Vince Nardone: Tax and Controversy

Tax Return Preparer's Sentence Enhanced; Abuse of Position of Trust - Tax Fraud (Criminal)

In a Sixth Circuit decision, the Court held that a district court's remand decision resentencing a taxpayer for conspiring to defraud the IRS, and using stolen identities to file false returns for personal benefit, was affirmed.  The Court found that the sentence was appropriately enhanced for taxpayer's abuse of position of trust that he held with a friend to steal the friend's children's personal information and make false returns.  A Multiple victim enhancement was also appropriate based upon the taxpayer's earlier admission that the scheme involved 31 individual victims.  The Court found that his belated attempt to raise a new argument that the IRS was the only real victim was rejected.  And, the record otherwise indicated that sentence was reasonable.

Facts

This action arose out of the sentencing of the taxpayer for one count of conspiracy to defraud the IRS in violation of 18 U.S.C. § 286; and one count of identity theft in violation of 18 U.S.C. § 1028(a)(7).  From 1999 through 2002, the taxpayer engaged in a scheme to defraud the IRS by preparing false tax returns using stolen names and social security numbers.  The taxpayer's aunt, Katherine King, also participated in the scheme.  Some of the names and social security numbers used for the false tax returns were obtained from legitimate tax returns that the taxpayer prepared for friends and acquaintances.  One such instance involved an individual named Thaddeus Taylor (“Taylor”) who the taxpayer met while in a rehabilitation facility.  The taxpayer prepared a legitimate tax return for Taylor.  But, the taxpayer filed false tax returns using the names and social security numbers of Taylor's children, which he obtained while preparing Taylor's tax return. Taylor was not a participant in the scheme. Other names and social security numbers were allegedly taken from a local newspaper that published such information in regard to child guardianship matters.

Abuse of Position of Trust

The taxpayer filed an appeal to the sentencing arguing that the district court misapplied U.S.S.G. § 3B1.3 when it enhanced his sentence based upon an abuse of a position of trust.  According to the taxpayer, the district court erred by imputing the relationship between Taylor and the taxpayer to Taylor's children and the taxpayer.  The taxpayer argued that under Guidry, the position of trust must be found in relation to the victim of the offense, and there must be pecuniary loss.  According to the taxpayer, the victims of the offense of identity theft are Taylor's children, with whom the taxpayer did not have a position of trust and who suffered no pecuniary loss. The taxpayer concluded that because the § 3B1.3 enhancement was predicated on the taxpayer's relationship with Taylor, whose identity was not stolen, the enhancement was improper.

The Court reasoned, however, that the plain language of § 3B1.3 states that “[i]f the defendant abused a position of public or private trust ... in a manner that significantly facilitated the commission or concealment of the offense,” the enhancement applies.  The taxpayer does not deny that he held a position of trust with Taylor, or that he stole Taylor's children's personal information. Under the plain language of § 3B1.3, the taxpayer abused his position of trust with Taylor in a manner that significantly facilitated the offense of identity theft with respect to Taylor's children - and the enhancement should apply.  The Court notes, however, that there is a line of cases that seemingly narrows the broad application of this enhancement. The Sixth Circuit has held that “[i]n order for the abuse of a position of trust enhancement to be applied to a defendant, the evidence must show that the defendant's position with the victim of the offense significantly facilitated the commission of the offense.” See United States v. Moored, 997 F.2d 139, 145 (6th Cir. 1993)(emphasis added). 

In Moored, the defendant used his position as a trustee at a local college to bolster his credibility with lenders and fraudulently obtain a loan.  The defendant pled guilty to fraud charges. The district court applied a two-level enhancement for abuse of a position of trust pursuant to § 3B1.3. The district court held “Mr. Moored's affiliation with Jordan College as an officer, trustee, and/or affiliate was used to facilitate the commission of the fraudulent documents that were sent through the wire, and therefore, the two point addition under 3B1.3 is clearly in order in this particular matter.” Moored, 997 F.2d at 142.  The Sixth Circuit agreed that in the commission of the offense, the defendant abused his position of trust with the college.  But, the Court disagreed that the abuse was sufficient to warrant application of the enhancement for abuse of a position of trust.  The defendant argued that his position was “no different from any other loan applicant's” and that finding his crime worthy of the abuse of trust enhancement “would permit an enhancement for any defrauding borrower who, in the course of loan negotiations, discloses a position of trust, even if that position had nothing to do with the loan decision.” Id. at 144.  The Moored court noted that the situation in which a defendant abused a position of trust with someone other than the victim of the charged conduct was novel.  The Moored court found that the district court's approach was “overly broad.” Id. at 145. The court held:

Applying the standard that the lower court applied, a sentencing court would enhance the sentence of virtually every defendant who occupied any position of trust with anyone, victim or otherwise. An argument could be made in virtually every case that the position of trust, though not directly a part of the offense conduct, had some remote connection with the defendant's crime.

