Practical considerations for the new paid preparer penalty rules and FIN 48.

• Author: Vernaglia, Anthony P.

Return preparers have recently become subject to new, higher standards from two sources: Congress and the Financial Accounting Standards Board (FASB). This item compares the new "more likely than not" standard and explores the pitfalls that CPAs may encounter under FIN 48 and the Code.

Preparer Standards Under the Code

The Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA), which was signed into law on May 25, 2007, includes a provision that modifies the existing preparer penalty rules. SBWOTA amended Sec. 6694 by making the following changes:

1. It expanded the preparer penalties to apply not only to income tax returns but also to estate and gift, excise, exempt organization, and employment tax returns.

2. It increased the dollar amount of preparer penalties:

   * For an "unreasonable position," the penalty is increased from $250 per return to the greater of $1,000 or 50% of the income derived by the preparer (per return or claim for refund).

   * For "willful or reckless conduct," the penalty is increased from $1,000 per return to the greater of $5,000 or 50% of the income derived by the preparer (per return or claim for refund).

3. It modified the standards of conduct that must be met to avoid the imposition of preparer penalties associated with the understatement of a tax liability:

   * The "not frivolous" standard for understatements involving a disclosed position is raised to a "reasonable basis" requirement.

   * The "realistic possibility of being sustained on its merits" standard for an undisclosed position has been raised to a "more likely than not" requirement.

   The Service has issued Notice 2007-54, which provides transitional relief from the new preparer penalty rules. This transitional relief will allow return preparers to follow the previous law under Sec. 6694 for income tax returns, amended returns, and refund claims. For all other returns, including estate, gift, and generation-skipping transfer tax returns, employment tax returns, and excise tax returns, the reasonable basis standard set forth in the regulations under Sec. 6662 will be applied in determining whether the IRS will impose a preparer penalty. The Notice 2007-54 relief will apply to all returns, amended returns, and refund claims due on or before December 31, 2007 (determined with regard to any extension of time for filing), to 2007 estimated taxes due on or before January 15, 2008, and to employment and excise tax returns due on or before January 31, 2008. No transitional relief is available where there is willful or reckless conduct...