§231-36.5 Understatement of taxpayer's liability by tax return preparer. (a) A tax return preparer who understates a person's tax liability based upon unreasonable positions on a tax return or claim for tax refund shall pay a penalty of $500 with respect to each such tax return or claim for tax refund.

(b) A tax return preparer who:

(1) Wilfully understates a person's tax liability; or

(2) Recklessly disregards any tax law or rule in understating a person's tax liability,

based upon unreasonable positions on a tax return or claim for tax refund shall pay a penalty of $1,000, with respect to each such tax return or claim for tax refund.

(c) For purposes of subsections (a) and (b), understatements of liability using unreasonable positions occur when:

(1) Any part of a tax return or claim for tax refund is based on a position that does not have substantial authority;

(2) The tax return preparer who prepared the tax return or claim for tax refund knew or reasonably should have known of the unreasonable position; and

(3) The unreasonable position was not a disclosed item as defined in subsection (h) or was frivolous.

(d) If within thirty days after the notice and demand of any penalty under subsection (a) or (b) is made, the tax return preparer:

(1) Pays an amount that is not less than fifteen per cent of the penalty amount; and

(2) Files a claim for refund of the amount so paid,

no action to levy or file a proceeding in court to collect the remainder of the penalty shall be commenced except in accordance with subsection (e).

(e) An action that is stayed pursuant to subsection (d) may be brought thirty days after either of the following events, whichever occurs first:

(1) The tax return preparer fails to file an appeal to the tax appeal court within thirty days after the day on which the claim for refund of any partial payment of any penalty under subsection (a) or (b) is denied; or

(2) The tax return preparer fails to file an appeal to the tax appeal court for the determination of the tax return preparer's liability for the penalty assessed under subsection (a) or (b) within six months after the day on which the claim for refund was filed.

Nothing in this subsection shall be construed to prohibit any counterclaim for the remainder of the penalty in any proceeding.

(f) If there is a final administrative determination pursuant to section 231-7.5, or a final judicial decision that the penalty assessed under subsection (a) or (b) should not apply, then that portion of the penalty assessed shall be voided. Any portion of the penalty that has been paid shall be refunded to the tax return preparer as an overpayment of tax without regard to any period of limitations that, but for this subsection, would apply to the making of the refund.

(g) At the request of the director of taxation, a civil action may be brought to enjoin a tax return preparer from further acting as a tax return preparer or from engaging in conduct prohibited under subsection (a) or (b) as follows:

(1) Any action under this subsection may be brought in the circuit court of the circuit in which the tax return preparer resides or has a principal place of business, or in which the taxpayer with respect to whose tax return the action is brought resides;

(2) The court may exercise its jurisdiction over the action separate and apart from any other action brought by the State against the tax return preparer or taxpayer;

(3) If the court finds that a tax return preparer has engaged in conduct subject to penalty under subsection (a) or (b) and that injunctive relief is appropriate to prevent the recurrence of that conduct, the court may enjoin the preparer accordingly; and

(4) If the court finds that a tax return preparer has continually or repeatedly engaged in conduct prohibited under subsection (a) or (b) and that an injunction prohibiting that conduct would not be sufficient to prevent the preparer's interference with the proper administration of this chapter, the court may enjoin the preparer from acting as a tax return preparer.

(h) For purposes of this section:

"Disclosed item" means any item where:

(1) The relevant facts affecting the item's tax treatment are adequately disclosed in a tax return or in a statement attached to a tax return; and

(2) There is a reasonable basis for the tax treatment of the item by the taxpayer.

"Substantial authority" means, in addition to any definition of substantial authority incorporated by subsection (j), that the following authority supports the tax treatment of an item:

(1) Statutory provisions;

(2) Proposed or final administrative rules;

(3) Tax information releases or procedures;

(4) Department of taxation announcements or official explanations;

(5) Court cases;

(6) Legislative intent reflected in committee reports and floor statements;

(7) Private letter rulings, comfort letters, technical or advice letters, and written determinations to the extent they are valid and not overruled by other authority; or

(8) Notices or other official pronouncements of the department of taxation.

"Tax return preparer" means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed under title 14 or any claim for refund of tax imposed under title 14. For purposes of this definition, the preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of the return or claim for refund.

A person shall not be a tax return preparer merely because the person:

(1) Furnishes typing, reproducing, or other mechanical assistance;

(2) Prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by whom the person is regularly and continuously employed;

(3) Prepares as a fiduciary a return or claim for refund for any other person; or

(4) Prepares a claim for refund for a taxpayer in response to any notice of deficiency issued to the taxpayer or in response to any waiver of restriction after the commencement of an audit of the taxpayer, or of another taxpayer if a determination in the audit of the other taxpayer directly or indirectly affects the tax liability of the taxpayer.

"Understatement of liability" shall have the same meaning as stated in section 231-36.6(b). The determination of whether there is an understatement of liability may be made without regard to any administrative or judicial action involving the taxpayer.

(i) The penalty imposed by this section shall be in addition to any other penalty provided by law.

(j) This section shall be construed in accordance with regulations and judicial interpretations for section 6694 of the Internal Revenue Code. [L 2009, c 166, §1]