Tax News

CCH (cch.taxgroup.com) reports:

  After months of speculation, the IRS on June 16 released proposed return preparer penalty regulations. The proposed regulations, the IRS explained, do not only provide guidance on the new Code Sec. 6694(a) more-likely-than-not preparer standard, they also contain a comprehensive overhaul of all preparer penalties. The IRS predicted that final regulations will be in place for the 2009 filing season. A hearing on the proposed regulations is scheduled for August 18, 2008, at the IRS National Office in Washington, D.C.

  In welcome news to practitioners, the IRS stated that it will not stack penalties under Code Sec. 6694 and Circular 230 (TAXDAY, 2007/10/09, M.2) and reiterated that penalties under Code Sec. 6694 are not automatic (TAXDAY, 2008/03/07, I.9). Additionally, the IRS included many examples of various provisions in the proposed regulations.

  Pending legislation could make the proposed regulations obsolete before they are finalized, Thomas Ochsenschlager, Vice President, Taxation, American Institute of Certified Public Accountants (AICPA), told CCH. The House-passed Renewable Energy and Job Creation Bill of 2008 (HR 6049) would equalize the preparer and taxpayer penalty standards at substantial authority (TAXDAY, 2008/05/22, C.1). Although Senate Democrats were unable to bring HR 6049 before the full Senate for debate during the week of June 9, they are expected to try again the week of June 16.

  "In an initial review of the proposed regs, I'm pleased to see that the examples include a number of preparation-based scenarios, which are indeed welcome to enrolled agents and, I think, to many in the Circular 230 community at large," Robert A. Kerr, senior director of government relations for the National Association of Enrolled Agents (NAEA) told CCH.

  "The proposed regs are likely to generate an avalanche of comment on the lack of certainty about how to determine the amount of the penalty," Kip Dellinger, chair of the AICPA Tax Division's Tax Practice Responsibilities Committee, told CCH. Dellinger, who is author of CCH's The Practical Guide to Federal Tax Practice Standards, also predicted that the legal community will "seek more bright-line guidance on who is a nonsigning preparer."

Sea Change in 2007

  Passage of the Small Business and Work Opportunity Tax Act of 2007 (2007 Small Business Tax Act) (P.L. 110-28), sparked the drafting of the proposed regulations. The new law replaced the "realistic possibility of success standard" in Code Sec. 6694(a) with the heightened "more likely than not standard" for nonabusive undisclosed positions. The preparer must have a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits.

  The 2007 Small Business Tax Act also extended Code Sec. 6694 to preparers of all returns and not just preparers of income tax returns. Additionally, the new law significantly increased the penalties for noncompliance. The old, first-tier $250 penalty in Code Sec. 6694(a) jumped to the greater of $1,000 or 50 percent of the income derived, or to be derived, by the preparer. The penalty for willful or reckless conduct in Code Sec. 6694(b) increased from $1,000 to the greater of $5,000 or 50 percent of the income derived or to be derived by the preparer.

Interim Guidance

  The IRS initially delayed implementation of the new standard until 2008 (IR-2007-115, Notice 2007-54, I.R.B. 2007-27, 12). In January 2008, the IRS issued interim guidance for 2008 (Notice 2008-13, I.R.B. 2008-3, 282; TAXDAY, 2008/01/02, I.1). At that time, the IRS indicated that proposed regulations would be issued mid-year with adequate time for comments before they are finalized.

Regulation Provisions

  A discussion of the provisions contained in the newly proposed regulations is below.

Preparer Within Firm

  The proposed regulations eliminate the current "one preparer per firm" rule used in determining who in a particular firm is responsible for penalties in favor of a framework that focuses on returns on a position-by-position basis. If a preparer is primarily responsible for a position on a return giving rise to an understatement, that person will be subject to Code Sec. 6694. Only one person within a firm will be considered primarily responsible for each position; however, multiple individuals may be responsible for a position if employed by multiple firms.

  The individual signing the return will continue to be held responsible for all of the positions on a return, but if another individual is determined (either via information received from the signing individual or from other sources) to have primary responsibility for a position giving rise to the understatement, that other individual will be responsible under
Code Sec. 6694. If there are one or more nonsigning tax return preparers at the same firm and no signing preparer at the firm, the individual within the firm with supervisory responsibility for the position will be responsible for the
Code Sec. 6694 penalty.

