[Federal Register Volume 59, Number 52 (Thursday, March 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6237]
[[Page Unknown]]
[Federal Register: March 17, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[IA-78-93]
RIN 1545-AS58
Accuracy-Related Penalty
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: These proposed regulations amend the accuracy-related penalty
regulations under chapter 1 of the Internal Revenue Code. These
amendments are necessary to effect changes to the accuracy-related
penalty made by the Omnibus Budget Reconciliation Act of 1993. This
document also provides notice of a public hearing on the proposed
amendments.
DATES: Written comments must be received by June 21, 1994. The IRS
intends to hold a public hearing on these proposed regulations on July
12, 1994, beginning at 10 a.m. Persons wishing to speak at the hearing
must submit outlines of their comments by June 21, 1994.
ADDRESSES: Send submissions to: Internal Revenue Service, Attn:
CC:DOM:CORP:T:R (IA-78-93), room 5228, POB 7604, Ben Franklin Station,
Washington, DC 20044. The public hearing will be held in the IRS
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David L.
Meyer, 202-622-6232; concerning submissions, Michael Slaughter, 202-
622-7180. (These are not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Temporary Regulations and 26 U.S.C. 7805(e)(1)
In the Rules and Regulations section of this issue of the Federal
Register, the IRS is issuing temporary regulations (Treasury Decision
8533) to implement certain changes made to the accuracy-related penalty
in section 6662 of the Internal Revenue Code (Code) by section 13251 of
the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993). Section
7805(e)(1) of the Code (26 U.S.C. 7805(e)(1)) requires the publication
of a notice of proposed rulemaking whenever the Secretary issues
temporary regulations to allow an opportunity for public comment. The
substance of T.D. 8533 is reflected in the proposed amendments to
sections 1.6662-1 through 1.6662-4. The Internal Revenue Service
presently intends to revise Secs. 1.6662-1 through 1.6662-4 in response
to taxpayers' comments on the proposed regulations and does not
presently intend to finalize Sec. 1.6662-7T.
Background
These proposed regulations set forth certain changes made to the
accuracy-related penalty in section 6662 of the Code by section 13251
of OBRA 1993. These changes eliminated the disclosure exception for the
negligence penalty (section 6662(b)(1) of the Code) and raised the
disclosure standard for purposes of the penalties for disregarding
rules or regulations (section 6662(b)(1) of the Code) and a substantial
understatement of income tax (section 6662(b)(2) of the Code) from
``not frivolous'' to ``reasonable basis.'' See section 13251 of OBRA
1993 and H. Rep. No. 213, 103rd Cong., 1st Sess. 669 (1993) (the
Conference Report).
The legislative history to OBRA 1993 indicates that this
``reasonable basis'' standard is a relatively high standard of tax
reporting that is significantly higher than the ``not frivolous''
disclosure standard previously applicable to taxpayers under section
6662 of the Code and currently applicable to preparers under section
6694 of the Code. See Conference Report, at p. 669. A position is not
frivolous if it is not ``patently improper.'' See Sec. 1.6694-2(c)(2)
of the Income Tax Regulations and current Sec. 1.6662-3(b)(3). The
legislative history to OBRA 1993 also provides that the reasonable
basis standard is not satisfied by a position that is merely arguable
or merely a colorable claim. See Conference Report, at p.669.
In addition to adopting the new reasonable basis standard as the
standard that a disclosed return position must satisfy to avoid the
disregard and substantial understatement penalties, Congress adopted
the new reasonable basis standard as the standard that a return
position must satisfy to avoid the negligence penalty. See Conference
Report at p.669.
Treasury requests comments on how the new reasonable basis standard
should be defined for purposes of the negligence, disregard, and
substantial understatement penalties.
Explanation of Changes
Section 1.6662-3(a) of the regulations generally provides that if
any portion of an underpayment, as defined in section 6664(a) of the
Code and Sec. 1.6664-2, of any income tax imposed under subtitle A of
the Code that is required to be shown on a return is attributable to
negligence or disregard of rules or regulations, there is added to the
tax an amount equal to 20 percent of such portion. Section 1.6662-
3(b)(1) defines ``negligence'' to include any failure to make a
reasonable attempt to comply with the provisions of the internal
revenue laws or to exercise ordinary and reasonable care in the
preparation of a tax return. Currently, Sec. 1.6662-3(c) generally
provides that no penalty under section 6662(b)(1) may be imposed on any
portion of any underpayment that is attributable to negligence or a
position contrary to a rule or regulation if the position is adequately
disclosed and is not frivolous, if the requirements of that section are
met.
