Still more legislation: 2008 Emergency Economic Stabilization Act changes.

• Author: Josephs, Stuart R.
• Position: Fed Tax

The following are highlights of the 2008 Emergency Economic Stabilization Act (Act), signed into law Oct. 3, 2008.

Prepare Penalty Standards Retroactively Relaxed

Background: Before enactment of the 2007 Small Business and Work Opportunity Tax Act, an income tax return prepare who prepared a tax return, which had a tax understatement due to an undisclosed position for which there was no realistic possibility of being sustained on its merits, was liable for a penalty. For a disclosed position, the preparer was liable only if the position was frivolous.

The 2007 Act broadened the scope of this penalty by applying it to all tax return preparers and altering the standards of conduct a preparer must meet to avoid the penalty. A preparer could have been penalized fort preparing a return that had a tax understatement resulting from an "unreasonable position."

Any position that a preparer did not reasonably believes was more likely than not to be sustained on its merits was an "unreasonable position" unless it was disclosed on the return and there was a reasonable basis for the position.

New Law: The Act revises the definition of an "unreasonable position" and changes the standards for imposing the preparer penalty.

The preparer standard for undisclosed positions is reduced to "substantial authority," which conforms to the taxpayer standard. The preparer standard for disclosed positions is set at "reasonable basis."

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The preparer standards for tax shelters and transactions subject to Sec. 6662A remains unchanged. For these transactions, the preparer must have a reasonable belief that the position would more likely than not be sustained on its merits.

Transactions subject to Sec. 6662A are:

* Listed transactions; and

* Reportable transactions (other than listed transactions) that have a significant purpose of avoiding or evading Federal income tax.

Effective Dates: The new law generally is effective for returns prepared after May 25, 2007. For tax shelters and Sec. 6662A transactions, the new law apples to returns prepared for tax years ending after Oct. 3, 2008.

AMT Patch

Old Law: The following AMT exemptions applied to individuals:

* Married filing jointly or surviving spouses--$45,000; and

* Other individual--$33,750. Personal credits were not allowed against the AMT.

At the end of 2007, H.R. 3996 increased these exemptions for 2007 only to $66,250 and $44,350, respectively, and allowed personal credits against the AMT.

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