  These new rules allow the IRS more flexibility in assessing responsibility for positions giving rise to understatements than the IRS has under the current "one preparer per firm" system.

Income Derived

  The proposed regulations also provide new guidance for determining the amount of income derived by a firm or an individual in preparing a return containing a position giving rise to an understatement, upon which the maximum penalty under Code Sec. 6694 is calculated. Income derived includes all compensation the preparer receives or expects to receive in preparing the return or providing tax advice. If the preparer is paid by a firm for work done for a client of the firm, income derived is all compensation that can be reasonably allocated to work done in preparing the return or advising the client on a position giving rise to an understatement.

  If the firm is subject to penalty under Code Sec. 6694, then all compensation received by the firm will be included as income derived from the transaction. If both the firm and the preparer are subject to liability, the income derived from the transaction will only count once, meaning that income received by the firm from the client and paid to the preparer will not both be used in determining the maximum penalty.

"More Likely Than Not Standard"

  The proposed regulations provide additional guidance on satisfaction of the "more likely than not" standard. The standard would be satisfied if the preparer analyzes the facts and authorities and reasonably concludes in good faith that the position has a greater than 50-percent likelihood of being sustained. The IRS will take into account the preparer's experience in tax law, familiarity with the taxpayer's affairs and the complexity of the facts. The standard may also be satisfied through a well-reasoned construction of statutory authority where no other authority exists or if the preparer relies upon the advice of another preparer or the taxpayer. However, the preparer may not rely upon information provided by taxpayers with respect to legal conclusions on tax issues.

Adequate Disclosure, Reasonable Basis

  Preparers must provide disclosure of a return position where the position has a reasonable basis, but the "more likely than not" standard cannot be satisfied. The proposed regulations provide that the reasonable basis standard for these purposes is the same as is used for the accuracy-related penalty under Code Sec. 6662 (significantly higher than not frivolous or patently improper and not satisfied by a position that is merely arguable or a merely colorable claim). However, in meeting the "reasonable basis" standard, preparers can rely in good faith upon the advice furnished by a taxpayer, advisor or another preparer without verification.

  The proposed regulations also provide guidance on what constitutes adequate disclosure, building upon guidance provided in
Notice 2008-13. For a signing return preparer, disclosure can be accomplished in one of five ways:

  - through the use of Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, or on the return in accordance with the annual procedure (see Rev. Proc. 2008-14, I.R.B. 2008-7, 435);

  - if the position does not satisfy the substantial authority standard of Reg. §1.6662-4(d), provision of a disclosure to the taxpayer with the prepared tax return;

  - if the position does satisfy the substantial authority standard of Reg. §1.6662-4(d), by advising the taxpayer of all the penalty standards applicable under
Code Sec. 6662;

  - if the position can be described as a tax shelter or reportable transaction, the preparer must advise the taxpayer of the requirements of minimum substantial authority and possession, on the part of the taxpayer, of a reasonable belief that the "more likely than not standard" is met and that the disclosure does not preclude the assessment of an accuracy-related penalty; or

  - for returns or refund claims subject to penalties other than the accuracy-related penalty for substantial understatements, the preparer must advise the taxpayer of the applicable penalty standards under Code Sec. 6662.

For a nonsigning return preparer, adequate disclosure may be met in one of three ways:

  - through the use of Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, or on the return in accordance with the annual procedure (see Rev. Proc. 2008-14, I.R.B. 2008-7, 435);

  - the preparer may advise the taxpayer of opportunities to avoid potentially applicable Code Sec. 6662 accuracy-related penalties and of applicable standards of disclosure; and

  - the nonsigning preparer advises another preparer that disclosure may be required and notes this advice in the other preparer's files.

Each of these methods of disclosure with regard to advice given to a taxpayer must be tailored to the taxpayer's facts and circumstances. Boilerplate language is not sufficient.

Reasonable Cause

  Under current Reg. §1.6694-2(d), an exception to the imposition of the penalty is provided where the understatement is due to reasonable cause where the preparer acted in good faith. The regulation includes factors to be considered in determining if the exception applies. The proposed regulations provide that whether the position is supported by generally accepted administrative or industry practices is to be added as an additional factor to be taken into consideration.

Tax Return Preparer

  The proposed regulations provide definitions of both a signing tax return preparer and a nonsigning tax return preparer. A signing tax return preparer is any tax return preparer who signs or is required to sign a return or claim for refund. A nonsigning tax return preparer is any tax return preparer who is not a signing tax return preparer but prepares all or a substantial portion of a return.

