section 1.6694-2(a)(2) special rule LOOPHOLE

The 6694 penalty temporary regulations have a special rule for tax return preparation corporations, partnerships and other firms.

Under these regulations, the person in the firm plus the firm employing the tax return preparer can each be subject to the section 6694 penalty. The penalty applies if one or more members of the firm or a branch office participated in or know of the conduct proscribed by section 6694(a) (i.e., not meeting the "more likely than not" standard or a lesser standard) and the firm failed to provide a reasonable and appropriate procedures for review of the position for which the penalty is imposed..

The regulations do not define "reasonable and appropriate procedures for review of the position>."

Common sense dictates that the proceures can be met if the firm drafts a written procedure that funnels all complex factual and legal issues to a "compliance manager" or other "reviewer" with further procedures on notifying a client, implementing special research or analysis or bringing in an outside consultant, and including procedures for the determination of whether the position taken should be disclosed or not disclosed. Engagement letters with clients should reflect the possibility that additional time may be neede for research, review, analysis, consultants, etc. Clients need to understand that their fees will go up if they take dubious positions that put at risk the return preparer and the firm that engages the tax return preparer.

PTHE PROPER PROCEDURES ARE NECESSARY TO PROTECT THE FRIM FROM THE 6604 PENALTY. IN A SENSE, THIS REGULATION OUTLINES A LOOPHOLE FOR THE TAX PREPARATION FIRM.

Also note that ignorence is not an excuse. If the firm does not identify the issue because they cannot identify the issue, the penalty will be assessed. Therefore, if the return preparer or manager wants to know if there is an issue that needs to be addressed, they should consult an outside consultant to deal with the issue.

If you have any questions about drafting procedures to protect the firm from the 6694 penalty, contact Alvin Brown & Associates 888 712-7690 ex 106.