6694 penalty - "should have known"

Section 1.6694(a)(1) references understatements of tax resulting from a position that the return preparer knew (or reasonably should have known).

The penalty will apply under 6694(a), as amended, even under the reduced standards if the return preparer "reasonably should have known" that the position taken would have resulted in any understatement of tax.

That term is a very dangerous standard for return preparers. It is my opinion that the IRS will conclude that the return preparer "reasonably should have known" everyting in the Internal Revenue Code and the published regulations under the Code.
But the list goes on: IRS published positions (e.g., notices, revenue rulings, revenue procedures). Those are obvious things the return preparer reasonably should know. I suspect this this comes as a wake up call for many of those reading this blog.

However, it gets worse. I believe the IRS will take the position that the return preparer should have known about long standing case law.

All of the above will flunk the "reasonable basis" and "substantial authority" standards where the obvious law is readily available from basic tax research and analysis.

Of course, these issues do not arise if there is no understatement of tax. Without question, tax return preparers will have have the facility to research applicable tax law.

There is no doubt that this terminology will survive into the final 6694 regulations.

You can expect that the IRS examination software used by the IRS Service Centers will build in section 6694 for understatements of tax for tax returns prepared by return preparers for the 2008 tax year that will be filed in 2009. I expect the 6694 penalties to hit return preparers in 2009.