The tax return preparer standard: policy developments.

• Author: Jamouneau, Greg

The tax return preparer standard set forth in Sec. 6694 has been subject to a series of revisions and refinements. Legislation enacted in May 2007 established a new more-likely-than-not (MLTN) return preparer standard, which required preparers to have a greater-than-50% level of confidence in undisclosed positions. Treasury and the IRS have issued guidance to address many practical concerns about the effects of the MLTN standard, including:

* The difference between the standards that apply to preparers and to taxpayers;

* Application of the standard to nonsigning preparers who provide post-transaction advice; and

* Which positions, with adequate disclosure, should be eligible for a standard that is less than MLTN.

In October 2008, Congress again changed the tax return preparer standard, retroactively lowering it to substantial authority (no disclosure required) for most tax positions. Under the new legislation, certain positions will still require a minimum MLTN confidence level to avoid imposition of a return preparer penalty (and effectively enable tax return preparers to sign a return). As the return preparer standard evolves, there is increasing uncertainty among tax professionals about how to provide traditional tax services to clients without being exposed to the Sec. 6694 penalty regime.

Prior Standard

Under prior law enacted in 1989, tax return preparers could prepare tax returns without making any specific disclosures as to positions reported on tax returns as long as a tax position had at least a "realistic possibility" (approximately a one in three chance) of being sustained on its merits. As a practical matter, under the realistic possibility of success standard it was not difficult for return preparers appropriately evaluating relevant authority to conclude that a tax position had a 33% chance of being sustained on its merits.

A key policy behind the increased MLTN standard seems to have been the desire to hold tax return preparers to a greater gatekeeping role in the tax system. It appears that Congress wanted tax return preparers to take on a greater responsibility for ensuring that tax returns reflect sustainable positions at a level of confidence much greater than one in three without issue disclosure and create more confidence and transparency for the IRS. This resulted in the increased MLTN standard and the required disclosure of positions not meeting the MLTN standard. Moreover, Congress apparently believed that, over...