In order for the abuse of a position of trust enhancement to be applied to a defendant, the evidence must show that the defendant's position with the victim of the offense significantly facilitated the commission of the offense. In this case, the Defendant held no position of trust with the intended victims of his offense. Accordingly, we find that the district court incorrectly enhanced Defendant's offense level.

Moored, 997 F.2d at 145.

In this case, the lower court stated that it applied the § 3B1.3 enhancement based on an abuse of the taxpayer's position of trust with Taylor, specifically in regards to the identity theft of Taylor's children's information. Thus, the Court reasoned that the first issue was whether the taxpayer held a position of trust with the victims of the charged offense of identity theft, i.e. Taylor's children.  The Court recognized that the government argued that the relationship between the taxpayer and Taylor should be imputed to Taylor's children, who relied upon their father's relationship with his tax preparer to protect their confidential information.  The Court agreed with the government's argument under these particular circumstances.  The Court went onto say that it was undisputed for purposes of this appeal, that the taxpayer held a position of trust with Taylor.  The taxpayer, in the course of preparing legitimate tax returns for Taylor, obtained Taylor's children's personal information and used that information to file false tax returns. Where a parent provides the personal information of his children for the purpose of tax preparation, it is reasonable that any trust relationship between the parent and the preparer extends to the children and the preparer. 

The Court indicated that this was different than the situation addressed in Moored.  In Moored, the Court was concerned with application of § 3B1.3 where the position of trust relied on to support the enhancement had nothing to do with the conduct that was the substance of the charged offense.  The Court sought to prevent application of the enhancement where the relied on position of trust had only “some remote connection with the defendant's crime.” Moored, 997 F.2d at 145. Such is not the case here.  The taxpayer's position of trust with Taylor, however, was his sole means of gaining Taylor's children's personal information.  Further, Taylor only provided his children's information to facilitate legitimate tax return preparation.  Under these circumstances, the Court found that the district court was correct in extending the position of trust that the taxpayer held with Taylor to Taylor's children.

Substantive Reasonableness

The taxpayer also argued that his sentence is substantively unreasonable because the taxpayer’s “conduct does not warrant a sentence 84 months.  But, as the Court noted, the taxpayer's brief was submitted before the Supreme Court decided Rita and Gall v. United States, --- S.Ct.----, No. 06-7949, 2007 WL 4292116 (2007).  In Rita and Gall, the Supreme Court upheld the application of a presumption of reasonableness to sentences that fall within the applicable Sentencing Guidelines range.  Liou, 491 F.3d at 338 (citing Rita, 127 S.Ct. at 2459).   The Court stated that the taxpayer’s argument did not convince the Court that this presumption of reasonableness does not apply to his case simply by stating that his sentence was too long.  See United States v. Crowell, 493 F.3d 744, 751 (6th Cir. 2007)(“[The defendant] contends the sentence is longer than it need be, but the “mere allegation that the sentence imposed is greater than necessary to achieve the goals of punishment in § 3553(a) is insufficient to rebut the presumption of reasonableness.”)(citation omitted).  The Court found that the taxpayer failed to offer any explanation as to why 84 months is an unreasonably lengthy sentence. Accordingly, the Court found that the sentence imposed by the district court was not unreasonable.

See (U.S. v. Sedore, CA 6, 101 AFTR 2d ¶2008-382)

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IRS, Audit Statistics out for 2007, IRS enforcement is up — Tax Audits

As reported in a statement issued by the IRS, the Service continues to make strong progress in a number of key enforcement areas. See the attached written discussion from the Service directly below.

Download irs_reports_audit_results.PDF

The Services enforcement efforts continued to increase in fiscal year 2007. For instance, the Service audited 84% more returns of individuals with incomes of $1 million or more than during 2006. And, overall the enforcement efforts increased revenues by $59.2 billion, up from $48.7 billion in 2006. See the chart below, which highlights the increased enforcement for 2007.

