Tax News

CCH (cch.taxgroup.com) reports:

  The IRS's proposed overhaul of Code Sec. 6694 regulations (NPRM REG-129243-07, I.R.B. 2008-27, 32; TAXDAY, 2008/06/17, I.1) drew a subdued response from tax professionals at an August 18 hearing in Washington, D.C. Representatives from practitioner groups and the return-preparation industry appear ready to live with the regulations if they are finalized as proposed. Recommended changes are largely limited to clarifications of proposed rules, such as those dealing with reliance on a taxpayer's legal conclusions, disclosure, a preparer's reliance on the advice of others, penalties and the treatment of appraisers.

New Standard

  The IRS issued the proposed regulations in June in response to changes made to Code Sec. 6694 by Congress in 2007. The Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) replaced the realistic-possibility-of-success standard in Code Sec. 6694(a) with the heightened more-likely-than-not standard for undisclosed, nonabusive 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. Additionally, Congress extended Code Sec. 6694 to cover preparers of all returns, not just preparers of income tax returns.

  Preparers also risk significantly increased penalties under the 2007 Small Business Act. The old, first-tier $250 penalty in Code Sec. 6694(a) has 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.

Legal Conclusions

  Under the proposed regulations, a preparer may generally rely in good faith on information provided by the taxpayer. However, the proposed regulations expressly prohibit the preparer from relying on information from a taxpayer with respect to legal conclusions on federal tax issues.

  J. Edward Swails, speaking on behalf of the American Institute of Certified Public Accountants (AICPA), warned that the prohibition could be interpreted as "changing the government's long-standing position that preparers can rely on taxpayer information regarding items that involve mixed issues of fact and law." These include, Swails explained, earnings and profits, depreciation and inventory. Swails also predicted that the prohibition would require preparers to "re-perform the research and analysis conducted by in-house tax professionals."

  Brian Donahue, director of government relations for H&R Block, Inc., urged the IRS to clarify the definition of legal conclusion. For example, if a client believes that he or she owns a property outright but actually has a life estate in the property, would the taxpayer's representation of an ownership interest be a legal conclusion, Donahue asked.

Alternative Reference Sources

  The first-tier penalty in Code Sec. 6694(a) would not be imposed if the IRS determines that the understatement was due to reasonable cause and the preparer acted in good faith. Among the factors the IRS will consider is the preparer's good-faith reliance on the advice of the taxpayer or others.

  The Pennsylvania Society of Public Accountants (PSPA) asked the IRS to expand the factors and accept alternative reference sources in addition to the authorities in Reg. §1.662-4(d)(3)(iii). "The alternative reference sources would be for purposes of sustaining that a preparer has reasonable cause and acted in good faith," said Paul J. Cannataro, speaking on behalf of the PSPA. An example of an alternative reference source would be CCH's Master Tax Guide, Cannataro told CCH.

  "The pressure from taxpayers to complete returns causes practitioners to work as many as 80 to 90 hours a week," Cannataro said. "For less complicated issues, the alternative reference sources provide a more expedient solution to the overwhelmed practitioner's problems."

Disclosure

  The proposed regulations permit a preparer to contemporaneously document in his or her file that disclosure was made to the client. However, boilerplate language is not allowed. The IRS has estimated that preparers will be able to prepare the contemporaneous document in 15 minutes. "The 15-minute estimate is inaccurate and misleading," Cannataro said.

NATP Comments

  The National Association of Tax Professionals (NATP), which did not send a representative to testify in person at the hearing, provided written comments to the IRS. The NATP urged the IRS to exercise caution in penalizing preparers for nonwillful errors. "IRS auditors should be disabused from raising a penalty as a result of a material error unless it is willful and there is a repeated pattern of it happening with the preparer. A one-time penalty should not be the basis for application of a penalty."

  Appraisers cautioned that the proposed regulations could be interpreted as treating appraisers as nonsigning preparers. The proposed regulations govern both signing and nonsigning preparers.

  Anita C. Soucy, attorney-advisor, Treasury Office of Tax Legislative Counsel, asked if a person could be retained to appraise a property and also prepare a return (related to the property). Jay Fisherman, speaking on behalf of the American Society of Appraisers, responded that this scenario would create a conflict of interest for the appraiser.

  Deborah Butler, associate chief counsel (Procedure & Administration), indicated that the proposed regulations will be finalized before the end of the year. The AICPA recommended that final Code Sec. 6694 regulations give preparers some transition relief. "The effective date should include a transition rule allowing preparers to comply with the requirements of Notice 2008-13 (TAXDAY, 2008/01/02, I.1), rather than the final regulations, for any return filed or any advice given within the 60 days following publication of the final regulations."

  In July, AICPA President Barry C. Melancon told CCH that equalizing the preparer and taxpayer penalty standards at substantial authority for undisclosed nonabusive return positions is the organization's top legislative priority (TAXDAY, 2008/07/24, M.2). The pending Renewable Energy and Job Creation Bill of 2008 (HR 6049), the so-called "extenders bill," would equalize the standards. While the bill passed in the House, it stalled in the Senate before Congress's August recess.

  The PSPA urged the IRS to support equalizing the preparer and taxpayer standards at substantial authority at the hearing. "The IRS has the obligation to make Congress aware of laws that cause inefficiency in the tax system. One such example is the unequal standard placed on preparers versus taxpayers," Cannataro said.

  By George L. Yaksick, Jr., CCH News Staff

AICPA Comments on Proposed Rules (REG-129243-07) Regarding Tax Return Preparer Penalties

National Association of Tax Professionals Comments on Tax Return Preparer Penalties Under Code Secs. 6694 and 6695