IRS issues final regulations on sec. 6694 tax return preparer penalties.

• Author: Beavers, James

[ILLUSTRATION OMITTED]

The IRS issued final regulations implementing the changes to the Sec. 6694 tax return preparer penalties made by the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28, and the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, P.L. 110-343 (the Tax Extenders Act).

Changes Made to the Proposed Regulations

The IRS issued proposed regulations under Sec. 6694 (REG-129243-07) in June 2008, before the enactment of the Tax Extenders Act, which retroactively replaced the more likely than not (MLTN) standard as the general standard for the application of the tax return preparer penalty with the substantial authority standard. (See Tax Trends, 39 The Tax Adviser 847 (December 2008), for a discussion of the statutory changes.) The proposed regulations have been modified as necessary to conform to the change in the standard.

Besides incorporating the change in the statutory standard, the Service also made changes to the proposed regulations based on over 30 written comments received in response to them. The most significant changes the IRS made after considering these comments are summarized below.

Defining the preparer within the firm: The final regulations maintain the proposed regulations' framework for defining a "preparer per position within a firm," focusing on the position giving rise to the understatement on the return or claim for refund and any responsible parties for such position. However, the regulations were modified to provide that if there is no signing tax return preparer for the return or refund claim within that firm or if, after the application of Regs. Sec. 1.6694-1(b)(2), it is concluded that the signing tax return preparer is not primarily responsible for the position, the nonsigning tax return preparer within the firm with overall supervisory responsibility for the position(s) giving rise to the understatement generally will be considered the tax return preparer who is primarily responsible for the position for purposes of Sec. 6694. Notwithstanding this rule, based upon credible information from any source, the Service may determine that another nonsigning tax return preparer within the firm is primarily responsible for the position(s) on the return or claim for refund giving rise to an understatement.

In addition, the regulations were modified to provide that if the IRS is given information that would support a finding that either the signing tax return preparer or a nonsigning...