Download irs_increased_audit_results.PDF

Individual Enforcement.  Overall, the total individual returns audited was 1,384,563 in 2007 (an increase of 7% from 2006). There were 293,188 audits of individual returns with income of $100,000 or more (an increase of 13.7% from 2006). There were 113,105 audits of individuals returns with incomes over $200,000 (an increase of 29.2% from 2006). Audits of individuals with incomes of $1 million or more increased to 31,382 during fiscal year 2007 (an 84% increase from 2006) with the result that one out of 11 individuals with incomes of $1 million or more faced an audit in 2007.

Business Enforcement.  Overall, audits of businesses in general rose to 59,516 (an increase of almost 14% from 2006). IRS continued its efforts to review more returns of flow-through entities—partnerships and S corporations. There were 17,681 audits of S corporations (an increase of 26% from 2006), and 12,195 audits of partnerships during 2007 (an almost 25% increase from 2006). Large corporate audits were down slightly, but audits of returns of mid-market corporations (those with assets between $10 million and $50 million dollars) rose. Audits of mid-market corporations increased to 4,473 (an increase of 6% from 2006), while the audits of large corporations declined slightly in 2007 to 9,644 audits.

See the spreadsheet attached, which highlights the audit activities. 

Download irs_spreadsheet_of_enforcement_activities.PDF

Tax Return Preparer Prosecuted, Sentenced Affirmed

Another tax return preparer subject to the Department of Justice’s prosecution. In Daulton, the return preparer’s, and also former truck driver, sentence for assisting preparation of false returns that claimed fraudulent "automatic" deductions for truck driver clients was affirmed. According to the Sixth Circuit, the district court properly calculated tax loss under preponderance of evidence standard. The Court also found that the district court properly allowed evidence of certain acts or material outside indictment because such was closely related and intrinsic to charged acts. It further stated that even if not intrinsic to charged acts, however, subject evidence would still be admissible because it went to preparer's methodology and plan for claiming false deductions; and the defendant suffered no undue prejudice.

Also, sophisticated means enhancement was appropriately imposed based on proof preparer did not just lie on clients' returns, but used his specialized knowledge of trucking industry to claim deductions for industry-common expenses that weren't actually incurred by his clients, instructed employees how to calculate those unincurred expenses, and made promotional video advertising his ability to obtain high refunds. And, while court may have erred insofar as considering harsh version of U.S.S.G. in effect at time of sentencing, error was at most harmless and resulted in no Ex Post Facto violation because court actually considered that version in tandem with earlier U.S.S.G. version in effect at time of offense, took all relevant 18 USCS 3553(a) factors into account, and imposed sentence within advisory range applicable under either U.S.S.G. version.

This case provides a good discussion of the loss calculation that defense attorneys and taxpayers must be intimately familiar with in dealing with the Department of Justice. Also, the government’s ability to bring in certain extrinsic evidence of uncharged conduct is also highlighted in this case, which also is very important for defense attorneys and taxpayers to understand.

See U.S. v. Daulton, CA 6, 101 AFTR 2d ¶2008-353 attached below. 

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Collection Due Process Hearing appealed, Taxpayer Successful (I think).

In this case, an auto dealership was granted a second remanded CDP hearing on IRS's administrative determination to proceed with liens for its employment tax deficiencies and penalties: The appeals officer erred in original hearing insofar as failing to properly consider taxpayer's underlying liabilities disputes and argument that penalties should be abated on basis of bank errors in EFTPS transactions. Although taxpayer wasn't entitled to abatement on basis of certain other theories it was advancing, it was entitled to be heard on bank error/EFTPS transaction error theory. So, officer was ordered to give that issue proper consideration on remand. Officer was also ordered to consider effect of IRS's earlier failure to properly apply certain agreed payments and adjustments. And, while he had been correct insofar as determining that taxpayer had not submitted necessary information to support any collection alternative during original hearing, officer was required to re-consider same in light of foregoing issues and to conduct renewed balancing analysis. See Don Johnson Motors v. U.S., DC TX, 101 AFTR 2d ¶2008-335 attached. 

Now, this case highlights that in some instances appeals officers make mistakes in these cases, but the question I have is: Is it worth appealing and maybe it is. Because what you do not hear about is what happens when the case is remanded.  That is, most of these cases are procedural errors and once it is remanded to the appeals officer you are likely to find that the appeals officer corrects the procedural error and the end-result is the same. That is, the taxpayer loses. What is more important is working with the appeals officer at the appeals so that the taxpayer can obtain a satisfactory result without having to pursue litigation, which in most instances is cost prohibitive—although I recognize that you may obtain that one appeals officer that is simply not going to work with you.

