Example 2 - 1.6694-2(b)(4) of the proposed regs

Example 2 merely states that new law impacted on a proposed transaction that would not be correct under the new law but would have been correct under prior law. With those stipulated facts, the section 6694 penalty will be assessed if the return prepaer took a position contrary to the new law.

The intent of this example is to warn return preparers to be current with changes in the tax law that trump prior law for the undisclosed position. This is another way of saying that if the position taken by the return preparer is clearly wrong under the prevailing law, the 6694 penalty will be assessed.

The nuance in Example 2 is that the return preparer was "aware" of the change in the law and still took the position under the prior law. Does this mean that ignorance of the law is a defense to the section 6694 penalty? That would be a fair construction of Example 2. I would be surprised if the IRS kept Example 2 in the final regulations because it is a "blank check" for those who are not aware of new changes in the law that impact negatively on the postion taken under the prior law.