6694 - reliance on an advisor

The proposed regulations reference "reliance on an advisor" within the same firm twice: once under the "more likely than not standard" and once under the "reasonable cause" provision. That is, a return preparer may rely on information "or advice" furniehd by a taxpayer, advisor, another tax return prepaer, or other party, even one within the same firm. Under the reasonable cause provision, the return preparer reliance will form the basis for "reasonable cause."

The above language is far more liberal than the "reliance on a professional" example in the 6664 regulations that provide relief from the negligence penalty and other penalties. The reason is that the new requirements for a "technical analysis" and the need to cite the "relevant authority" involve complex tax law provisions and the tax policy is to offset the complexity with these liberal reliance issues.

In any of the CPA firms or any of the tax preparation firms, there will be some competion to be at the lower level rather than the managerial, review or supervisory levy to avoid the penalty risk. On person in the firm where there is a signing prepaerer and one person in a non-signatory firm will be subject to the penalty - only one person per issue.

Those return preparers do want to avoid the 6694 penalty risk need to understand that they should not be the person who gives the advice or approval for the position taken.

As noted in a prior blog, the firm itself can be liabile for the penalty.

The dog fight in the firms will be whether one is an advisor or the person who gets the advice. That division of responsibility should be documented in writing.

Everyone is "off of the hook" merely be getting the advice of an outside professional who can meet the analysis and technical authority standards of the proposed regulations.

For those who need clarification of this important issue, send an e-mail to ab@irstaxattorney.com or call 888 712-7690 ex 106. We have been receiving requests for technical advice on complex technical position, however, we give courtesy (free) comment on questions regarding these proposed regulations. Under the proposed regulations there is a new risk to our tax law firm when we draft a written opionion because that makes our firm subject to the 6694 penalty; for that reason, our written opinions are based on an agreement that the position taken must be disclosed to the IRS under the disclosure provisions of the proposed regulations in order to take advantage of the "reasonable basis" standard.