Comment on the new 6694 regulations 129243-07

REG-129243-07

The new rgulations deal with the enhancement of the penalty under section 6694 under Business and Work Opportunity Tax Act of 2007 (2007 Small Business Tax Act). The proposed regs describe, among other controversial items, the new more likely than not standard in Code Sec. 6694(a), penalties for noncompliance, the responsibilities of non-signing preparers, and adequate disclosure. The IRS has scheduled a hearing on the proposed regs this summer and predicted that the regs will be finalized in time for the 2009 filing season.

While practitioners have been anxiously awaiting release of the proposed regs, pending legislation could make much of them irrelevant. The House has already approved legislation ( H.R. 6049) equalizing the preparer penalty and taxpayer penalty standards at substantial authority for nonabusive undisclosed positions. The reducesd standard is part of the so-called "extenders bill". A similar provision is part of the House-approved Taxpayer Assistance Act of 2008 ( H.R. 5719).

A hearing on the proposed regs is scheduled for August 18 at the IRS National Office in Washington, D.C.


Reasonable belief

At the heart of the proposed regs is the explanation of what is a reasonable belief of more likely than not under Code Sec. 6694(a) A preparer may reasonably believe that a position would more likely than not be sustained on its merits if he or she analyzes the pertinent facts and authorities, and in reliance upon that analysis, reasonably concludes in good faith that the position has a greater than 50 percent likelihood of being sustained on its merits.

The requirement that a position satisfies the more likely than not standard must be satisfied on the date the return is deemed prepared.


All of the facts and circumstances will be taken into account in determining if a preparer satisfies this standard, including the preparer's due diligence.


Under the proposed regs, a preparer may rely in good faith and without verification on information furnished by a tax attorney or another tax return preparer. A preparer may rely in good faith without verification upon a tax return that has been previously prepared by a taxpayer or another tax return preparer and filed with the IRS.

A preparer may not ignore the implications of information furnished to the tax return preparer or actually known by the tax return preparer. If the information appears to be incorrect or incomplete, the preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.

The proposed regs describe the penalty under Code Sec. 6694(a) for understatement due to an unreasonable position and the penalty under Code Sec. 6694(b) for an understatement due to willful, reckless, or intentional conduct.

The Code Sec. 6694(a) penalty will not be imposed if, considering all the facts and circumstances, it is determined that the understatement was due to reasonable cause and that the tax return preparer acted in good faith. The proposed regs describe various factors the IRS will take into account.

The IRS is revisiting the one preparer one firm rule. In its place, the IRS has proposed a preparer-per-position within a firm approach. Under the proposed regs, only one person within a firm would be considered primarily responsible for each position giving rise to an understatement and, accordingly, be subject to the penalty.

The individual signing the return will continue to be held responsible for all of the positions on a return, but if another individual is determined (either via information received from the signing individual or from other sources) to have primary responsibility for a position giving rise to the understatement, that other individual will be responsible under Code Sec. 6694. If there are one or more nonsigning tax return preparers at the same firm and no signing preparer at the firm, the individual within the firm with supervisory responsibility for the position will be responsible for the Code Sec. 6694 penalty.

The IRS intends to modify its internal guidance so that a referral by revenue agents to OPR will not be per se mandatory when the IRS assesses a tax return preparer penalty under section 6694(a) against a tax return preparer who is also a practitioner within the meaning of Circular 230.

The IRS also indicated that it will "generally" not stack penalties under Code Sec. 6694(a) and Circular 230.

The proposed regs do not carve-out an exception for non-signing preparers. A nonsigning preparer is any preparer who is not a signing preparer but who prepares all or a substantial portion of a return or claim for refund within the meaning of §301.7701-15(b)(3) with respect to events that have occurred at the time the advice is rendered.

However, the IRS created a safe harbor. In determining whether an individual is a nonsigning preparer, the proposed regs provide that any time spent on advice that is given with respect to events that have occurred, which is less than five percent of the aggregate time incurred by the person with respect to the position(s) giving rise to the understatement will not be taken into account in determining whether an individual is a nonsigning preparer.

The proposed regs describe disclosure of a position for signing preparers and non-signing preparers. For signing preparers, disclosure includes, among other methods, Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, as appropriate, or on the tax return in accordance with the annual revenue procedure (Rev. Proc. 2008-14). The proposed regs also describe ways that non-signing preparers may disclose a position. Disclosure must be tailored to the taxpayer's facts and circumstances. Boilerplate language is not sufficient, the IRS warned.