IRS to Get Stricter on Preparer Penalties

In response to a recent government report, the IRS will be improving its procedure for determining and enforcing penalties on paid tax preparers.

The report from the Treasury Inspector General for Tax Administration was requested by the IRS Oversight Board to determine how effective the IRS is in using the existing requirements and penalty regime that applies to unenrolled paid tax return preparers. The overall objective was to determine whether controls are in place to ensure that the IRS effectively enforces and applies penalties to paid preparers as required by Internal Revenue Code Section 6694, which provides penalty standards for paid preparers who take unreasonable positions or intentionally prepare inaccurate tax returns.

TIGTA reviewed a statistical sample of 98 closed Section 6694 preparer penalty cases from a population of 2,345 cases with penalties totaling $9.35 million that were closed during fiscal years 2009 through 2011. In eight cases, the immediate managers did not properly approve $19,000 in preparer penalty assessments as required.

Section 6751(b) requires that no penalty shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor. The lack of proper approval could hinder the IRS’s ability to successfully litigate these penalty assessments in court if necessary. When this issue was brought to their attention, IRS officials took immediate corrective actions by emphasizing the importance of properly approving, in writing, preparer penalty assessments.

TIGTA also analyzed the IRS’s quality reviews for civil penalty determinations to evaluate whether preparer penalties were properly considered and documented. IRS quality reviewers found that examiners did not always adequately document the examination case files with the facts that supported whether or not they considered paid preparer penalties. This appeared to be attributable to management’s interpretation of procedures regarding proper documentation in the examined cases.

In addition, TIGTA analyzed the Master File to determine whether the IRS is effectively enforcing paid preparer penalties, and found that current enforcement practices do not treat paid preparers with unpaid penalties as a priority, which could impact whether penalties achieve their intent of changing preparer behavior and increasing voluntary compliance.

TIGTA recommended that the IRS update the Internal Revenue Manual and implement improvements to ensure that managers and employees adhere to internal procedures for documenting actions and results in the preparer penalty case files. TIGTA also recommended that the IRS develop procedures to expedite assigning Section 6694 preparer penalty tax accounts to a revenue officer, as well as to give more consideration before suspending collection actions on these types of accounts.

IRS officials agreed with all of the recommendations and said that they plan to take corrective actions.