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RETURN PREPARER REGULATIONS
T he Service has issued long-awaited
proposed regulations that implement changes made
by the Small Business and Work Opportunity Tax Act
of 2007 to the return preparer penalties in IRC §§
6694 and 6695 and related provisions
(REG-129243-07). The Service describes the
proposed regulations as “the first significant
step” in a “comprehensive review and overhaul of
all the tax return preparer penalties and related
regulatory provisions.” The provisions of the
proposed regulations would generally be effective
for returns and claims for refund filed after the
final regulations are published.
Addressing one concern of tax practitioners,
the proposed regulations clarify that the IRS will
not mandate a referral to the Office of
Professional Responsibility (OPR) when penalties
are assessed against a preparer under section
6694. In cases of conduct that is not willful, the
Service says it will look for a pattern of failure
to meet the section 6694 standards before making a
referral to the OPR. They caution that “egregious”
conduct may form the basis for an OPR referral.
One preparer per firm . In the
past, the Service has employed a “one preparer per
firm” rule when determining penalties. With these
proposed regulations, the IRS is abandoning that
rule and moving to a structure in which each
position taken on a return can have a different
preparer. One person in a firm will be considered
primarily responsible for each position taken
(Prop. Treas. Reg. § 1.6694-1(b)). The person who
signs the return will generally be considered
primarily responsible for all the positions on the
return, but that presumption can be overcome by
evidence that another preparer is primarily
responsible for a particular position.
Income derived . Section 6694
subjects preparers to penalties of up to 50% of
the income derived (or to be derived) “with
respect to the return or claim.” In the case of a
preparer who works for a firm, “income” means
compensation the preparer receives from the firm
that can reasonably be allocated to the return
preparation engagement or to providing tax advice.
The same income will not be taken into
account more than once in computing penalties
against a preparer and his or her firm. The IRS
also states that it anticipates that it will not
stack section 6694 penalties and Circular 230
penalties for the same conduct.
Meeting the standards . Under
the proposed regulations, a preparer will meet the
new “more likely than not” (MLTN) standard if the
preparer analyzes the “pertinent facts and
authorities” (that is, the authorities in Treas.
Reg. § 1.6662-4(d)(3)(iii)) and “reasonably
concludes in good faith that the position has a
greater than 50 percent likelihood of being
sustained on its merits.” This will be determined
based on the facts and circumstances, including
the preparer’s due diligence. In the absence of
other authority, the preparer may rely on a
“well-reasoned construction” of applicable
statutes to meet the MLTN standard.
Follow-up advice . One concern
among practitioners has been whether providing
follow-up advice after a transaction has occurred
would make the adviser a nonsigning return
preparer. The proposed regulations contain a de
minimis safe harbor for posttransaction advice in
the definition of “nonsigning tax return preparer”
(Prop. Treas. Reg. § 301.7701-15(b)(2)).
This safe harbor is designed to encourage tax
professionals to provide follow-up advice
requested by a taxpayer without the concern that,
by providing such advice, they would become a tax
return preparer. For a detailed discussion
of the issues in this area, see “News Notes” in
the August 2008 issue of The Tax Adviser
. — Alistair M. Nevius,
editor-in-chief
The Tax Adviser | Notice to
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