This case also provides a good discussion on reasonable cause and the abatement of certain penalties.

Download 1373689.PDF

IRS Reports on Frivolous Claims to Avoid Paying Taxes, Tax Fraud - Civil

Today, the Internal Revenue Service issued a notice that lists four additional erroneous legal positions that taxpayers should refrain from using as an excuse to avoid paying their taxes. An individual or group may not avoid paying their fair share of taxes by making “frivolous” legal arguments such as those listed in this notice. The IRS publicizes these frivolous claims to help taxpayers understand the law and avoid penalties. More importantly, as Wesley Snipes has found out (the hard way), the government also prosecutes individuals from taking positions on tax returns that are frivolous in nature.

Notice 2008-14 lists positions identified as frivolous for purposes of the penalty under section 6702 of the federal tax code for filing a frivolous tax return or submitting to the IRS a frivolous request for a collection due process hearing or application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order. Taxpayers who file a tax return or make a submission based on a position listed in this notice are subject to a $5,000 penalty. This notice adds to the positions listed in Notice 2007-30, 2007-14 I.R.B. 883.

The positions that have been added are found in paragraphs 9(g), 11, 14, and 25. The four new frivolous claims pertain to the following: (1) Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending. (2) Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS. (3) A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals. (4) Certain instances of misuse or excessive use of the section 6421 fuels credit. In 2006, Congress increased the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous. See the attached Notice 2008-14.

Download tax_fraud_frivolous_claims.PDF

Sentencing, Reasonableness Standard, Filing False Returns - Tax Fraud (criminal) and Sentencing.

In a recent decision from the 4^th Circuit, a Professional testing corp. owner/self-confessed addicted gambler's 7206(1) conviction, for filing false returns omitting substantial income that he diverted from corp. for personal use, was affirmed. The court held that the district court was within its discretion in excluding psychiatrist testimony which taxpayer proffered to support willfulness defense, claiming that as pathological gambler, he lacked requisite intent to commit Code Sec. 7206((1) crime and instead honestly believed diverted funds were loans necessary to support his gambling habit. Psychiatrist testimony had little or no probative value on question of whether taxpayer held specific intent to file return he believed to be false. Court also properly excluded, in part due to confusion and lack of proper notice, abstract testimony by forensic accountant about “seven primary indicators” of tax fraud. Taxpayer's claim that he didn't give timely notice because he didn't know he'd need subject testimony, until surprised by govt.'s expert's characterization of his transactions as diversions and misappropriations, was incredible.

Although the evidentiary rulings were interesting and worth discussing, what is more telling from this case is the government’s motion to dismiss its cross-appeal.  In its cross-appeal, the government challenged the reasonableness of the district court's variance sentence, which was 43% below the 63–72 month range recommended by the Sentencing Guidelines. Following the Supreme Court's recent decisions in Gall v. United States, 552 U.S. __, No. 06-7949 (Dec. 10, 2007), and Kimbrough v. United States, 552 U.S. __, No. 06-6330 (Dec. 10, 2007), however, the government voluntarily dismissed its cross-appeal, and we approve its dismissal request. 

This dismissal recognizes the district court’s discretion given the U.S. Supreme Court decisions and is a good result for defense counsel and their clients when it comes to the court’s willingness to provide a sentence below the guideline range.

          See U.S. v. Hayez, 101 AFTR 2d ¶2008-302 (4^th Cir. 2008), attached as a pdf. 

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Tax Attorneys and Accountants Beware: Valuation Penalty Applies

The Service has stated in a memorandum (AM 2007-0017, 10/31/07) that it may assess a Section 6695A penalty against an appraiser for appraisals prepared after 5/25/07 that are used in connection with an estate or gift tax return or claim for refund or credit that results in a gross valuation misstatement. It also said that no limitations period applies to the assessment of Section 6695A penalties.  See the IRS memorandum below.

