Taxing changes: what's different about tax preparer penalties?

• Author: Davis, Conrad
• Position: TAXPREPARATION

Time will tell if recent amendments to tax preparer penalties will significantly impact how tax services are provided or if things will remain business as usual.

[ILLUSTRATION OMITTED]

On the one hand, increases in penalty amounts may provide IRS agents with the incentive to pursue additional fines. On the other hand, the apparent intent of the law is to punish abusers of the tax system. As such, the IRS may choose to broadly define "reasonable belief" to limit application of the new standard to those originally designed to be penalized. In any case, it is important for preparers to be aware of the changes and any potential consequences.

OVERVIEW

The Small Business and Work Opportunity Act of 2007 amended IRC Sec. 6694 for all returns prepared after May 25, 2007. Overall, changes to the Act apply to tax preparers and taxpayers, as well as the IRS. Highlights of the amendments include:

* The preparer standard for undisclosed positions was raised from the "realistic possibility of success" (RPOS) standard to a "reasonable belief that the position would more likely than not be sustained on its merits" (MLTN).

* The preparer standard for disclosed positions was raised from "not frivolous" to "reasonable basis."

* The preparer penalty and related standards now apply to a number of additional forms including estate, gift, excise and payroll tax returns. Previously these penalties only applied to income tax returns. (At press time, it was not established whether the IRS will publish a list of affected forms.)

While these changes are generally effective for returns prepared after May 25, 2007, the U.S. Treasury issued Notice 2007-54 deferring the implementation of the new penalty structure and easing the difficulties of implementation. The Treasury also issued proposed regulations to change Circular 230 Sec. 10.34 to conform to the changes to IRC Sec. 6694.

Preparers must understand the importance of these amendments because they affect the way tax returns are prepared and the communications between the preparer, taxpayer, other preparers and the IRS.

CONFLICTS OF INTEREST

In short, the amended Act presents a greater potential for conflicts of interest between preparers and their clients. For many preparers, it may prove difficult to determine the correct treatment of routine items with the degree of certainty required by the MLTN standard.

In response to the severe potential penalties for failing to disclose items on the tax return, preparers may...