The report from TIGTA, requested by the IRS Oversight Board, examined IRS supervision of unenrolled tax return preparers. The main purpose was to determine if the IRS is effectively enforcing and applying penalties to tax practitioners as required by Internal Revenue Code Section 6694. This tax law provision imposes penalties on paid preparers who take unreasonable positions or intentionally prepare inaccurate returns for clients.
TIGTA reviewed 98 out of 2,345 cases showing penalties totaling $9.35 million from 2009 through 2011. In eight of the cases, the immediate supervisors didn't properly approve $19,000 in preparer penalty assessments as required by law. No Section 6694 penalty can be assessed unless an initial determination is personally approved in writing by an immediate supervisor.
Such failures could potentially doom IRS efforts to litigate penalty assessments in court. When the IRS was notified of this issue, it initiated immediate corrective actions that emphasize the need to properly approve, in writing, penalty assessments for paid tax return preparers.
TIGTA also reviewed the procedures for determining if tax return preparer penalties were being properly evaluated and documented. It found that the cases weren't always adequately documented by the facts supporting the IRS' position. This could result in a conclusion that IRS managers aren't adhering to the documentation requirements in such cases.
Finally, TIGTA analyzed the Master File to determine if the IRS is effectively enforcing paid preparer penalties. It found that the IRS isn't treating this issue as a top priority, so it often goes by the wayside. Without increasing its emphasis on policing tax return preparers, TIGTA says it's unlikely the IRS can change its behavior and increase voluntary compliance.
In summary, the new report advises the IRS to update its manual to improve procedures for documenting actions in paid preparer penalty case files. TIGTA also recommends the IRS develop procedures to expedite assigning accounts to case workers as well as giving more consideration before suspending collection actions on these types of accounts.
IRS officials agreed with all of TIGTA's recommendations. The IRS says it's putting corrective actions in motion. Tax return preparers should be aware that there's a new sheriff in town.