Wednesday, October 10, 2018

Tax Return Business Owner Not Penalized for Returns He Did Not Sign

A district court has determined on summary judgment in LOWERY v. U.S. that a return preparer who owned a tax preparation business was not liable for Code Sec. 6694 penalties with respect to returns that he didn't sign or help prepare.

The court found that IRS failed to show that the preparer had any involvement with those returns or that liability could nonetheless be imposed on the basis that he employed the preparers.

However, the court denied the preparer's motion for summary judgment with respect to the returns signed by him, stating that whether he acted willfully under Code Sec. 6694 was a factual issue to be decided by a jury.

IRC Sec. 6694(b) provides in relevant part that a penalty will be assessed on any tax return preparer who prepares a tax return “with respect to which any part of an understatement of liability is due to...a willful attempt in any manner to understate the liability for tax on the return or claim, or...a reckless or intentional disregard of rules or regulations.”

A “tax return preparer” is “any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title.” (Code Sec. 6694(f))

A “signing preparer” is “any preparer who signs a return of tax or claim of refund as a preparer.” (Reg. § 1.6694-2) “[T]he signing tax return preparer generally will be considered the person who is primarily responsible for all of the positions on the return.” (Reg. § 1.6694-1(b)(2)) “A nonsigning tax return preparer is any tax return preparer who is not a signing tax return preparer but who prepares all or a substantial portion of a return or claim for refund...” (Reg. § 301.7701-15(b)(2))

Under Reg. § 1.6694-1(b)(3), if there is no signing tax return preparer within a firm or if the signing tax return preparer is determined not to be primarily responsible for the position(s) on the return giving rise to the understatement, the nonsigning tax return preparer within the firm with overall supervisory responsibility for the position(s) giving rise to the understatement generally will be considered the tax return preparer who is primarily responsible for the position for purposes of Code Sec. 6694.

Marshall Lowery was the sole member of an LLC that employed individuals, including Lowery, to provide tax preparation services to clients.

IRS originally sought to impose $170,000 in tax preparer penalties against Lowery ($5,000 penalty × 34 returns). This amount was ultimately reduced to $77,500, reflecting a full $5,000 penalty for each of the six returns that he prepared and a 50% penalty for 19 returns prepared and signed by other employees of Business.

The Appeals Officer who recommended the reduced penalty noted that is was unclear in certain instances whether Mr. Lowery would be determined to be the tax return preparer, and that there were "significant evidentiary hazards" with respect to a number of returns.

Notice and demand was sent to Lowery, who made partial payment and filed a claim for refund. IRS took no action on the refund claim, so Lowery filed a refund suit.

In its answer and counterclaim, the government sought to reduce the outstanding tax assessments against Lowery to judgment, contending that he was the "statutory return preparer of returns filed by the Business" because he is its sole owner.

Both parties filed motions for summary judgment. The court found that Lowery was entitled to summary judgment with respect to the 19 returns that he didn't prepare. The court found that there was no evidence that Lowery was involved in the preparation of these returns, and also found that IRS failed to introduce any authority that would support holding him liable given his lack of involvement.
Although IRS pointed to two separate cases, the court found that neither of these cases actually stood for the proposition of imposing Code Sec. 6694 liability against an employer. Accordingly, the court found that since he wasn't involved in the preparation of these returns, he could not be held liable for the alleged understatements of tax liability on them.

However, the court denied Lowery's motion with respect to the remaining six returns, finding that the question of whether his conduct was willful or reckless was one of fact that should be decided by a jury.

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