A of the Internal Revenue Code for all periods up to (and including) the close of the year, bears to the investment base for the investor as of the close of the year.

  2. Amount of deductions: Amount of gross deductions and other similar tax benefits potentially allowable for the investment. Gross deductions are not offset by any gross income to be derived or potentially derived from the investment. Thus this term is not equivalent to the net loss, if any, attributable to the investment.

  3. Credits: Gross amount of credits potentially allowable for the investment without regard to any possible tax liability resulting from the investment of any potential recapture of the credits.

  4. Aggregate amount invested: Amount received from the sale of interests in the investment and includes all cash, the fair market value of all property contributed, and the principal amount of all indebtedness received in exchange for interests in the investment, regardless of whether the proceeds of the indebtedness are included in the investment base.

  5. Investment base: For any year, the cumulative amount of money and the adjusted basis of other property (reduced by any liability that the other property is subject to) that is unconditionally required to be contributed or paid directly to the tax shelter on or before the close of the year by an investor. The investment base must be reduced by the following amounts:

    • Any amounts to be held for the benefit of investors in cash, cash equivalents, or marketable securities. An amount is to be held in cash equivalents if the amount is to be held in a checking account, savings account, mutual fund, certificate of deposit, book entry government obligation, or any other similar account or arrangement.

    • Any distributions (whether of cash or property) that will be made without regard to the income of the tax shelter, but only to the extent such distributions exceed the amount to be held as of the close of the year.

    • For additional amounts that reduce the investment base, see Temporary Treas Reg. 301.61111T.

20.1.6.10.3  (02-08-2008)
Penalty Computation

  1. If the tax shelter ratio as defined above is greater than 2:1, compute the penalty.

    1. Former IRC section 6707(a) provides a penalty of 1 percent of the aggregate amount invested in the tax shelter or $500, whichever is greater, for the failure to register a tax shelter.

    2. However, for former IRC section 6111(d) shelters relating to confidential arrangement, the penalty is the greater of: 50% of the fees paid to all promoters of the tax shelter for offerings made prior to registration of the shelter, or $10,000.

    3. In the case of an intentional failure or act, the 50% penalty is increased to 75% (former IRC section 6707(a)(3)(A)).

  2. Former IRC section 6707(b)(1) provides a penalty of $100 for each failure to furnish an identifying number as required.

  3. Former IRC section 6707(b)(2) provides a $250 penalty for each failure to include an identifying number on a return.

20.1.6.10.4  (02-08-2008)
Assertion

  1. Examiners assigned to promoter cases assess IRC section 6707 penalties.

  2. Due to the complex provisions and numerous amendments made to the Code and Regulations over the years, all examiners investigating promoters for a potential IRC section 6707 penalty should contact their local counsel to assist in the cases. Assistance of field specialists may also be necessary and is strongly encouraged.

20.1.6.10.5  (02-08-2008)
Penalty Relief

  1. The reasonable cause exception applies to former IRC section 6707 penalties except IRC section 6707(b)(1) penalties. See IRM 20.1.1.3, Relief From Penalties, for a discussion of reasonable cause.

  2. The liability for former IRC section 6707 penalties is imposed on a joint and several basis. (Treas. Reg. 301.6707-1T, Q&A 9).

20.1.6.10.6  (02-08-2008)
Statute of Limitations

  1. Generally, former IRC section 6707 penalties may be assessed at any time.

  2. Former IRC section 6707(b)(2) penalties for failing to include a tax shelter registration number on a return must be assessed within 3 years of filing the return with the missing identification number.

20.1.6.11  (02-08-2008)
Failure to Maintain Lists of Advisees with Respect to Reportable TransactionsIRC 6708 post AJCA of 2004

  1. Under IRC section 6112(a), each material advisor with respect to a reportable non-listed transaction (including listed transactions) is required to maintain a list that:

    1. identifies each person with respect to whom the advisor acted as a material advisor with respect to the reportable non-listed transaction, and

    2. contains other information as may be required by the Secretary.

  2. The Secretary may prescribe regulations which provide that, in cases in which two or more persons are required to maintain the same list, only one person would be required to do so.

20.1.6.11.1  (02-08-2008)
Penalty Computation under AJCA

  1. IRC section 6708 imposes a penalty on any person required to maintain a list under IRC section 6112(a) who fails to make such list available.

