IRS Penalties and OPR (Office of Professional

Responsibility)

Presented bySidney Goldin, CPA, MS

Taxation

I. Penalties—A big deal for IRS

A. Substantial Revenue Raisers1. 37.9 million penalties assessed in

2012

2. Total value of $27 billion dollars

1. Deterring non-compliance

2. Establishing fairness by punishing non-compliant taxpayers

B. Deterrent Effect

C. Penalty Policy Statement

1. End game should be future compliance, not punitive punishment

2. Duty of consistency—similar cases should be treated alike

3. Opportunity to have adequate penalty defense

4. 4. Careful thought and consideration by IRS to make fair and correct decision

C. Penalty Policy Statement (cont’d.)

5. Impartial and honest decision should be made, objective enforcement

6. Promote voluntary compliance not for purpose of raising revenue

7. Resolve each case in a prompt manner

D. Good Sound Bites, But Seldom Followed

1. Non-filing penalties—most common for preparers—missed extensions, inadvertent error

2. Examiners propose assessment of accuracy related (20%) penalties automatically without forethought on reports

3. Small error rates from CPA firms, not reasonable cause for IRS

E. Most Common types of Penalties

1. Failure to File

a. 5% per month or part of month return not filed—limit 25%

b. Reasonable estimate for extension required per IRS regulation

(1.6081)

c. High estimate is recommended, even if little or no payment made

E. Most Common types of Penalties (cont’d.)

2. Failure to pay

• ½ of 1% per month or part of month—limit 25%

3. No tax due, no penalties

• In later examination, if deficiency found, penalty imposed from original due date

E. Most Common types of Penalties (cont’d.)

4. Accuracy related penalty

a. Based on underpayment

b. Usually enforced at audit level

c. Only applied where return was filed; doesn’t apply on substitute returns.

E. Most Common types of Penalties (cont’d.)

5. Fraud Civil Penalty

a. 75% of deficiency or underpayment

b. Burden of proof is on IRS to prove intent

E. Most Common types of Penalties (cont’d.)

6. Trust Fund Recovery Penalty

a. 100% of trust fund portion of corporation liability

b. Imposed on “responsible” persons

E. Most Common types of Penalties (cont’d.)

6. Trust Fund Recovery Penalty (cont’d.)

c. Can have very broad meaning

i) Responsible persons can include bankers or other lenders who provide or pay funds directly to employers specifically earmarked for wages with knowledge that the employer will not deposit payroll taxes

E. Most Common types of Penalties (cont’d.)

6. Trust Fund Recovery Penalty (cont’d.)

c. Can have very broad meaning (cont’d.)

ii) However recent abatement of penalty was obtained by office who paid employees when other creditors weren’t paid

E. Most Common types of Penalties (cont’d.)

7. Failure to Deposit Employment Taxes

a. Made within 5 days—2%

b. 5-15 days—5%

c. More than15 days—10%

E. Most Common types of Penalties (cont’d.) 7. Failure to Deposit Employment Taxes (cont’d.)

d. Criminal (jail time) penalties also possible—have

been imposed in egregious cases

e. Imposed on corporation—not to be confused with

TFRP

E. Most Common types of Penalties (cont’d.) 8. Preparer Penalties

a. Unreasonable positions

i) For undisclosed positions— no substantial authority— e.g., code, regs. case law, rev. rulings, tech. advice memorandums

ii) For disclosed positions—no reasonable basis or

frivolous arguments

E. Most Common types of Penalties (cont’d.)

8. Preparer Penalties (cont’d.)

b. No penalty if reasonable cause or good faith exists

c. Examiners can “write up” preparers for penalties if adjustments exists— “non” signing or “signing”

preparers. Required to consider in all cases.

E. Most Common types of Penalties (cont’d.) 8. Preparer Penalties (cont’d.)

d. Handled as separate cases, not allowed to discuss with

taxpayers

e. Preparer can file appeal if penalty proposed

f. Either examiner of appeals can refer directly to OPR in

egregious cases

E. Most Common types of Penalties (cont’d.) 8. Preparer Penalties (cont’d.)

g. Penalty for unreasonable position—greater of $1,000

or 50% of income from return

h. Willful or reckless conduct—greater of $5,000 or 50% of

income from return

E. Most Common types of Penalties (cont’d.) 8. Preparer Penalties (cont’d.)

i. IRC 6713—disclosure of tax return information or

improper use of tax information—$250 per each violation up to

$10,000 per year

E. Most Common types of Penalties (cont’d.) 8. Preparer Penalties (cont’d.)

j. IRC 7216—knowing or reckless use or disclosure of tax return information—maximum fine $1,000 and up to one year imprisonment—use care when responding to banks or mortgage company requests

for client information

II. IRS Office of Professional Responsibility

(OPR)

A. IRS “police”

B. Operates under Circular 230

C. Can receive referrals from revenue agents, revenue officers, independent internal investigations, or other sources

D. Governs practitioners, authorized to practice before IRS

E. Conducts disciplinary proceedings against

CPAs, attorneys and enrolled agents

F. Can suspend or disbar practitioners after

due process occurs

G. Common cases are non-filing and/or non-payment of taxes by practitioners, or other violations of IRS rules and regulations

H. Proceedings begin with complaints by referring parties mentioned above

1. File is opened and assigned to enforcement attorney

H. Proceedings begin with complaints by referring

parties (cont’d.)

2. Letter containing complaint is sent to practitioner—must state basis for complaint,

alleged violations of rules, regulations, etc. of Circular 230

H. Proceedings begin with complaints by referring

parties (cont’d.)

3. Practitioner or representative must respond in timely manner

4. Conference with enforcement attorney is held; attorney can propose sanctions.

H. Proceedings begin with complaints by referring

parties (cont’d.)

5. If agreed, case can be settled at that point

6. If no agreement, then case goes to Administrative Law Judge

and is heard there

H. Proceedings begin with complaints by referring

parties (cont’d.)

6. If no agreement, then case goes to ALJ (cont’d.)

a. Rules of evidence and discovery are

allowed if approved by ALJ

b. Conducted similar to court of law

H. Proceedings begin with complaints by referring parties (cont’d.)

7. Can take case to U.S. District Court if ALJ decision is appealed—good luck with that

If you have any questions, please feel free to contact

Sidney Goldin214.635.2509

SGoldin@GPPcpa.comor

Rick Lahr214.635.2520

RLahr@GPPcpa.com