REFERENCE: 200542034, October 21, 2005, Released

CC:PA:APJP:B02, POSTF-119683-05, UILC: 6695.01-00, 7701.18-00

TEXT:

date: July 14, 2005

to: Joseph M. Abele

Associate Area Counsel (Philadelphia, Group 1)

(Small Business/Self-Employed)

(CC:SB:2:PHI:1)

from: Ashton P. Trice

Branch Chief, Administrative Provisions & Judicial Practice, Branch 2

(Procedure & Administration)

(CC:PA:APJP:B02)

subject: Application of the preparer penalty under section 6695(d)

This Chief Counsel Advice responds to your request for assistance dated April 14, 2005. This advice may not be used or cited as precedent.

ISSUES

1) Whether the "income tax return preparer" for purposes of applying the penalty under section 6695(d) is an S corporation or the sole-shareholder/owner of the S corporation who signed most of the returns.
2) Whether the penalty under section 6695(d) can be assessed when the preparer failed to produce copies of returns prepared or list of clients served pursuant to a summons and also failed to comply fully with a court order resulting from a summons enforcement hearing, which required the preparer produce copies of the bills to clients.

CONCLUSIONS

1) The penalty under section 6695(d) should be assessed against the S corporation  [*2]  if the shareholder is an employee of the S corporation under common law rules. If the shareholder is not an employee, the penalty should be assessed against the shareholder directly.
2) The Service can assess the penalty against the income tax return preparer under section 6695(d) when the preparer failed to comply with a summons or court order relating to the Service's request for returns or preparer's list retained under section 6107(b).

FACTS

A Subchapter S corporation (S Corporation) is in the business of tax return preparation. S corporation has one shareholder (Shareholder) and at least one employee, the niece of the shareholder (Niece). It is unclear whether others are employed by S Corporation, as well. The Service doesnot know all the details pertaining to the relationship between the Shareholder and S Corporation. Shareholder has not received wages from S Corporation. S Corporation did pay wages to Niece for the services she performed for the company.

Both Shareholder and Niece have signed returns as the preparer for S corporation. Shareholder has prepared the majority of the returns that S Corporation prepared for clients. Approximately one-half of the returns Shareholder signed  [*3]  included the name and EIN of S Corporation. Shareholder signed the other approximate half of the returns using only her name and social security number.

A revenue agent conducted an audit of S Corporation. The Service requested the list of returns, and/or copies of returns, required to be maintained pursuant to section § 6107(b) from Shareholder for the [TEXT REDACTED] and [TEXT REDACTED] taxable years. Shareholder did not cooperate and the Service summoned the returns. The Service commenced an action to enforce the summons. During the enforcement action, Shareholder stated that she could not retrieve and print the requested information from her computer and was concerned about the revenue agent having the social security numbers of her client base. Therefore, the Court ordered Shareholder to produce her bills to clients. Following the enforcement action, Shareholder produced these records pertaining to approximately 400 returns, which were incomplete in some respects. The Service's computer records indicate that Shareholder and S Corporation prepared approximately 1500 returns during the years at issue. Thus, the Service assessed the penalty under section 6695(d) for the remaining  [*4]  approximately 1100 returns against Shareholder and S Corporation separately.

LAW AND ANALYSIS

Any person who is an income tax return preparer with respect to any return or claim for refund who fails to comply with section 6107(b) with respect to such return or claim shall pay a penalty of $ 50 for each such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. I.R.C. § 6695(d). The maximum penalty imposed under this subsection on any person with respect to any return period shall not exceed $ 25,000. Id.

Section 6107(b) requires an income tax return preparer with respect to a return or claim for refund, for a period of three years after the close of the return period, to (1) retain a completed copy of the return or claim, or retain, on a list, the name and taxpayer identification number of the taxpayer for whom the return or claim was prepared; and (2) make the copy or list available for inspection upon request by the Service.

Issue 1: Whether S Corporation or Shareholder is the preparer subject to penalty

An income tax return preparer is any person who prepares for compensation, or who employs one or more persons to prepare for compensation,  [*5]  all or a substantial portion of any return of tax imposed by subtitle A or any claim for refund of tax imposed by Subtitle A. I.R.C. § 7701(a)(36)(A); Treas. Reg. § 301.7701- 15(a). In addition, the regulations under section 6107 provide the general rule that, where there is an employment arrangement between two or more income tax return preparers, the person who employs (or engages) one or more other persons to prepare for compensation any return or claim for refund (other than for the person) shall be considered to be the sole income tax return preparer. Treas. Reg. § 1.6107-1(c).

In the instant case, S Corporation employed Niece (and possibly others) to prepare tax returns. Because S Corporation employs agents or employees to prepare income tax returns for compensation, S Corporation is an income tax return preparer with respect to those returns or claims for refund for purposes of sections 6107(b) and 6695(d).

