Return Preparer Penalties Guidance Issued

The IRS said it will revise regulations before the end of 2008 to incorporate provisions of the Small Business and Work Opportunity Tax Act of 2007 concerning preparer penalties under section 6694 and related sections.

In the meantime, interim guidance issued in the final hours of 2007 offered some clarification and relief. Most notably, the interim guidance provides a method for signing tax return preparers to reconcile section 6694’s more-likely-than-not certainty threshold for nondisclosed items with the section 6662 “substantial authority” standard for taxpayers. In Notice 2008-13, the Service said that if a position meets section 6662’s requirements for nondisclosure, the signing preparer will be deemed to have met the section 6694 requirements if he or she explains to the taxpayer the difference between the two standards and contemporaneously documents that the advice was provided.

Other provisions of Notice 2008-13 provide that the preparer of an information return listed in Exhibit 2 of the notice (or other document, such as a depreciation schedule or cost, expense or income allocation study) will be considered a preparer of a tax return if entries in the information return or other document constitute a substantial portion of that tax return. For example, the preparer of a Form 1065, U.S. Return of Partnership Income, may be considered a preparer of a partner’s individual income tax return if the entry or entries on the partnership return constitute a substantial portion of the partner’s return.

In contrast, the preparer of an information return listed in Exhibit 3 of the notice (such as Form W-2, Wage and Tax Statement) will not be considered a preparer of a tax return even if the entries in the information return constitute a substantial portion of that tax return, unless the information return was prepared willfully to understate tax liability “or in reckless or intentional disregard of rules or regulations.”

Additional guidance regarding the effective dates for the revisions to section 6694 is provided in Notice 2008-11. Guidance regarding return preparer signature requirements is provided in Notice 2008-12.

Comments on Notice 2008-13 are requested by March 24 and may be submitted by e-mail to Notice.Comments@irscounsel.treas.gov or by other means described in the notice.