Informal comment by Treasury on the new regulations

Treasury attorney Anita Soucy discussed the new 6694 return preparer regulations at a June 23, 2008 meeting. Soucy noted that some of the most important areas the Treasury grappled with were the one-preparer-per-position rule, the determination of income derived from return preparation and the applicable standard of care that applied to tax preparers.

Soucy noted that the proposed regulations maintain the exception for advice given on events that have not yet occurred. The rules would not reach out to pre-transaction planning, and no penalty would apply. The Treasury added a 5-percent carve-out rule, allowing 5-percent of the preparer's advice to apply to past events without triggering potential liability. She noted that the effective date applies to the time that the return is signed, not when the advice is given. The filing of the return is important. For pre-effective date actions, the interim rules apply, she commented.


The Treasury made a change to the current rules by imposing the one-preparer-per-firm-per-position rule. This reflects modern tax practice, Soucy commented. The result is to expand the liability of the firm, because the return may reflect multiple positions and more than one person could be liable overall.


The signing preparer is generally responsible, Soucy said. This is a rule of convenience for the IRS, providing a point of initial contact regarding the return. The IRS was very concerned about a default rule, she indicated. The signer may, in fact, be liable for the penalty if there is no reliance on others. However, a non-signing preparer may be responsible for the position on the return and, therefore, be liable for the penalties. If the signer is not primarily responsible, the IRS may look to the supervisor who has overall responsibility for the position taken on the return.

The regulations continue to allow reasonable reliance on third parties. A preparer may reasonably rely on other professionals, other advisors at the same firm, and previously filed returns.

The rules for income derived by the firm applied some operating rules. It was difficult to identify all compensation received by the firm for preparing the return. If the firm is paid in a lump sum, this can be allocated to pre- and post-transaction advice. It may be necessary to look at the firm's engagement letter to determine the services for which it is being compensated.

The income may be allocated between the firm and an individual preparer. The firm will not always be liable for a penalty; if it is, the regulations should not count the same income twice, Soucy said. She stated that the Treasury is interested in comments on whether penalties are being equitably imposed under the regulations (aside from the liability issue).

Soucy said that the factors in the regulations for imposing liability recognize that it is difficult for a preparer to meet the "more likely than not" standard. If they cannot, they must instruct the taxpayer about the potential penalties --"have a conversation with the taxpayer," she indicated. She added that this is a useful practice that many law firms are adopting.


In addition, Soucy noted that the examples in the regulations are targeted to specific situations. For example, a preparer can rely on the statute itself if there is no other guidance. This is a rule of necessity to prevent the IRS from being swamped with disclosures. But the preparer's assumptions must be reasonable. Soucy said that reliance on a generally accepted industry practice can be reasonable.

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Comment by Alvin S. Brown, Esq. ab@irstaxattorney.com

Ms. Soucy did not distinguish beteen the differenct standards for disclosed and non-disclosed positions, and she did not take into account the difficulty of dealing with an IRS examiner. For the disclosed positions, the return preparer must have a "reasonable basis" for the position. The IRS examiner can be expected to challange the "reasonableness" of the analysis and authority used. Then the burden of proof is on the return preparer to demonstrate that the analysis and authority is reasonable. This cannot be done without a leglam memorandum on the applicable law.

Ms. Soucy's comment that one can rely on a statute if there is nothing else does not take into account that most tax issues involve statutes, regulations, legislative history, tax policy, IRS publications, the Internal Revenue Manual, and a large body of case law. Her comment is a trap for the unwary.

The return prepararation industry must wake up to the fact that the tax issues arising in 20o8 for tax returns to be filed in 2009 must be resolved now before the tax returns are prepared in order to best prepare to avoid the 6694 penaltyies.