Tax return preparer penalties under sections 6694 and 6695.

• Author: Riley, Christopher T.

August 21, 2008

On August 21, Tax Executives Institute submitted the following comments to the Department of the Treasury and the Internal Revenue Service on proposed regulations under section 6694 and 6695 of the Internal Revenue Code as well as Circular 230, which governs practice before the IRS. The comments, which were signed by TEl President Vincent Alicandri, were prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Christopher T. Riley of Archer Daniels Midland Co.

Tax Executives Institute is pleased to submit comments on proposed regulations issued on June 17, 2008, implementing amendments to the tax return preparer penalties under sections 6694 and 6695 of the Internal Revenue Code and Circular 230, which governs practice before the Internal Revenue Service.

TEI applauds the Internal Revenue Service and the Treasury for recognizing that the 2007 amendments to the tax return preparer penalties necessitated "a comprehensive review and overhaul of all the tax return preparer penalties and related regulatory provisions." As the preeminent association of in-house tax professionals, TEI and its members have a dual role in the tax system and a dual perspective on section 6694 and Circular 230. First, as individuals who themselves provide advice, prepare returns, or otherwise "practice before the IRS," we are vitally concerned with the potential application of the regulations to our members. Second, we are concerned with how the regulations may affect the quality, nature, timeliness, cost of the advice, return preparation services, and other assistance that our members' employers receive from other professionals who are subject to Circular 230 and section 6694. In general, while the proposed regulations provide greater clarity on the definition of the term "tax return preparer," we believe more guidance is still needed on the rules' application to in-house tax professionals.

Background

Tax Executives Institute was founded in 1944 to serve the professional needs of in-house tax professionals. Today, the organization has 54 chapters in North America, Europe, and Asia. As the preeminent global organization of corporate tax officials, TEI has a significant interest in promoting sound tax policy, as well as in the fair and efficient administration of the tax laws, at all levels of government. Our more than 7,300 members represent approximately 3,200 of the largest companies in the world.

TEI members are accountants, lawyers, and other corporate and business employees who are responsible for the tax affairs of their employers in executive, administrative, and managerial capacities. They are exclusively "in-house" tax professionals, including chief tax officers, tax directors, compliance managers, tax analysts, specialists, and a host of other corporate tax department employees with varying titles. Our members are engaged in the regular, day-to-day operation and management of the tax affairs of their employers, including tax return preparation and filing, research and planning, general tax compliance, tax accounting, and management of tax controversies. TEI members subscribe to the organization's Standards of Conduct, which were developed four-and-a-half decades ago in recognition of the dual role played by tax executives--serving as both an adviser on and implementer of decisions regarding a company's tax matters. (1)

The Current Regulatory Landscape

The regulatory landscape governing the giving of tax advice and the signing of tax returns has changed considerably in the last several years. Some of the changes have been targeted at specific behaviors (e.g., the "covered opinion" concept in section 10.35(2) of Circular 230), whereas others have raised the bar in terms of practitioner behavior (e.g., the 2007 elevation of the tax return preparer standard in section 6694 from realistic possibility of success on the merits to more likely than not).

Because of the far-reaching implications of Congress's 2007 revision of section 6694 on practitioners (and, hence, their clients), the IRS provided interim relief in Notice 2007-54, 2007-27 I.R.B. 12 (June 11, 2007), and again in Notice 2008-13, 2008-3 I.R.B. 282 (December 31, 2007), where it announced the intention to review the entire regulatory scheme governing tax return preparers and other practitioners, as follows:

[A]s part of the regulatory rulemaking process, the Treasury Department and the IRS will determine the appropriate modifications to the existing regulatory framework, given the complexities and anomalies created by the inter-relationship of the amendments to section 6694 applicable to tax return preparers and the various accuracy-related penalty provisions applicable to taxpayers, as well as the inter-relationship of the amendments to section 6694 and the regulations governing the practice before the IRS in Circular 230 (31 CFR part 10).

Restructuring Circular 230

Circular 230 governs the standards of practice for tax practitioners, including attorneys, certified public accountants, enrolled agents, and other persons who represent clients before the Internal Revenue Service. Subpart B of Circular 230 addresses the duties of and restrictions upon tax practitioners, and sets minimum standards for practitioners who give advice relating to any positions taken on tax returns or who prepare or sign such returns. (2)

The rules contained in Circular 230 are complex, in part because of the patchwork manner in which they evolved. As a result, tax practitioners do not have an integrated set of rules to guide their conduct. This is unfortunate because ideally any potentially affected party should be able to read Circular 230 and answer the following questions with reasonable certainty:

(a) Does Circular...