When Form 8275 cannot avoid accuracy-related penalty
The accuracy-related penalty attributable to the following types of misconduct cannot be avoided by disclosure on Form 8275:
- Negligence
- Disregard of regulations
- Any substantial understatement of income tax on a tax shelter item
- Any substantial valuation misstatement under chapter one of the Internal Revenue Code
- Any substantial overstatement of pension liabilities
- Any substantial estate or gift tax valuation understatements
Tax return preparer
- Any person who, for compensation, prepares a tax return or claim for refund.
- A person is not a preparer if unpaid, the return is for an employer, or prepared as a fiduciary
Tax return requirements (Primary)
Preparer with primary responsibility for accuracy of return MUST sign the return, enter PTIN on return, and give a copy of the return to the taxpayer no later than when presented for signature.
Preparer Tax Identification Number (PTIN) requirement
All paid tax return preparers (including attorneys, CPAs, and enrolled agents) must have a PTIN in order to prepare a federal tax return.
Standards for tax return positions
Tax return positions taken by a preparer must be reasonable.
- Undisclosed position must have substantial authority.
- Disclosed position must have a reasonable basis.
- The return cannot contain frivolous positions, which have no basis for validity in existing law or which have been deemed frivolous by the U.S. Tax Court or another federal court.
Preparer failures that result in $60 penalty (5)
A penalty of $60 for each occurrence up to a maximum of $30,000 a year for any failure relating to a return or claim for refund filed in 2024, unless it is shown that such failure is due to reasonable cause and not willful neglect:
- §6695(a) Failure to furnish copy of return to taxpayer
- §6695(b) Failure to sign return
- §6695(c) Failure to furnish identifying number
- §6695(d) Failure to retain copy or list
- §6695(e) Failure to file correct information returns
Penalties for fraud
- §7206 Fraud and false statements. Felony. Fine of not more than $250,000 ($500,000 if a corporation), 3 years prison, or both.
- §7207 Fraudulent returns, statements, or other documents. Misdemeanor. Fine of not more than $10,000 ($50,000 if a corporation), 1-year prison, or both.
Appealing preparer penalties
A preparer has 30 days to pay the penalty upon receipt of a demand for payment. The preparer can pay 15% of the penalty and file a claim for refund. If denied (or six months have passed), the preparer has 30 more days to begin a court proceeding to determine liability.
Preparer failures that result in $600 penalty
$600 per failure, no maximum penalty, for any failure relating to a return or claim for refund filed in 2024—reasonable cause exception does not apply:
- §6695(f) Negotiation of check penalty
- §6695(g) Failure to be diligent in determining eligibility for certain tax benefits – Those who prepare returns that claim EIC, AOTC, CTC/ACTC/ODC, and HOH filing status must not only ask all the questions required on Form 8867 but must also ask additional questions when information seems incorrect, inconsistent, or incomplete. In addition, the preparer must verify identity, prepare a computational checklist (Form 8867 or equivalent), and meet a recordkeeping requirement.
Understatement of liability §6694
A practitioner must not sign a tax return or claim for refund that the practitioner knows or reasonably should know contains an unreasonable position. No penalty if there is a reasonable cause and the preparer acted in good faith, otherwise the following penalties apply:
- Unreasonable positions – greater of $1,000 or 50% of preparer’s fee.
- Willful or reckless conduct – greater of $5,000 or 75% of preparer’s fee.
Unauthorized disclosure or use of tax return information
- §6713 civil penalty is $250 for each violation, up to a maximum $10,000 in a calendar year.
- §7216 criminal provision if preparer knowingly or recklessly discloses or uses tax return information. $1,000 penalty or 1-year prison, or both, for each violation.
Reasonable basis
- Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper.
- The reasonable basis standard is not satisfied by a return position that is merely arguable.
- If a return position is reasonably based on one or more of the authorities set forth in §1.6662–4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments), the return position will generally satisfy the reasonable basis standard.
Substantial authority
- There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.
- All authorities relevant to the tax treatment of an item, including the authorities contrary to the treatment, are taken into account in determining whether substantial authority exists.
More likely than not
The more likely than not standard is the standard that is met when there is a greater than 50% likelihood of the position being upheld.
Frivolous position
A frivolous position has no basis for validity in existing law or has been deemed frivolous by the U.S. Tax Court or another federal court.
Which standard of authority is the most stringent? Also, order of authority
The substantial authority standard is less stringent than the more likely than not standard but more stringent than the reasonable basis standard.
Most stringent to least stringent:
- more likely than not
- substantial authority
- reasonable basis
Tax evasion
Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are. Common evasion schemes include:
- Intentional understatement or omission of income
- Claiming fictitious or improper deductions
- False allocation of income
- Improper claims, credits, or exemptions
- Concealment of assets
Tax avoidance
Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent but shapes and preplans events to reduce or eliminate tax liability within the parameters of the law.
Standard of authority for tax shelter position
- Tax shelters have a higher standard and must have a confidence level of at least more likely than not (greater than 50% likelihood) that one or more significant tax issues would be resolved in the taxpayer’s favor.
- A tax shelter, for purposes of the substantial understatement portion of the accuracy-related penalty, is a partnership or other entity, plan, or arrangement, with a significant purpose to avoid or evade federal income tax.
Disclosure
- Provide adequate disclosure to avoid portions of the accuracy-related penalty or understatements due to unreasonable positions.
- Form 8275-R to disclose positions contrary to Treasury regulations.
- Form 8275 for other disclosures.
Negligence and Fraud
Negligence is a failure to make a reasonable attempt to comply with the provisions of the tax code or a failure to exercise the ordinary and reasonable care that a reasonable person would exercise when completing a tax return.
Fraud, unlike negligence, is a willful attempt to evade or defeat a lawful tax. Affirmative acts of fraud are actions taken by the taxpayer, return preparer and/or promoter to deceive or defraud.
When Form 8275 cannot avoid accuracy-related penalty (6)
The accuracy-related penalty attributable to the following types of misconduct cannot be avoided by disclosure on Form 8275:
- Negligence
- Disregard of regulations
- Any substantial understatement of income tax on a tax shelter item
- Any substantial valuation misstatement under chapter one of the Internal Revenue Code
- Any substantial overstatement of pension liabilities
- Any substantial estate or gift tax valuation understatements
Period of Limitations
- Later of 3 years from due date or 2 years after payment of tax to file a claim for refund.
- 3 years if taxpayer owes additional tax.
- 6 years if unreported income is more than 25% of gross income.
- 7 years for bad debt or worthless securities.
- No limit if return is fraudulent or not filed.
E-File process
- Must use e-file if preparing 11 or more returns
- E-File accepts returns for the current year and 2 prior years
- Only current year 4868 may be e-filed (extension request)
- Not considered filed until IRS acknowledges acceptance
- Electronic postmark date is considered the date of filing for timely filed return
