more likely than not standars is ELIMINATED

Emergency Economic Stabilization Act of 2008, as Amended and Passed by the Senate on October 1 (legislative day, September 17), 2008, , (October 3, 2008) - signed by gthe President 10-3-2008

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SEC. 506. MODIFICATION OF PENALTY ON UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY TAX RETURN PREPARER.

(a) In General- Subsection (a) of section 6694 is amended to read as follows:

`(a) Understatement Due to Unreasonable Positions-

`(1) IN GENERAL- If a tax return preparer --

`(A) prepares any return or claim of refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2), and

`(B) knew (or reasonably should have known) of the position,

such tax return preparer shall pay a penalty with respect to each such return or claim in an amount equal to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

`(2) UNREASONABLE POSITION-

`(A) IN GENERAL- Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position.

`(B) DISCLOSED POSITIONS- If the position was disclosed as provided in section 6662(d)(2)(B)(ii)(I) and is not a position to which subparagraph (C) applies, the position is described in this paragraph unless there is a reasonable basis for the position.

`(C) TAX SHELTERS AND REPORTABLE TRANSACTIONS- If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is described in this paragraph unless it is reasonable to believe that the position would more likely than not be sustained on its merits.

`(3) REASONABLE CAUSE EXCEPTION- No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.'.

(b) Effective Date- The amendment made by this section shall apply --

(1) in the case of a position other than a position described in subparagraph (C) of section 6694(a)(2) of the Internal Revenue Code of 1986 (as amended by this section), to returns prepared after May 25, 2007, and

(2) in the case of a position described in such subparagraph (C), to returns prepared for taxable years ending after the date of the enactment of this Act.

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The Bill signed by the President is retroactive to May 25, 2007. So now that you have the "substantial authority" standard, do you think you will duck the penalty?
"Substantial authority" equates to being more than 40% correct instead of more than 50% correct. But note the following:

1. You still have to have the resources to do tax research
2. You still have to support positions not disclosed to the IRS with an "analysis" of the relevant "authorities" as required by the current proposed regulations.
3. The term "substantial authority" is subjective. Reasonable people can disagree on what is or is not "substantial authority."
6. You still have the risk that if you, as a return preparer, are "reckless," you can be subject to the $5,000 penalty.
7. The proposed regulations expect you to be knowledgeable about current changes in the tax law.
8. The IRS is aggressive on examination issues, and you can bet your sweet "bippie" that they will be encouraged to go after the very large penalties of $1,000 or $5,000 and the higher of 50% of your fee for preparing the tax retun.

The professional organizations that lobbied effectively for this change goofed in a "big time" way. They should have lobbied the size of the penalty. Prior to May 25, 2007, the size of the penalty was $250. Minimal revenue was collected from this penalty under prior law. The size of the current penalty is draconian. You can expect the IRS to vigorously go after the $1,000 and $5,000 penalties.

Frankly, I believe it will be easier for the IRS to go after the 6694(b) $5,000 penalty than the 6694(a) $1,000 penalty because all they need to do is establish that a return preparer was "reckless" - the same term used to determine "negligence" under 6662(c). In short, mere negligence will be sufficient for the IRS to justify the $5,000 penalty.

Without question, your best strategy would be to make a "disclosure" to the IRS of the position taken in order to take advantage of the lower "reasonable basis" standard, and at the same time have that position justified by a tax expert who can write a quality written memorandum on the facts and the applicable law. That way you have a better chance of preveting the tax return from being selected for examination and you have a better shot of comining under the "reasonable cause" exception to the penalty.

For those who want advice on any technical issue that may be subject to the disclosure rules, send us an e-mail at ab@irstaxattorney.com.