Electronically Filed and Signed Returns

  The proposed regulations provide two changes that will better facilitate the use of electronically signed returns. First, Reg. § 1.6107-1(a), which requires signing return preparers to provide a copy of the filed return to the taxpayer is proposed to be amended to allow preparers electronically filing Form 1040EZ or Form 1040-A to provide the copy to the taxpayer by reproducing the information on Form 1040. Also, a preparer need not sign an electronically signed return prior to providing the taxpayer with a copy of the return but must provide all of the information to that taxpayer at the same time the preparer provides the taxpayer with Form 8879, IRS e-file Signature Authorization.

Additional Proposed Changes

  The proposed regulations also provide the following changes:

  - the rules under Reg. §§1.6694-2 and -3 are proposed to be changed to allow for a firm to be subject to penalty where the firm's review procedures are not followed through willfulness, recklessness or gross indifference;

  - a reasonableness standard is provided for signing return preparer's due diligence requirements in determining eligibility for the earned income credit; and

  - for purposes of the penalties under
Code Sec. 6694, the date that a return is determined to be prepared is the date the return is signed by the preparer or, if the preparer fails to sign the return, the date the return is filed.

  The IRS stated in the preamble to the proposed regulations that the Service intends to modify its internal guidance so that a referral by revenue agents to the IRS Office of Professional Responsibility (OPR) will not be per se mandatory when the IRS assesses a tax return preparer penalty under Code Sec. 6694(a) against a tax return preparer who is also a practitioner within the meaning of Circular 230.

Hearing and Comments

  A public hearing has been scheduled for August 18, 2008, beginning at 10:00 a.m. Written or electronic comments must be received by the IRS by August 16, 2008. Outlines of topics to be discussed at the public hearing must be received by August 4, 2008.

  By Michael Henaghan and George L. Yaksick, Jr., CCH News Staff

Proposed Regulations, NPRM REG-129243-07, 2008FED ¶49,807

Proposed Regulations, NPRM REG-129243-07, FINH ¶41,136

Other References:

