Tax News

CCH (cch.taxgroup.com) reports:

Legislation to revise the controversial more-likely-than-not standard in Code Sec. 6694(a) was introduced in the House on December 6. The bill, introduced by Reps. Joseph Crowley, D-N.Y., and Jim Ramstad, R-Minn., would jettison the more-likely-than-not standard in favor of substantial authority. The bill, which had not been assigned a number as of press time, comes on the eve of the expiration of transitional relief.
Substantial Authority
Thomas Ochsenschlager, vice president-taxation for the American Institute of Certified Public Accountants (AICPA), told CCH that the proposed bill will equalize the return preparer and the taxpayer standards at substantial authority. "Historically, the return preparer standard was realistic possibility of success and the taxpayer standard was substantial authority," he explained.
The Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) changed the realistic possibility of success standard in Code Sec. 6694(a) to more-likely-than-not. The 2007 Small Business Tax Act also significantly increased the penalties for violating Code Sec. 6694 and made Code Sec. 6694 applicable to all return preparers and not just income tax return preparers.
Unintended Consequences
Immediately after the 2007 Small Business Tax Act was passed, the AICPA, the National Association of Enrolled Agents (NAEA), the National Association of Tax Professionals (NATP) and other professional groups, warned that the more-likely-than-not standard would change the role of practitioners from advocate to advisor. They also cautioned that practitioners encounter many issues for which there is no guidance from the IRS, making the determination of the proper treatment of an item far from clear.
Retroactive
The bill is retroactive to May 25, 2007, the effective date of the 2007 Small Business Tax Act. The retroactive provision effectively negates the more-likely-than-not standard, Ochsenschlager explained.
The bill would also provide a reasonable cause exception. No penalty would be imposed if the practitioner acted in good faith and there was reasonable cause for the understatement.
Tax Shelters
The bill also equalizes the standards for tax shelters and reportable transactions. Taxpayers would be subject to a more-likely-than-not standard as would practitioners. "The AICPA supports this change," Ochsenschlager said.
Non-Signing Preparers
The bill does not create an exception for non-signing preparers from the definition of return preparer under Code Sec. 6694. The American Bar Association (ABA) Section of Taxation recently urged the Treasury Department and the IRS to exclude non-signing preparers from the scope of Code Sec. 6694 (TAXDAY, 2007/11/19, M.3) in regulations, which are expected to be issued before the end of the year.
Transitional Relief
Transitional relief from the IRS will expire soon (IR-2007-115, Notice 2007-54; TAXDAY, 2007/06/12, I.4). For income tax returns, amended returns and refund claims due on or before December 31, 2007 (determined with regard to any extension of time for filing), the pre-2007 Small Business Tax Act standards and the current regulations will be applied when determining whether the IRS will impose a penalty under Code Sec. 6694(a).
For all other returns, amended returns and claims for refund, including estate, gift and generation-skipping transfer tax returns, employment tax returns and excise tax returns, the reasonable basis standard set forth in regulations issued under Code Sec. 6662, without regard to the disclosure requirements contained therein, will be applied when determining whether the IRS will impose a penalty under Code Sec. 6694(a).
By George L. Yaksick, Jr., CCH News Staff
Legislation to Modify the Penalty on the Understatement of Taxpayer's Liability by Tax Return Preparer's