New preparer penalty legislation affects taxpayers, practitioners.

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The Small Business and Work Opportunity Tax Act of 2007 signed into law on May 25 contains return preparer penalty changes that will affect taxpayers and practitioners. Briefly described here are some of the more significant changes among those highlighted in two recent Tax Membership Section E-Alerts:

* Preparer penalty standard raised. The act modifies the standards for avoiding preparer penalties for an understatement of tax. The current law realistic possibility standard for undisclosed positions is replaced with a requirement that the preparer have a reasonable belief that a position to be taken on a return would more likely than not be sustained on its merits. For disclosed positions, the provision replaces the non-frivolous standard with the requirement that there be a reasonable basis for the tax treatment of the position. The AICPA has opposed these changes and will continue to seek a remedy for this inconsistency in the penalty standards.

* Penalty applies to more returns. The act broadens the penalties to cover the preparation of estate and girl tax, employment tax, excise tax and exempt organization returns.

* Penalty level increased. Penalty amounts are dramatically increased. The bill increases the section 6694(a) penalty (understatements due to unreasonable positions) from $250 to the greater of $1,000 or 50% of the income derived (or to be derived) from preparing the return or claim for refund. It also increases the section 6694(b) penalty (willful or reckless conduct) from $1,000 to the greater of $5,000 or 50% of the income derived (or to be derived) from preparing the return or claim.

* Analysis required to reach MLTN standard. Because of the more clearly defined percentage test of the MLTN standard (more...

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