comment about 6694 temporary regujlations

With Congress on recess, the IRS made the news by issuing a settlement initiative of SILO and LILO tax shelters. The Service also issued proposed regulations regarding S corporations and charitable contributions, as well as guidance to the home construction industry, sponsors of qualified retirement plans and foreign trusts.



Preparer Penalty Regulations. In anticipation of the IRS's hearing on the controversial proposed preparer penalty regulations (NPRM REG-129243-07, I.R.B. 2008-27, 32; TAXDAY, 2008/06/17, I.1) scheduled for August 18 at IRS headquarters in Washington, D.C., various tax professional groups have begun an all-out campaign to have the guidance changed in several ways.



The American Institute of Certified Public Accountants (AICPA) has formally recommended that the final regulations permit a preparer to rely on generally accepted administrative or industry practice, not just with respect to establishing reasonable cause, but also with respect to determining if the reasonable-belief/more-likely-than-not standard is satisfied. The AICPA also asked the IRS to allow preparers to rely on a taxpayer's legal conclusions regarding federal tax issues that the preparer had reason to believe the taxpayer was competent to provide.



The Texas Society of Certified Public Accountants (TSCPA), which has also provided comments, recommended that the IRS reconsider its decision to abandon the traditional "one preparer, one firm" rule in the proposed regulations. "Reversing the one preparer, one firm rules may lead to significant problems in firms in identifying responsible parties," the TSCPA cautioned.

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The above suggestions are tepid. It is clear at this time that the "more than likely than not standard" is history, and that return preparers will have to grapple with the "substantial authority" standard for undisclosed positions and the "reasonable basis" standard for disclosed positions.

The "substantial authority standard" is a high threshold - not a walk in the park.

I will say this frequesntly: the best way to avoid the 6694 penalty for either disclosed or undisclosed positions is to establish "reasonable cause" in the event that a position taken results in a tax deficiency. You can do this by relying on the outside opinion of a tax expert, prefarably someone who is outside of your firm.

If there is a tax deficiency for any period after 2007, no matter how small, it is very likely that the IRS will go after the 6694 penalty from the return preparer. Any mistakes made in 2008 and thereafter will likely trigger the 6694 penalty in the same way that the negligence penalty is triggered.