Likewise, with respect to the returns Shareholder prepared, the issue of who is subject to the section 6695(d) penalty depends upon whether S Corporation employed Shareholder. Whether S Corporation employed Shareholder is determined under common law rules applicable in determining  [*6]  the employer-employee relationship. See Nu-Look Design, Inc. v. Commissioner, 356 F.3d 290 (3d Cir. 2004); American Consulting Corp. v. United States, 454 F.2d 473, 477 (3d Cir. 1971). Several factors used to determine the existence of the employer-employee relationship are (1) the right to control the details of the work; (2) furnishing of tools and the work place; (3) withholding of taxes, workmen's compensation and unemployment insurance funds; (4) right to discharge; and (5) permanency of the relationship. American Consulting Corp., 454 F.2d at 477; See Treas. Reg. § 31.3121(d)-1(c)(2). Although no one factor is controlling, the most important factors is the right to control. Id. Some cases have held that where a sole-shareholder of an S corporation is the "central worker" of the corporation and performs more than minor services for the corporation, the sole-shareholder should be treated as an employee. See, e.g., Nu-Look Design, Inc., 356 F.3d 290; Spicer Accounting, Inc. v. United States, 918 F.2d 90 (9th Cir. 1990).

If facts reveal that there was an employer-employee relationship between S Corporation and Shareholder for some or all of the returns Shareholder signed, then  [*7]  with respect to those returns, the penalty under section 6695(d) should only be asserted against S Corporation. If facts show that there was no employer-employee relationship for some or all of the returns Shareholder signed, then with respect to those returns, the penalty under section 6695(d) should only be asserted against Shareholder as the actual preparer. If S Corporation did not employ Shareholder, then Shareholder should be considered the preparer because she prepared the returns for compensation.

You wondered if the fact that Shareholder signed the majority of the returns was a key factor here, especially as Shareholder signed half of the returns using only her own name and EIN. Because we don't believe this action bears on the test for determining whether Shareholder is an employee, we don't believe that this fact is key to determining the applicability of the section 6695(d) penalty. We also note that the individual who prepares a taxpayer's return is required to sign the return and provide his or her taxpayer identification number. I.R.C. §§ 6109(a)(4), 6695(b), (c); Treas. Reg. §§ 301.6109-2(a)(1), 1.6695-1(b)(1). Failure to do so may result in a penalty, absent reasonable  [*8]  cause. I.R.C. § 6695(b), (c). If there is an employment arrangement between two or more income tax return preparers, the identification number of the employer must also appear on the return or claim. I.R.C. § 6109(a)(4); Treas. Reg. § 301.6109-2(a)(1). Similarly, failure to provide the employer identification number may result in a penalty, absent reasonable cause. See I.R.C. § 6695(c). In this case it appears that the name and EIN of the S corporation did not appear on all of the returns prepared by the shareholder. As it is not clear whether or not the shareholder was an employee of the S corporation, we do not have sufficient facts to determine if the absence of the S corporation's identification was due to an error or because there was no employment arrangement between Shareholder and S Corporation. As stated above, the key test here for purposes of section 6695(d) is whether Shareholder was an employee of S Corporation.

Issue 2: Whether the section 6695(d) penalty can be assessed

In this case, pursuant to the Court's determination at the summons enforcement action, Shareholder produced "buck slips," or bills to the clients, for approximately 400 of the estimated 1500 returns  [*9]  at issue. The Service assessed a penalty under section 6695(d) for each failure to provide the information with respect to the remaining approximately 1100 returns. In a subsequent e-mail, you questioned whether the section 6695(d) penalty could be asserted here where the Court ordered the employee only to produce the "buck slips" or bills to the clients and did not order the preparer to produce copies of the returns. It is unclear from the facts provided exactly why the Court ordered the bills to be produced in lieu of other records required to be maintained and produced under section 6107(b). As it does not appear from the facts that a penalty was assessed for any instance where the bills to clients were produced, we do not need to address such a situation here.

In addition, keep in mind that if, as the case develops, Shareholder establishes enough facts to prove that the failure to provide the information with respect to the taxpayer was due to reasonable cause and not due to willful neglect, then the penalty will need to be abated with respect to each instance for which she establishes reasonable cause. See I.R.C. 6695(d).

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

[TEXT  [*10]  REDACTED]

This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views