  2. A material advisor who fails to make the list available upon written request by the Secretary within 20 business days after the request will be subject to a penalty of $10,000 for each day of such failure after the 20th business day.

20.1.6.11.2  (02-08-2008)
Penalty Relief under AJCA

  1. The penalty does not apply for any day where the failure to comply is due to reasonable cause.

20.1.6.11.3  (02-08-2008)
Effective Date

  1. The provision requiring a material advisor to maintain an investor list applies to transactions with respect to which material aid, assistance or advice is provided after October 22, 2004.

  2. The provision imposing a penalty for failing to maintain investor lists applies to requests made after October 22, 2004.

20.1.6.12  (02-08-2008)
Failure to Maintain Lists of Investors in Potentially Abusive Tax Shelters IRC Section 6708 prior to October 23, 2004

  1. Former IRC section 6708 provides a penalty for each investor not included on the list as required by IRC section 6112, Organizers and Sellers of Potentially Abusive Tax Shelters Must Keep Lists of Investors.

  2. IRC section 6112 requires any organizer or seller of a potentially abusive tax shelter to maintain a list identifying each person who was sold an interest in such shelter. The organizers and sellers of potentially abusive tax shelters must make the lists available for inspection and retain the information for 7 years (IRC section 6112(c)(1)). A potentially abusive tax shelter is defined for this purpose in IRC section 6112(b), and includes any tax shelter required to be registered under IRC section 6111, Registration of Tax Shelters.

  3. Treas. Reg. 301.6112-1(e)(3) requires that each list contain the following information:

    1. The name of each transaction that is a potentially abusive tax shelter and the registration number, if any.

    2. The TIN, if any, of each transaction.

    3. The name, address, and TIN of each person required to be on the list.

    4. The number of units acquired by each person required to be included on the list.

    5. The date on which each person required to be included on the list entered into each transaction.

    6. The amount invested in each transaction by each person required to be included on the list.

    7. A detailed description of each transaction that describes both the tax structure and its expected tax treatment.

    8. A summary or schedule of the tax treatment that each person is intended or expected to derive from participation in each transaction.

    9. Copies of any additional written materials, including tax analyses or opinions.

    10. The name of the person from whom the interest was acquired.

  4. When requested in writing by the IRS, the list must be furnished within 20 business days (Treas. Reg. 301.6112-1(g)).

  5. The penalty applies to tax shelters which are first offered for sale after August 31, 1984.

20.1.6.12.1  (02-08-2008)
Penalty Computation

  1. A failure to meet any requirement of IRC section 6112 is subject to an IRC section 6708 penalty.

  2. The former IRC section 6708 penalty was $50 for each investor, with a maximum penalty of $100,000, for requests made prior to 10232004.

  3. A separate $100,000 limitation applies to each calendar year where a failure occurs, and for tax each shelter for which a list is required to be maintained. (Treas.Reg. 301.6708-1T, Q&A 5).

  4. The former IRC section 6708 penalties are imposed on an annual basis for each shelter, for requests made prior to 10232004.

  5. The penalty is in addition to any other penalty.

20.1.6.12.2  (02-08-2008)
Assertion

  1. Examiners assigned to promoter investigation cases assert the penalty.

20.1.6.12.3  (02-08-2008)
Penalty Relief

  1. The penalty is not asserted if there is reasonable cause and the failure was not due to willful neglect. See IRM 20.1.1.3, Relief From Penalties, for a discussion of reasonable cause.

20.1.6.12.4  (02-08-2008)
Statute of Limitations

  1. IRC section 6708 penalties are not subject to a statutory period of limitation. Sage v. United States, 908 F.2d.18 (5th Cir. 1990); Mullikin v. United States, 952 F.2d. 920 (6th Cir. 1991), cert. denied 506 U.S. 827 (1992); Capozzi v. United States, 980 F.2d. 872 (2d. Cir.1992).