Section 1.6662-4(a) of the regulations generally provides that if
any portion of an underpayment of any income tax imposed under subtitle
A of the Code that is required to be shown on a return is attributable
to a substantial understatement of such income tax, there is added to
the tax an amount equal to 20 percent of such portion. Section 1.6662-
4(a) further provides that, except in the case of any item attributable
to a tax shelter, an understatement is reduced by the portion of the
understatement that is attributable to positions for which there was
substantial authority or adequate disclosure. Currently, under
Sec. 1.6662-4(e)(2), this adequate disclosure exception will not apply
if the position on the return is frivolous.
As a result of OBRA 1993, the minimum standard that a disclosed
return position must satisfy to avoid either the penalty for
disregarding rules or regulations or for a substantial understatement
of income tax has been raised from ``not frivolous'' to ``reasonable
basis.'' In addition, there is no longer a disclosure exception for the
negligence penalty and, to avoid that penalty, the return position
generally must satisfy the new reasonable basis standard.
These rules generally apply to returns that are due (without regard
to extensions for filing) after December 31, 1993. However, the rules
relating to changes to the penalties for negligence or disregard of
rules or regulations will not apply to returns, including qualified
amended returns, filed on or before March 14, 1994.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It has also been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before the adoption of these proposed regulations, consideration
will be given to any written comments that are submitted timely (a
signed original and eight copies) to the Internal Revenue Service. All
comments will be available for public inspection and copying in their
entirety.
A public hearing will be held on July 12, 1994, in the IRS
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC. Because of access restrictions, visitors will not be
admitted beyond the building lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments, an outline of the topics to be discussed, and
the time to be devoted to each topic by June 21, 1994.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these proposed regulations is David L.
Meyer, Office of Assistant Chief Counsel, Income Tax and Accounting,
Internal Revenue Service. However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6662-0 is amended by:
1. Revising the introductory language,
2. Adding entries for Sec. 1.6662-2 (d)(1) and (d)(2),
3. Revising the entry for paragraph (b)(3) under Sec. 1.6662-3, and
4. Adding an entry for Sec. 1.6662-7.
5. The revised and added provisions read as follows:
Sec. 1.6662-0 Table of contents.
This section lists the captions that appear in Secs. 1.6662-1
through 1.6662-7.
* * * * *
Sec. 1.6662-2 Accuracy-related penalty.
* * * * *
(d) * * *
(1) Returns due before January 1, 1994.
(2) Returns due after December 31, 1993.
Sec. 1.6662-3 Negligence or disregard of rules or regulations.
* * * * *
(b) * * *
(3) Reasonable basis.
(i) In general [Reserved].
(ii) Relationship to other standards.
* * * * *
Sec. 1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes
to the accuracy-related penalty.
(a) In general.
(1) Scope.
(2) Effective date.
(b) No disclosure exception for negligence penalty.
(c) Disclosure standard for other penalties is reasonable basis.
(d) Definition of reasonable basis.
(1) In general [Reserved].
(2) Relationship to other standards.
Par. 3. In Sec. 1.6662-1, the second and third sentences of the
concluding text are revised to read as follows:
Sec. 1.6662-1 Overview of the accuracy-related penalty.
* * * * *
* * * The penalties for disregard of rules or regulations and for a
substantial understatement of income tax may be avoided by adequately
disclosing certain information as provided in Sec. 1.6662-3(c) and
Sec. 1.6662-4 (e) and (f), respectively. The penalties for negligence
and for a substantial (or gross) valuation misstatement under chapter 1
may not be avoided by disclosure.* * *
Par. 4. Section 1.6662-2 is amended by:
1. Redesignating the text of paragraph (d) as (d)(1) and adding a
heading,
2. Revising the first and second sentences of newly designated
paragraph (d)(1), and
3. Adding paragraph (d)(2).
4. The revised and added provisions read as follows:
Sec. 1.6662-2 Accuracy-related penalty.
* * * * *
(d) Effective date--(1) Returns due before January 1, 1994. Section
1.6662-3(c) and Sec. 1.6662-4 (e) and (f) (relating to methods of
making adequate disclosure) as codified in 26 CFR revised April 1,
1993, apply to returns the due date of which (determined without regard
to extensions of time for filing) is after December 31, 1991, but
before January 1, 1994. Except as provided in the preceding sentence,
Secs. 1.6662-1 through 1.6662-5 as codified in 26 CFR revised April 1,
1993, apply to returns the due date for which (determined without
regard to extensions of time for filing) is after December 31, 1989,
but before January 1, 1994. * * *
(2) Returns due after December 31, 1993. Except as provided in the
last sentence of this paragraph (d)(2), the provisions of Secs. 1.6662-
1 through 1.6662-4 reflecting the changes made to the accuracy-related
penalty by the Omnibus Budget Reconciliation Act of 1993 apply to
returns the due date for which (determined without regard to extensions
of time for filing) is after December 31, 1993. These changes include
raising the disclosure standard for the penalties for disregarding
rules or regulations and for a substantial understatement of income tax
from not frivolous to reasonable basis, eliminating the disclosure
exception for the negligence penalty, and providing guidance on the
meaning of reasonable basis. The Omnibus Budget Reconciliation Act of
1993 changes relating to the penalties for negligence or disregard of
rules or regulations will not apply to returns (including qualified
amended returns) that are filed on or before March 14, 1994.
