This article is brought to you by BNA Tax & Accounting and the Daily Tax Report. For more information or a free trial to the BNA Tax and Accounting Center, please visit www.bnatax.com.
The Internal Revenue Service Dec. 31 released extensive interim guidance for tax return preparers, establishing that a new “more likely than not” standard for tax positions taken by their clients will be met if there is a greater-than-50 percent likelihood that the position will be upheld if challenged by IRS.
Notice 2008-13 implemented the provisions of the Small Business and Work Opportunity Tax Act of 2007 (Pub. L. No. 110-28), which changed the “realistic possibility” of success that a tax position would be upheld to the “more likely than not” standard for avoiding preparer penalties.
The law, which went into effect May 25, 2007, also extended the application of the income tax return preparer penalties to all tax return preparers and altered the standards of conduct that must be met to avoid imposition of the Internal Revenue Code 6694(a) penalty for understating tax liabilities.
The package of guidance issued by IRS also included Notice 2008-11, which clarified IRS's earlier Notice 2007-54 (112 DTR G-1, 06/12/07) on interim and transitional relief for the preparer penalties in Section 6694, and Notice 2008-12, which provided guidance on implementation of the preparer signature requirement of the penalty provisions under Section 6695(b).
IRS said that preparers can rely in good faith without verification on information furnished by the taxpayer, or on information furnished by another adviser, tax return preparer, or third party, as allowed in Section 6694. They are not required to independently verify or review the items reported on tax returns, schedules, or other third-party documents to determine if they meet the reasonable belief standard.
However, preparers must not ignore the implications of information furnished to them or actually known to them, IRS said. They must also make reasonable inquiries if the information furnished by another tax return preparer or third party appears to be incorrect or incomplete.
Under the notice, preparers will not be subject to the new penalty provisions of the law unless they willfully understate tax or act in reckless or intentional disregard of the law, IRS said.
Good Faith Reliance on Third Parties.
Acting in good faith for purposes of the interim guidance will be relying on the advice of a third party who is not in the same firm as the tax return preparer and who the preparer had reason to believe was competent to render the advice. Relying in good faith will not include situations where the advice is unreasonable on its face, where the preparer knew or should have known that the third-party adviser was not aware of all the relevant facts, or where the preparer knew or should have known that the advice was no longer reasonable.
Ed Karl, director of the American Institute of Certified Public Accountants tax division, told BNA Jan. 2 that the AICPA is generally pleased with the interim guidance because it will allow the preparer community to have been deemed to have met the more likely than not standard for reporting undisclosed tax positions, especially for the upcoming tax season.
“This interim guidance provides information to the preparer community on how they can comply with the May law in a reasonable fashion,” Karl said. If the tax preparer advises the taxpayer of the difference between the new higher penalty standards for preparers and the penalty standards for taxpayers, and documents that in his or her files, then a reasonable basis standard for nondisclosure can be applied rather than a more likely than not standard.
Conflicts of interest created by differing standards for disclosing tax positions have been the AICPA's main concern.
“We believe that the law passed in May is critically flawed in that it raises the preparer standard above the standard for taxpayers,” Karl said.
‘Substantial Authority’ Standard for Taxpayers.
The standard for taxpayers to report positions has been and continues to be one of “substantial authority,” Karl said. For undisclosed tax positions, the taxpayer needed to have only a roughly 40 percent certainty that the position would be upheld by IRS in order to comply with the tax code. Tax preparers, prior to passage of the law, had to meet a lower one-in-three chance of success that the position would be upheld by IRS.
AICPA has said the new heightened standard for preparers causes a conflict of interest for preparers and will hurt business because some clients may not want to disclose.
The May law changed the standard to 51 percent for preparers, so that they would now be forced to tell their clients, if they were assisting with the return, they could not sign off on it in situations where there was a discrepancy between meeting the substantial authority standard and the more likely than not standard unless the position was reported to IRS. The taxpayer would have to report a position he may not otherwise have reported, solely to keep the tax preparer from incurring a penalty.
Notice 2008-13 also solicits input from the tax return preparer community on the planned overhaul of the tax return preparer penalty regime anticipated to be completed by the end of 2008, IRS said in an accompanying news release (IR-2007-213).
“The plan to take a fresh look at the preparer penalty regulations will be a top priority for us in 2008,” IRS Chief Counsel Don Korb said.
Texts of IR-2007-213 and Notice 2008-11, Notice 2008-12, and Notice 2008-13 are in TaxCore.
This article is brought to you by BNA Tax & Accounting and the Daily Tax Report. For more information or a free trial to the BNA Tax and Accounting Center, please visit www.bnatax.com. |
