6694 boilerplate warning

An IRS official has dismissed rumors that final Code Sec. 6694 regulations will be issued before Election Day (November 4, 2008) but said they will be out in time for the 2009 filing season. Richard S. Goldstein, special counsel to the IRS Associate Chief Counsel (Procedure & Administration), spoke during a webcast about the proposed regulations sponsored by the American Law Institute-American Bar Association (ALI-ABA) on July 11. Goldstein also cautioned practitioners "not to let 6694 drive the way you do business."


New Standard


In the Small Business and Work Opportunity Tax Relief Act of 2007 (P.L. 110-28), Congress changed the long-time Code Sec. 6694(a) preparer penalty standard from a realistic possibility of success to a reasonable belief that the position would more likely than not be sustained on its merits. "The more-likely-than-not standard is not a new standard to those who are familiar with the tax law," Goldstein said. "It is, however, new for this particular penalty."



The IRS issued proposed regulations in June (NPRM REG-129243-07, I.R.B. 2008-27, 32) and said that final regulations will be in place for the 2009 filing season. "We are working hard at getting them out before the end of the year," Goldstein said. However, he added that rumors that the final regulations will be issued before Election Day are incorrect.


Disclosure


The proposed regulations require a preparer to disclosure a position on a return when the new standard cannot be satisfied. "We have given signing preparers five ways of disclosing and nonsigning preparers three ways of disclosing," Goldstein said.



The proposed regulations permit preparers to advise clients of the penalty standards and contemporaneously document in the preparer's files that this advice was provided. However, Goldstein warned practitioners against using boilerplate disclosures. "You must disclose on a case-by-case basis."
Disconnect


Under current law, there is a disconnect between the preparer's penalty standard for undisclosed, nonabusive positions [more likely than not] and the taxpayer's standard [substantial authority]. This disconnect can create conflict between preparers and clients, Ackerman cautioned.



"We recognize that practitioners do not like to be in conflict with clients," Goldstein noted. He reiterated that the proposed regulations give preparers many ways to disclose a position. "Some amount to less than putting it [disclosure] on the return."


Reliance


The proposed regulations allow a preparer to generally rely in good faith --without verification --on information provided by the taxpayer. Similarly, a preparer may rely in good faith and without verification on information from another advisor, another preparer or other party.


"If you have any information that suggests there is a problem with a document, you need to check into that," Goldstein cautioned. "Does the document give you any thought that you need to do more inquiry?"


Expanded Scope


The new law significantly broadened the scope of who is a return preparer. The old rules applied only to income tax return preparers. Revised Code Sec. 6694 applies to all return preparers.


Practitioner Conduct


Finally, Goldstein urged practitioners not to fear the revised rules. "People doing the right thing before will not find themselves in a different situation because of the new rules. If you prepare a complete and accurate return, you will not be subject to a penalty."
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Comment on the above:

The Goldsteing warning about "no boilerplate" languages as well as his comment that research needs to be done a a case-by-case basis is important. The IRS contemplates resarch, writing, and analysis for each case and the best time to do that is at the time th positions are being identifed before the returns for the 2008 tax year are prepared and then disclosed to the IRS. The tax preparation industry does not yet understand that they have to identify and support all factual and legal issues at the time that the issues are identified, whether or not the positions will be disclosed to the IRS.

Goldsteing also noted that one way to protect a tax return preparer from the 6694 penalty is to get the opionion of a tax attorney who can prepare a legal memorandum that should be kept in the client's file for undisclosed positions or made part of the tax return for disclosed positions. It is more important to suppoprt disclosed positions, even with the reduced "reasonable basis" standard, in order to protect the tax return from being selected for examination. Once the IRS opens up a tax audit, they will normally go to two other tax years. More tax years mean more 6694-penalty potential.

Goldsteing is the first person to note that "The more-likely-than-not standard is not a new standard to those who are familiar with the tax law," Goldstein said. "It is, however, new for this particular penalty."