Tax preparer and taxpayer reporting standards equalized.

• Author: Beavers, James

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A provision in the 2008 Tax Extenders and AMT Relief Act sets the standard of conduct for preparers to avoid the penalty for understatement of tax due to an undisclosed return position at "substantial authority," the same standard applied to taxpayers. The controversial "more likely than not" standard has been retroactively repealed.

Background

Prior to May 25, 2007, an income tax return preparer who prepared a tax return for which there was a tax understatement that was due to an undisclosed position was liable for a preparer penalty if there was not a realistic possibility of the position's being sustained on its merits. If the preparer disclosed the position, the preparer was liable for a penalty only if the position was frivolous.

An amendment to Sec. 6694 made by the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA), changed the scope of the preparer penalty to apply to all types of tax returns (instead of just income tax returns), increased the amount of the penalties, and heightened the standards of conduct needed for tax return preparers to avoid the imposition of penalties for the preparation of a return for which there is an understatement of tax. Under the SBWOTA version of Sec. 6694, a tax return preparer could be penalized for preparing a return on which there was an understatement of tax liability due to an "unreasonable position" taken on the return. An unreasonable position was defined as a position that a return preparer does not reasonably believe is more likely than not (MLTN) to be sustained on its merits unless the position is disclosed on the return and for which there is a reasonable basis.

The imposition of the MLTN standard by SBWOTA was unexpected by both IRS officials and the tax community and was roundly criticized by both. The chief complaint was that the new standard of conduct was higher than the standard imposed on taxpayers, who have always had a "substantial authority" standard applied to their undisclosed positions. This difference in standards created a potential conflict of interest between preparers and their clients because, in some situations, a preparer could be protected from a penalty only by a position's disclosure by a client who was not required to disclose the position. As Barry Melancon, president and CEO of the AICPA, stated, this conflict "could have chilled the professional advice CPAs might have given taxpayers."

The AICPA's Tax Division...