Tax News

CCH (cch.taxgroup.com) reports:

Proposed regulations will not exclude nonsigning preparers from the scope of Code Sec. 6694, a senior IRS official indicated on April 30. "The idea of signing and nonsigning preparers will live in the proposed regulations," Deborah A. Butler, Associate Chief Counsel (Procedure and Administration), IRS Office of Chief Counsel, said during a teleconference sponsored by the American Bar Association (ABA) Section of Taxation. Butler also reported that the proposed regulations, which are "hundreds of pages" long will be issued in May with final regulations in place for the next filing season.
Nonsigning Preparers
The Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) significantly changed Code Sec. 6694. Before the statute was amended, the standard for nonabusive, undisclosed items under Code Sec. 6694(a) was a realistic possibility of success. Under the new law, the preparer must have a reasonable belief that the tax treatment of the position would more-likely-than not be sustained on its merits.
After Congress enhanced the standard, the ABA Taxation Section suggested that the IRS exclude nonsigning preparers from the definition of return preparer under Code Sec. 6694 (TAXDAY, 2007/11/19, M.3). The definition of return preparer should "be clarified to include only signing preparers and others directly involved in the actual preparation of line items on a return," the ABA Taxation Section told the IRS in November 2007. However, in recent comments to the IRS, the ABA Taxation Section has apparently modified its recommendation.
The definition of nonsigning preparer is "full of ambiguities" and many nonsigning preparers are unsure if they are subject to Code Sec. 6694, the ABA Taxation Section, told the IRS on April 3. "Because of these problems, and because we are not convinced that it is appropriate to subject pure tax advice to penalties under Code Sec. 6694, we considered recommending that the nonsigning preparer category be eliminated from Code Sec. 6694. Ultimately, however, we chose not to make that recommendation." Instead, the ABA Taxation Section proposed adding new language to the regulations clarifying when a nonsigning preparer would be subject to Code Sec. 6694.
Calls to eliminate nonsigning preparers from Code Sec. 6694 are "not going to see the light of day," Butler said. "Both signing preparers and nonsigning preparers have an impact on a [taxpayer's] return."
Per Se Treatment
The proposed regulations are also unlikely to identify if some services, such as cost segregation studies and transaction cost studies, are per se tax return preparation, Butler indicated. "These could be characterized as strategy or return preparation."
Michael J. Desmond, former tax legislative counsel in the Treasury Department's Office of Tax Policy, noted that per se
rules could generate difficulties in administration of the regulations. " Per se rules may answer 90 percent of questions but make [the remaining] 10 percent more difficult [to answer]."
Disclosure
One way to disclose a position is to use Form 8275, Disclosure Statement, which is attached to the taxpayer's return. Notice 2008-13 (I.R.B. 2008-3, 282) (TAXDAY, 2008/01/02, I.1) also permits a preparer to advise the taxpayer of the difference between the penalty standards applicable to the taxpayer and the penalty standards applicable to the preparer, along with contemporaneously documenting that the advice was provided.
The disclosure requirement builds on the concept of trusted advisor, Butler indicated. "What is the information that needs to be told to [clients] to meet their obligations?" Desmond warned that boilerplate language "on every email you send out is not going to meet the position-by-position requirement."
Butler also reported that the Service has received questions about disclosure in the estate and gift tax return area. "We're addressing [in the proposed regulations] all the returns that are involved."
CCH Comment. The IRS has updated its Frequently Asked Questions about tax return preparer penalties on its website and has described how a preparer can disclose a position in the case of items attributable to a pass-through entity. "Disclosure in the case of items attributable to a pass-through entity is generally made with respect to the return of the entity. Thus, disclosure in the case of pass-through items must be made on the entity's prepared tax return with a complete Form 8275 or 8275-R disclosure statement, or on the entity's return in accordance with the annual revenue procedure, if applicable."
Proposed Regulations Soon
IRS officials have predicted the imminent release of the proposed regulations in recent weeks (TAXDAY, 2008/04/14, I.8). Butler told practitioners to expect the proposed regulations "within the next month [May]." A hearing on the proposed regulations will be held this summer, she predicted. "Final regulations will be out by October or November so they are in place for the next filing season."
The IRS is also updating its employee educational materials about the changes to Code Sec. 6694. The internal materials will reflect the small business act and the various guidance items the IRS has already issued. Consequently, the internal materials "could be different" from the proposed regulations, Butler said. Nonetheless, Butler told practitioners, "Don't panic."
By George L. Yaksick, Jr., CCH News Staff
ABA Letter to IRS Commissioner Shulman and Comments on Code Sec. 6694 Preparer Penalty