Source: https://www.currentfederaltaxdevelopments.com/blog/2015/4/5/penalty-under-6694-may-be-assessed-against-preparer-up-to-three-years-after-meritless-refund-claim-filed
Timestamp: 2019-04-20 04:45:19+00:00

Document:
The IRS addressed the period during which a penalty may be assessed against a preparer under IRC §6694 for having prepared a claim for refund that contained a meritless position in Chief Counsel Advice 201514008. As well the memo addressed the statute of limitations for the preparer to claim a refund of such a penalty.
A tax return preparer (P) prepares an amended tax return (Form 1040X) for a taxpayer for taxable year 2011. Such amended return shows an overpayment and includes a claim for refund. The return, though, contains a meritless filing position and the taxpayer’s reported overpayment on the amended return is based on the incorrect, meritless, position. The period of limitations on refunds or credits for taxable year 2011 will expire on the later of April 15, 2015 (3 years following the filing of the return), or two years following payment of 2011 tax. The taxpayer’s Form 1040X for year 2011 was a timely claim for refund because it was filed on or before April 15, 2015.
The request indicated that no such fact pattern was before this exam group at the time, but they wanted guidance for future use. Presumably they were concerned that the §6694 penalty’s statute might expire at the same time as the taxpayer’s ability to file the claim would have expired.
That, however, is not how this works.
Code section 6694(a) imposes a penalty on a tax return preparer for any return or claim for refund that he prepares resulting in an understatement of liability due to an unreasonable position, about which the preparer knew or reasonably should have known. The penalty is the greater of $1,000 or 50 percent of the income derived by the preparer from the return or claim. The regulation implementing section 6694(a) divides reporting positions into two categories in describing the standards against which the return preparer’s conduct is measured. Treas. Reg. § 1.6694-1(a)(1).
For positions other than those relating to tax shelters and reportable transactions, this preparer penalty applies when the return or refund claim includes an understatement of tax liability that is due to an undisclosed position for which the return preparer did not have substantial authority, or due to a disclosed position for which there is no reasonable basis. Treas. Reg. § 1.6694-1(a)(1). For positions respecting tax shelters or reportable transactions, the preparer penalty applies if the return or claim includes an understatement of liability for which it is not reasonable to believe that the position is more likely than not to be sustained on the merits. Id.; see generally United States v. Pugh, 717 F.Supp.2d 271, 288-89 (E.D. N.Y. 2010)(evidence was sufficient to sustain penalty against preparer who prepared returns containing understatements of tax due to the subtraction of wage and salary income when calculating gross income and deductions based on a frivolous “claim of right” scheme).
(1). . .The amount of any penalty under section 6694(a), section 6695, or 6695A shall be assessed within 3 years after the return or claim for refund with respect to which the penalty is assessed was filed, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period . . .
(2) Except as provided in section 6694(d), any claim for refund of an overpayment of any penalty assessed under section 6694 . . . shall be filed within 3 years from the time the penalty was paid.
In a footnote the memo explains that the exception in section 6694(d) described above applies if there is a final or judicial determination that the tax return did not contain an understatement—that is, the taxpayer prevails. That’s true even if the above three year statute has expired.
Thus the IRS has three years from the date the claim is filed to assess a penalty under §6694(a).
If the penalty is assessed and paid by the preparer, the memo notes that the preparer has 3 years from the date the penalty was paid to file a claim for refund pursuant to IRC §6694(b).

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