Source: https://www.currentfederaltaxdevelopments.com/blog/2018/11/17/s-shareholder-likely-cannot-be-penalized-under-irc-6695g-but-corporation-itself-may-be-liable
Timestamp: 2019-09-22 19:31:05
Document Index: 12283147

Matched Legal Cases: ['§6695', '§6695', '§1', '§1', '§1', '§ 1', '§1', '§ 1', '§ 1']

S Shareholder Likely Cannot Be Penalized Under IRC §6695(g), but Corporation Itself May Be Liable — Current Federal Tax Developments
IRC §6695(g), after amendment by the Tax Cuts and Jobs Act, reads as follows:
The IRS has issued regulations, found at Reg. §1.6695-2, that provide for the procedures for the preparer to follow. Under Reg. §1.6695-2(b)(1) the preparer must properly complete IRS Form 8867, Paid Preparer’s Due Diligence Checklist, as noted below:
(1) Completion and submission of Form 8867
(i) The tax return preparer must complete Form 8867, Paid Preparer's Due Diligence Checklist, or complete such other form and provide such other information as may be prescribed by the Internal Revenue Service (IRS), and
As well, Reg. §1.6695-2(b)(3)(i) provides the following knowledge requirements:
(i) In general. The tax return preparer must not know, or have reason to know, that any information used by the tax return preparer in determining the taxpayer’s eligibility to file as head of household or in determining the taxpayer’s eligibility for, or the amount of, any credit described in paragraph (a) of this section and claimed on the return or claim for refund is incorrect. The tax return preparer may not ignore the implications of information furnished to, or known by, the tax return preparer, and must make reasonable inquiries if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. The tax return preparer must also contemporaneously document in the preparer’s paper or electronic files any inquiries made and the responses to those inquiries.
For the year this issue arose, prior, virtually identical, temporary regulations governed in this area. The email notes that, generally, merely holding an equity interest in a tax preparation S corporation would not make the shareholder a preparer subject to this penalty:
Temporary regulation § 1.6695-2T(b)(3) provides generally that the tax return preparer must not know, or have reason to know that any information used by the tax return preparer in determining the taxpayer's eligibility for, or the amount of, any credit described in paragraph (a) of this section and claimed on the return or claim for refund is incorrect. We think that this specific knowledge requirement would present a legal hazard for assessing the penalty provided for under section 6695(g) directly on the SSN of the 25% co-owner of the S-Corp. However, we do not have enough facts in our possession to make a recommendation in your specific case.
But the S corporation itself, as the party hiring the preparer who presumably violated the due diligence rules, could be liable under the regulations. Reg. §1.6695-2(c) provides:
(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 --
The email points out that the S corporation itself, rather than the shareholder, may be appropriate party to penalize in this fact situation.
The S-Corp may be a tax return preparer within the definition of section 7701(a)(36) if it employs a person who prepares a tax return for compensation. The S-Corp may be the proper person on which to assess the penalty under section 6695(g) pursuant to Treasury regulation § 1.6695-2(c) if one of the requirements set forth in that section are met. We do not have enough facts in our possession to make a recommendation as to whether the S-Corp in your case meets these requirements. In addition, there are likely legal hazards with assessing the penalty provided for under section 6695(g), pursuant to Treasury regulation § 1.6695-2(c), directly on the SSN of the 25% co-owner of the S-Corp because it is the S-Corp that employees the preparers and not the co-owner.