The "diligence" test in the proposed 6694 regs.

Proposed §1.6694-2(b)(1) provides that the "reasonable belief that the position would more likely than not be sustained on its merits" standard will be satisfied if the tax return preparer 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. Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer's due diligence. In determining the level of diligence in a particular case, the IRS will take into account the tax return preparer's experience with the area of tax law and familiarity with the taxpayer's affairs, as well as the complexity of the issues and facts in the case. The proposed regulations also provide that a tax return preparer may meet the "reasonable belief that the position would more likely than not be sustained on its merits" standard if a position is supported by a well-reasoned construction of the applicable statutory provision despite the absence of other types of authority, or if the tax return preparer relies on information or advice furnished by a taxpayer, advisor, another tax return preparer, or other party (even when the advisor or tax return preparer is within the tax return preparer's same firm), as provided in proposed §1.6694-1(e).

The above language comes from the proposed section 6694 regulations.

The "analysis" and "authority" requirement is also subject to a "facts and circumstances" test that "includes" a due diligence test that takes into account the personal experience of the regturn preparer and the complexity of the law.

The languages suggest that an inept tax return preparer may be excused from the penalty under the "diligence" test. But the "diligence" test is only one of the facts and circumstnaces that may be considered. The key language of the MLTN standard requiring "analysis" and "authority" will not be negated by an inept tax return preparer. In other words, the "diligence" test is only a factor is not an independant test that will satisfy the "analysis" and "authority" requirements.

In determining the level of diligence in a particular case, the IRS will take into account the tax return preparer's experience with the area of tax law and familiarity with the taxpayer's affairs, as well as the complexity of the issues and facts in the case.