Example 3. 1.6694-2(b)(4) proposed regulations

In this example the return preparer took a position that was on a statute that the return preparer determined was silent. Three private letter rulings issues to other taxpayers in prior tax years support the taxpayer's position but temporary regulations subseqent to the three prior letter rulings are clearly contrary to taxpayer's position. The example goes on to state that after the issuance of the temporary regulations, the earlier private letter rulings cease to be authorities and are not taken into account in determining whether the more likely than not standard. The section 6694(a) penalty will apply to the tax return preparer for not following the temporary regulations.

Example 3 makes the obvious point that the more likely than not standard will not be satisfied if the return preparer takes a position contrary to the temporary regulations. This is a classic "relevency" issue. What is more relevant, the more current temporary regulations or three private letter rulings that were invalidated by the temporary regulations? The clear answer is that the tax return preparer should be guided by the more current temporary regulations. Noone can question the authority of the IRS to issue regulations under section 7805(a) of the Code.

Although this example is obviously correct, it implies that privat letter rulings have some authoritative value when private letter rulings are limited to the facts of that specific case and are not authority for anyone other the person who received the letter ruling.

The more interesting point in this example is that the return preparer had done research and knew about the private ruling letters and the prior temporary regulations. This is again another signal that the IRS section 6694 temporary reglations expect return preparers to do the legal research.

This example goes out of its way to stipulate that the return preparer was "aware" of the prior positions. What would the result be in this example if the return preparer did no research and, therefore, was not aware of the prior position? The implication is that the section 6694 penalty may not apply for untrained and uneducated return preparers in application of the "reasonable belief" standard under section 1.6694-2(b) in applying the more likely than not standard.

The apparent intent of this example is similar to Example 2 that contemplates that the return preparer be "aware" of the legal precedent.

This suggested tax policy is preverse because the IRS is going out of its way to help the less competent tax return preparers while taking a harsh position for the trained and knowledgeable tax return preparers.