Prepare yourself; IRS proposes regulations on new prepare penalties.

• Author: Josephs, Stuart R.
• Position: FedTax - Internal Revenue Service

The 2007 Small Business and Work Opportunity Tax Act. (P.L. 110-28) expanded and increased preparer penalties. On June 17, 2008, the IRS published proposed regulations (REG-129243-07) to implement that new law. It is proposed that these regulations would apply to returns and refund claims filed, and advice provided, after the date final regulations are published in the Federal Register.

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Caution: Pending legislation could supersede many of these proposed rules. The House of Representatives passed an "extenders bill" (H.R. 6049) providing the same substantial authority standard for non-abusive undisclosed positions for preparer penalties and taxpayer penalties. A similar provision is contained in the House-approved 2008 Taxpayer Assistance Act (H.R. 5719). The fate of this legislation in the Senate is presently unknown.

Nevertheless, selected highlights of these proposed regulations follow.

Reasonable Belief That a Position Would More Likely Than Not Be Sustained on Its Merits

A preparer may have such a belief if the preparer analyzes the pertinent facts and authorities, and relying on that analysis, reasonably concludes in good faith that the position has a greater than 50 percent likelihood of being sustained on its merits. In reaching this conclusion, the possibility that the position will not be challenged by the IRS is not taken into account. The analysis prescribed by Regs. Sec. 1.6662-4(d)(3)(ii), to determine whether substantial authority exists, also applies to determine whether the more likely than not standard is satisfied.

Whether a preparer meets this standard will be determined based on all facts and circumstances, including the preparer's diligence. In determining the level of diligence in a particular situation, the preparer's experience with the area of Federal tax law and familiarity with the taxpayer's affairs, as well as the complexity of the issues and facts, will be considered.

A preparer also may have such a belief, despite the absence of other types of authority, if the position is supported by a well-reasoned construction of the applicable statute.

To determine whether a preparer has such belief, the preparer may rely in good faith without verification upon information furnished by other parties, as provided in Pop. Regs. Sec. 1.6694-1 (e).

A position must not be based on unreasonable factual or legal assumptions, including assumptions as to future events, and must not unreasonably rely on the...