Par. 5. Section 1.6662-3 is amended by:
1. Revising the second sentence of paragraph (a),
2. Revising paragraph (b)(3), and
3. Revising paragraphs (c) (1) and (2).
4. The revisions read as follows:
Sec. 1.6662-3 Negligence or disregard of rules or regulations.
(a) * * * The penalty for disregarding rules or regulations does
not apply, however, if the requirements of Sec. 1.6662-3(c)(1) are
satisfied and the position in question is adequately disclosed as
provided in Sec. 1.6662-3(c)(2), or to the extent that the reasonable
cause and good faith exception to this penalty set forth in
Sec. 1.6664-4 applies. * * *
(b) * * *
(3) Reasonable basis--(i) In general. [Reserved].
(ii) Relationship to other standards. The reasonable basis standard
is significantly higher than the not frivolous standard applicable to
preparers under section 6694 and defined in Sec. 1.6694-2(c)(2).
* * * * *
(c) * * *
(1) In general. No penalty under section 6662(b)(1) may be imposed
on any portion of an underpayment that is attributable to a position
contrary to a rule or regulation if the position is disclosed in
accordance with the rules of paragraph (c)(2) of this section and, in
case of a position contrary to a regulation, the position represents a
good faith challenge to the validity of the regulation. This disclosure
exception does not apply, however, in the case of a position that does
not have a reasonable basis or where the taxpayer fails to keep
adequate books and records or to substantiate items properly.
(2) Method of disclosure. Disclosure is adequate for purposes of
the penalty for disregarding rules or regulations if made in accordance
with the provisions of Secs. 1.6662-4(f)(1), (3), (4), and (5), which
permit disclosure on a properly completed and filed Form 8275 or 8275-
R, as appropriate. In addition, the statutory or regulatory provision
or ruling in question must be adequately identified on the Form 8275 or
8275-R, as appropriate. The provisions of Sec. 1.6662-4(f)(2), which
permit disclosure in accordance with an annual revenue procedure for
purposes of the substantial understatement penalty, do not apply for
purposes of this section.
Par. 6. Section 1.6662-4 is amended by:
1. Removing the third sentence in paragraph (d)(2), and
2. Revising paragraph (e)(2) to read as follows:
Sec. 1.6662-4 Substantial understatement of income tax.
* * * * *
(e) * * *
(2) Circumstances where disclosure will not have an effect. The
rules of paragraph (e)(1) of this section do not apply where the item
or position on the return--
(i) Does not have a reasonable basis (as defined in Sec. 1.6662-
3(b)(3));
(ii) Is attributable to a tax shelter (as defined in section
6662(d)(2)(C)(ii) and paragraph (g)(2) of this section); or
(iii) Is not properly substantiated, or the taxpayer failed to keep
adequate books and records with respect to the item or position.
Par. 7. Section 1.6662-7 is added to read as follows:
Sec. 1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes to the
accuracy-related penalty.
(a) In general--(1) Scope. The Omnibus Budget Reconciliation Act of
1993 made certain changes to the accuracy-related penalty in section
6662. This section provides rules reflecting those changes.
(2) Effective date. This section applies to returns that are due
(without regard to extensions of time for filing) after December 31,
1993. However, the provisions of these regulations relating to the
penalties for negligence or disregard of rules or regulations will not
apply to returns (including qualified amended returns) that are filed
on or before March 14, 1994.
(b) No disclosure exception for negligence penalty. The penalty for
negligence in section 6662(b)(1) may not be avoided by disclosure of a
return position.
(c) Disclosure standard for other penalties is reasonable basis.
The penalties for disregarding rules or regulations in section
6662(b)(1) and for a substantial understatement of income tax in
section 6662(b)(2) may be avoided by adequate disclosure of a return
position only if the position has at least a reasonable basis. See
Secs. 1.6662-3(c) and 1.6662-4(e) and (f) for other applicable
disclosure rules.
(d) Definition of reasonable basis--(1) In general. [Reserved].
(2) Relationship to other standards. The reasonable basis standard
is significantly higher than the not frivolous standard applicable to
preparers under section 6694 and defined in Sec. 1.6694-2(c)(2).
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-6237 Filed 3-14-94; 12:20 pm]
BILLING CODE 4830-01-U