 
Code Sec. 6060

  CCH Reference - 2008FED ¶36,561C

  CCH Reference - 2008FED ¶36,561E

  CCH Reference - 2008FED ¶36,561G

  CCH Reference - 2008FED ¶36,561I

  CCH Reference - 2008FED ¶36,561K

  CCH Reference - 2008FED ¶36,561M

  CCH Reference - 2008FED ¶36,561O

  CCH Reference - 2008FED ¶36,561Q

  CCH Reference - FINH ¶22,229

  CCH Reference - FINH ¶22,230

  CCH Reference - FINH ¶22,231

  CCH Reference - FINH ¶22,229

 
Code Sec. 6107

  CCH Reference - 2008FED ¶36,921BC

  CCH Reference - 2008FED ¶36,921BE

  CCH Reference - 2008FED ¶36,921BG

  CCH Reference - 2008FED ¶36,921BI

  CCH Reference - 2008FED ¶36,921BK

  CCH Reference - 2008FED ¶36,921BM

  CCH Reference - 2008FED ¶36,921BO

  CCH Reference - 2008FED ¶36,921BQ

  CCH Reference - FINH ¶20,436B

  CCH Reference - FINH ¶20,436C

  CCH Reference - FINH ¶20,436D

  CCH Reference - FINH ¶20,436E

 
Code Sec. 6109

  CCH Reference - 2008FED ¶36,961BC

  CCH Reference - 2008FED ¶36,961BE

  CCH Reference - 2008FED ¶36,961BG

  CCH Reference - 2008FED ¶36,961BI

  CCH Reference - 2008FED ¶36,961BK

  CCH Reference - 2008FED ¶36,961BM

  CCH Reference - 2008FED ¶36,961BQ

  CCH Reference - 2008FED ¶36,964C

  CCH Reference - FINH ¶20,438A

  CCH Reference - FINH ¶20,438B

  CCH Reference - FINH ¶20,438C

  CCH Reference - FINH ¶20,438F

 
Code Sec. 6694

  CCH Reference - 2008FED ¶39,955AD

  CCH Reference - 2008FED ¶39,956BC

  CCH Reference - 2008FED ¶39,956BE

  CCH Reference - 2008FED ¶39,956BG

  CCH Reference - 2008FED ¶39,956BI

  CCH Reference - 2008FED ¶39,956BK

  CCH Reference - 2008FED ¶39,956BM

  CCH Reference - 2008FED ¶39,956BO

  CCH Reference - 2008FED ¶39,956BQ

  CCH Reference - 2008FED ¶39,957BC

  CCH Reference - 2008FED ¶39,957BE

  CCH Reference - 2008FED ¶39,957BG

  CCH Reference - 2008FED ¶39,957BI

  CCH Reference - 2008FED ¶39,957BK

  CCH Reference - 2008FED ¶39,957BM

  CCH Reference - 2008FED ¶39,957BO

  CCH Reference - 2008FED ¶39,957BQ

  CCH Reference - 2008FED ¶39,957EC

  CCH Reference - 2008FED ¶39,957EE

  CCH Reference - 2008FED ¶39,957EG

  CCH Reference - 2008FED ¶39,957EI

  CCH Reference - 2008FED ¶39,957EK

  CCH Reference - 2008FED ¶39,957EM

  CCH Reference - 2008FED ¶39,957EO

  CCH Reference - 2008FED ¶39,957EQ

  CCH Reference - 2008FED ¶39,957HC

  CCH Reference - 2008FED ¶39,957HE

  CCH Reference - 2008FED ¶39,957HG

  CCH Reference - 2008FED ¶39,957HI

  CCH Reference - 2008FED ¶39,957HK

  CCH Reference - 2008FED ¶39,957HM

  CCH Reference - 2008FED ¶39,957HO

  CCH Reference - 2008FED ¶39,957HQ

  CCH Reference - FINH ¶21,853B

  CCH Reference - FINH ¶21,854B

  CCH Reference - FINH ¶21,854C

  CCH Reference - FINH ¶21,854D

  CCH Reference - FINH ¶21,854E

  CCH Reference - FINH ¶21,856B

  CCH Reference - FINH ¶21,856C

  CCH Reference - FINH ¶21,856D

  CCH Reference - FINH ¶21,856E

  CCH Reference - FINH ¶21,858B

  CCH Reference - FINH ¶21,858C

  CCH Reference - FINH ¶21,858D

  CCH Reference - FINH ¶21,858E

  CCH Reference - FINH ¶21,860B

  CCH Reference - FINH ¶21,860C

  CCH Reference - FINH ¶21,860D

  CCH Reference - FINH ¶21,860E

 
Code Sec. 6695

  CCH Reference - 2008FED ¶39,966BC

  CCH Reference - 2008FED ¶39,966BE

  CCH Reference - 2008FED ¶39,966BG

  CCH Reference - 2008FED ¶39,966BI

  CCH Reference - 2008FED ¶39,966BK

  CCH Reference - 2008FED ¶39,966BM

  CCH Reference - 2008FED ¶39,966BO

  CCH Reference - 2008FED ¶39,966BQ

  CCH Reference - 2008FED ¶39,969

  CCH Reference - FINH ¶21,863B

  CCH Reference - FINH ¶21,863C

  CCH Reference - FINH ¶21,863D

  CCH Reference - FINH ¶21,863E

 
Code Sec. 6696

  CCH Reference - 2008FED ¶39,977BC

  CCH Reference - 2008FED ¶39,977BE

  CCH Reference - 2008FED ¶39,977BG

  CCH Reference - 2008FED ¶39,977BI

  CCH Reference - 2008FED ¶39,977BK

  CCH Reference - 2008FED ¶39,977BM

  CCH Reference - 2008FED ¶39,977BO

  CCH Reference - 2008FED ¶39,977BQ

 
Code Sec. 7701

  CCH Reference - 2008FED ¶43,081BC

  CCH Reference - 2008FED ¶43,081BE

  CCH Reference - 2008FED ¶43,081BG

  CCH Reference - 2008FED ¶43,081BI

  CCH Reference - 2008FED ¶43,081BK

  CCH Reference - 2008FED ¶43,081BM

  CCH Reference - 2008FED ¶43,081BO

  CCH Reference - 2008FED ¶43,092AE

  CCH Reference - FINH ¶22,772

  CCH Reference - FINH ¶22,773

  CCH Reference - FINH ¶22,774

  CCH Reference - FINH ¶22,813

  Tax Research Consultant

  CCH Reference - TRC IRS: 6,150