Exhibit 20.1.6-1  (02-08-2008)
Forms Used in the Preparer Penalty Case File

Forms Description
886-A Explanation of Items
872-D Consent to Extend the Time on Assessment of Tax Return Preparer Penalty
895 Notice of Statute Expiration
2797 Referral Report of Potential Criminal Fraud Case
3198 Special Handling Notice For Examination Case Processing
3244-A Payment Posting Voucher - Examination
4318 Examination Workpapers Index
4318-A Continuation Sheet for Form 4318 Examination Workpapers Index
4665 Report Transmittal
4700 Examination Workpapers
4700-A Form 4700 Supplement
5808 Return Preparer Penalty Follow-Up
5809 Preparer Penalty Case Control Card
5816 Report of Income Tax Return Preparer Penalty Case
5838 Waiver of Restrictions on Assessment and Collection of Tax Return Preparer Penalty
6459 Return Preparer's Checksheet
8278 Computation and Assessment of Miscellaneous Penalties
8484 Report of Suspected Practitioner Misconduct

Exhibit 20.1.6-2  (02-08-2008)
Examination and Area Counsel

  1. 6700/6701 Quarterly Joint Workplan and Conference Memorandum

Case name: Quarter Ending:
Attorney: Meeting Date:
Revenue Agent: Estimated Completion Dates:
Case Status: ( ) In Exam ( ) In Counsel ( ) In DOJ 7408: 6701
ACCOMPLISHMENTS IN CURRENT QUARTER: Area Counsel Attorney:  
Revenue Agent:  

WORKPLAN FOR NEXT QUARTER:

Area Counsel Attorney:

Revenue Agent:

OVERALL OBSERVATIONS:

Problems in the case:

Comments:

District Counsel Attorney Date Revenue Agent Date
Assistant Area Counsel Date Group Manager Date

Exhibit 20.1.6-3  (02-08-2008)
American Jobs Creation Act of 2004

American Jobs Creation Act of 2004
Provisions Affecting Tax Shelter Promoters and Investors
page 1
 
IRC Section Act Section Description Effective Date Comments
         
 
6707A 811 Penalty for Failure to Disclose Reportable Transactions Returns due after 10/22/04 Penalty ranges from $10,000 to $200,000. Commissioner may rescind.
 
   
6662A 812 Accuracy Related Penalty for Listed Transactions and Other Reportable Transactions Taxable Years ending after 10/22/2004 For disclosed reportable transactions the penalty is 20%. The penalty is 30% if taxpayer fails to disclose.  
 
 
   
7525 813 Tax Shelter Exceptions to Confidentiality Privileges Communication made on or after 10/22/04 Previously only applied to corporate tax shelters.  
 
   
6501 814 Statute of Limitations for taxable years for which required listed transactions not reported Taxable years for which the assessment date did not expire before 10/22/04 Extends investor statute for one year from the earlier of the date the investor discloses or, the date the promoter furnishes the investor list.  
 
 
 
   
6111 and 6112 815 Disclosure of Reportable Transactions Advice and assistance provided after 10/22/04 Promoters must now "disclose" rather than "register" shelters. Removes the ratio and confidential corporate tax shelter concepts. Requires disclosure of "reportable transactions".  
 
 
 
 
 
American Jobs Creation Act of 2004
Provisions Affecting Tax Shelter Promoters and Investors
page 2
 
IRC Section Act Section Description Effective Date Comments
         
 
6707 816 Penalty for Failure to Furnish Information for Reportable Transactions Returns due after 10/22/04 Penalty is $50,000 or, for listed transactions, the greater of $200,000 or 50% of gross income (75% for intentional disregard).
 
 
 
   
6708 817 Penalty for Failure to Maintain Lists of Investors Requests made after 10/22/2004 Failure to furnish an investor list within 20 business days results in a penalty of $10,000 for each day. May not extend the 20 day period.  
 
 
 
   
6700 818 Penalty on Promoters of Tax Shelters Activities after 10/22/04 Penalty increased from $1,000 per activity / promotion to 50% of gross income derived from activities.  
 
 
   
7408 820 Actions to Enjoin Certain Conduct Related to Tax Shelters and Reportable Transactions After 10/22/04 Expands authority to enjoin conduct subject to penalty under IRC 6700, 6701, 6707, 6708, or Circular 230.  
 
 
   
31 USC 330 (Cir 230) 822 Regulations of Individuals Practicing before the Department of Treasury Actions taken after 10/22/04 Expands sanctions available to the Department of Treasury. Treasury may now impose monetary penalties on tax advisors, their employers or professional firms. Treasury can also impose shelter opinion standards.  
 
 
 
 

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