Sound of relief: IRS provides transitional relief for return preparer penalty.

• Author: Allen, Bruce C.
• Position: Governmentrelations

The IRS recently released Notice 2007-54, providing guidance and transitional relief for the return preparer penalty provisions amended by the Small Business and Work Opportunity Act of 2007. The new amendments are effective for returns prepared after May 25, 2007.

The transitional relief provided by Notice 2007-54 will apply to all returns, amended returns and refund claims due on or before Dec. 31, 2007, including those returns, amended returns and refund claims filed pursuant to extensions to file due on or before Dec. 31, 2007; to 2007 estimated tax returns due on or before Jan. 15, 2008; and to 2007 employment and excise tax returns due on or before Jan. 31, 2008.

Background

The Small Business and Work Opportunity Act of 2007, Pub. L. No. 110-28, 121 Stat.--, (the Act) was enacted into law May 25, 2007. Sec. 8246 of the Act amends several provisions of the Code to extend the application of the income tax return preparer penalties to all tax return preparers, alter the standards of conduct that must be met to avoid imposition of the penalties for preparing a return, which reflects an understatement of liability, and increase applicable penalties.

The amendments are effective for tax returns prepared after the date of the enactment, May 25, 2007.

The amendments made by the Act raise questions regarding activities representing preparation of a tax return, who is a return preparer within the meaning of Sec. 7701(a)(36) (as amended), and how the statute applies to signing and non-signing preparers.

To address these questions, the IRS is considering whether regulations or other published guidance are needed, including, but not limited to, amendments to Treas. Reg. sections 301.7701-15 and 1.6694-0 through 1.6694-4.

Because the Act extends the types of returns subject to the new provisions, changes also are required to the relevant forms and publications. The IRS also must alter existing procedures to process disclosures with certain forms and in electronic formats.

Because the amendments to Sec. 6694 are effective immediately for returns prepared after May 25, 2007, the IRS believes that effective tax administration requires transitional relief with respect to the new standards of conduct under Sec. 6694(a).

Penalty Under Sec. 6694

Prior to amendment by the Act, the penalty under Sec. 6694(a) applied if:

(1) any part of an understatement of liability with respect to any return or claim for refund is due to a position for which there was not...