Tax Court Holds Preparer Who Placed Truncated Social Security Number on Returns Subject to Penalties

For tax returns submitted after 2010, preparers who prepare a return for compensation must place a preparer tax identification number (PTIN) on the return. Prior to that, preparers could satisfy the requirement alternatively by placing their full social security number on the return. A paid preparer’s failure to place the appropriate number on the return leads to a $50/return civil penalty, absent reasonable cause.

In 2009 CPA Valentine Anyanwu prepared 134 tax returns as part of his side tax return prep business; he reported the income from that business in 2010. IRS examined Valentine’s 2010 income tax return and as part of the exam it pulled returns he prepared and signed in 2009. In connection with the examination of his income tax return where it looked at his bank account information, IRS was able to identify 90 payments that he received from his prep business. Valentine had estimated that he had done 76 returns for compensation; the rest he claimed were freebies for friends and family.

Upon reviewing the 2009 returns, IRS found that he failed to place a PTIN or full social security number on any of the returns. It was Valentine’s practice in 2009 to sign, place his phone number and address and also put his last 4 numbers of his Social Security number on the returns. Asked why he placed only the last 4 digits he claimed that he did so because he was a prior identity theft victim, though it was not clear why he chose that path rather than getting a PTIN.

After reviewing the returns Valentine prepared based upon a client list he gave to the IRS, IRS assessed $6,700 in penalties, or $50 on the 134 2009 returns he submitted. An interesting side note: at trial the examining agent also testified that it was able to generate a list from the Service Center of all the returns that Valentine prepared. Asked how it generated the list, “the examining agent was unclear on how this list was generated, stating at trial that ‘somebody would have pushed some kind of button, I guess’.”

IRS issued a notice of intent to levy and Valentine challenged the penalty in a Tax Court CDP case, as the penalty is not subject to deficiency procedures.

The opinion is pretty brief and there are two main findings. First, the Tax Court found that there was evidence that only 90 of the returns were done for compensation, so it abated the portion of the assessment that related to the 44 returns where the IRS failed to meet the burden of production that he received compensation. In effect, the penalty went from $6,700 to $4,500.

Valentine requested that the IRS abate the entire penalty, leading to the more interesting finding that Valentine did not have reasonable cause for his actions. Here was his argument:

Mr. Anyanwu claims that his failure to include his full identifying number on the returns he prepared was based on reasonable cause and not due to willful neglect. To support his claim, Mr. Anyanwu testified that he had been a victim of identity theft in the past and thus feared disclosing his full Social Security number. Mr. Anyanwu stated that he believed that the IRS could properly identify him as the return preparer with only the last four digits of his Social Security number, name, address, and phone number.

The Tax Court gave credence to his privacy concerns, but found that it was not enough to constitute reasonable cause because he could have gotten a PTIN and protected his social security number:

While we acknowledge that privacy concerns are important, we find that Mr. Anyanwu has failed to show that he had reasonable cause. Mr. Anyanwu could have satisfied his privacy concerns within the rules by obtaining and using a PTIN instead of his full Social Security number on the returns he prepared.

Parting Thoughts

In upholding the penalties, the Tax Court reaches a sensible conclusion but I sympathize with Valentine in this case at least on the facts as reported in the opinion. The purpose of civil penalties is to promote voluntary compliance. Valentine did give the IRS what it would need to correlate him with the returns he prepared, and that is what the preparer identification rules generally are meant to achieve. In addition, the mandatory PTIN rules were not yet in effect, and some preparers (especially those who were not large preparers like Valentine) may not have been fully aware of the PTIN rules, though the opinion does not address that. Moreover, there is no suggestion in the opinion that the returns he prepared were inaccurate. On top of all that, there are legitimate privacy concerns that people have when it comes to IRS or the government for that matter safeguarding information, especially when the preparer as in this case was a prior identity theft victim.

While I have been a strong advocate for oversight over preparers, including recommending about a decade ago that IRS require preparers to use a uniform identifying number on returns to facilitate accountability and visibility, when faced with its application in this case I sympathize with the preparer who now faces thousands in penalties for a business that I suspect was not his principal business activity. While it is hard to armchair quarterback when there may be other facts, in reading this opinion I am left with the feeling that IRS should have exercised discretion and let this one pass with a warning that in future years a failure to properly identify the returns will generate penalties.

In a follow up post to this I will look at how TIGTA has criticized IRS for its failure to use its PTIN authority fully, a troubling criticism for those like me who believe that the IRS should have expanded powers to oversee the hundreds of thousands of unlicensed commercial preparers.