A closer look: analysis: 2007 tax preparer penalty statutory revisions.

• Author: Dellinger, Kip
• Position: Taxpreparation

notice 2008-13, issued by the IRS Dec. 31, establishes temporary rules for the application of the revised IRC Sec. 6694 preparer penalty provisions that were enacted by the Small Business and Work Opportunity Tax Act of 2007.

Accompanying the notice were notices 2008-11 and 2008-12. Notice 2008-11 clarifies Notice 2007-54, which provided "transitional relief" for application of the penalty provisions after their May 25, 2007, effective date for 2006 federal tax returns filed through Dec. 31, 2007 (and with regard to some returns, through Jan. 31, 2008). Notice 2008-12 provides an interim exception to the requirement, under IRC Sec. 6695, that a preparer "sign" a federal tax return with regard to those federal returns that, prior to the new rules, did not provide for signature.

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What does all this mean for tax practitioners?

Signing Preparers and Adequate Disclosure

A signing preparer may satisfy the ''disclosure" of a tax position for which there is a reasonable basis--but not a more likely than not level of confidence--by advising the taxpayer of the differences between the taxpayer's substantial authority requirements under IRC Sec. 6662(d)(2)(B)(i) and the preparer's requirements under IRC Sec. 6694, and contemporaneously documenting in the preparer's files that the advice was provided. The same process may also be used regarding "tax shelter" issues for the taxpayer and preparer under IRC Sec. 6662(d)(2)(C).

In other words, if the taxpayer and the preparer are "in conflict," the taxpayer may make the disclosure decision for the preparer as long as the preparer has advised the taxpayer of the conflict between the preparer and taxpayer disclosure standards.

Notice 2008-13, however, does not change the disclosure requirement of both the taxpayers and CPAs with respect to tax positions taken on California income tax returns that do not meet a "more likely than not" confidence threshold, and the requirement of reasonable basis for disclosed tax positions.

Non-signing Preparers and Adequate Disclosure

Non-signing preparers are only required to advise a taxpayer of any possibility of avoiding penalties under IRC Sec. 6662 by disclosure for lack of substantial authority, provided that there is reasonable basis for the advice. In essence, non-signing preparers have no duty to require--or even request--disclosure for their own protection under IRC Sec. 6694.

When providing advice to a signing preparer, a non-signing preparer must, however, advise the signing preparer of the opportunity to avoid penalties under IRC Sec. 6694 by disclosure.

Signing preparers may, until...