Parts of the proposed 6694 regulations still apply

The New "substantial authority" standard in section 6694(a)(2)(A), as amended by the Emergenchy Economic Stabilization Act of 2008, that replaced the "more likely than not" standard under 6694(a) prior to its amendment by the new Act. [However, note that the "more likely than not" standard of conduct remains applicable to tax shelters and reportable transactions under section 6694(a)(2)(C), as amended by the Act].

If the vast return preparer industry thinks that they won a victory in this new amendment to section 6694, you are living a fairy tale becasue the legislative change DOES NOT CHANGE THE REQUIREMENT IN THE PROPOSED 6694 REGULATIONS THAT TAX RETURN PREPARERS, FOR DISCLOSED AND NON-DISCLOSED POSITIONS, WILL NEED TO SUPPORT THE POSITIONS TAKEN WITH REFERENCE TO THOSE STANDARDS UNDER THE GUIDELINES DESCRIBED IN SECTION 1.6662-4(d)(3)(ii) AND (iii). There are no reasons for the final 6694 regulations to eliminate those references because they pertain to the "analysis" requilred to support a position and they identify the type of "technical authority" necessary to support the position taken.

There is less authority required for non-disclosed positions to be sure, but do not assume that return preparers are off the hook from supporting their technical positions. The change in the 6694 statute DID NOT CHANGE THE BURDEN OF PROOF as specified in section 1.6694-2(e) of the proposed regulations.

The taxpayer bears the burden of proving substantial authority. Norgaard v. Comm'r [ 91-2 USTC ¶50,378], 939 F.2d 874, 877-78 (9th Cir. 1999). Substantial authority for tax treatment exists "only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment." Treas. Reg. §1.6662-4(d)(3)(i). Substantial authority is an "objective standard involving an analysis of the law and application of the law to relevant facts." Treas. Reg. §1.6662-4(d)(2). "[T]he taxpayer's belief that there is substantial authority for the tax treatment of an item is not relevant in determining whether there is substantial authority for that treatment." Treas. Reg. §1.6662-4(d)(3)(i) (1998). Pertinent authorities for a substantial authority analysis include the Internal Revenue Code, other statutory provisions, regulations, revenue rulings, and court decisions, but not opinions rendered by tax professionals. Treas. Reg. §1.6662- 4(d)(3)(iii).

Reg. §1.6662-4 (d) Substantial authority

(1) Effect of having substantial authority. --If there is substantial authority for the tax treatment of an item, the item is treated as if it were shown properly on the return for the taxable year in computing the amount of the tax shown on the return. Thus, for purposes of section 6662(d), the tax attributable to the item is not included in the understatement for that year. (For special rules relating to tax shelter items see §1.6662-4(g).)

(2) Substantial authority standard. --The substantial authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts. The substantial authority standard is less stringent than the more likely than not standard (the standard that is met when there is a greater than 50-percent likelihood of the position being upheld), but more stringent than the reasonable basis standard as defined in §1.6662-3(b)(3). The possibility that a return will not be audited or, if audited, that an item will not be raised on audit, is not relevant in determining whether the substantial authority standard (or the reasonable basis standard) is satisfied.


(3) Determination of whether substantial authority is present

(i) Evaluation of authorities. --There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. All authorities relevant to the tax treatment of an item, including the authorities contrary to the treatment, are taken into account in determining whether substantial authority exists. The weight of authorities is determined in light of the pertinent facts and circumstances in the manner prescribed by paragraph (d)(3)(ii) of this section. There may be substantial authority for more than one position with respect to the same item. Because the substantial authority standard is an objective standard, the taxpayer's belief that there is substantial authority for the tax treatment of an item is not relevant in determining whether there is substantial authority for that treatment.


(ii) Nature of analysis. --The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority. For example, a case or revenue ruling having some facts in common with the tax treatment at issue is not particularly relevant if the authority is materially distinguishable on its facts, or is otherwise inapplicable to the tax treatment at issue. An authority that merely states a conclusion ordinarily is less persuasive than one that reaches its conclusion by cogently relating the applicable law to pertinent facts. The weight of an authority from which information has been deleted, such as a private letter ruling, is diminished to the extent that the deleted information may have affected the authority's conclusions. The types of document also must be considered. For example, a revenue ruling is accorded greater weight than a private letter ruling addressing the same issue. An older private letter ruling, technical advice memorandum, general counsel memorandum or action on decision generally must be accorded less weight than a more recent one. Any document described in the preceding sentence that is more than 10 years old generally is accorded very little weight. However, the persuasiveness and relevance of a document, viewed in light of subsequent developments, should be taken into account along with the age of the document. There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.


(iii) Types of authority. --Except in cases described in paragraph (d)(3)(iv) of this section concerning written determinations, only the following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item: applicable provisions of the Internal Revenue Code and other statutory provisions; proposed, temporary and final regulations construing such statutes; revenue rulings and revenue procedures; tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; court cases; congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers; General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); private letter rulings and technical advice memoranda issued after October 31, 1976; actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin); Internal Revenue Service information or press releases; and notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin. Conclusions reached in treatises, legal periodicals, legal opinions or opinions rendered by tax professionals are not authority. The authorities underlying such expressions of opinion where applicable to the facts of a particular case, however, may give rise to substantial authority for the tax treatment of an item. Notwithstanding the preceding list of authorities, an authority does not continue to be an authority to the extent it is overruled or modified, implicitly or explicitly, by a body with the power to overrule or modify the earlier authority. In the case of court decisions, for example, a district court opinion on an issue is not an authority if overruled or reversed by the United States Court of Appeals for such district. However, a Tax Court opinion is not considered to be overruled or modified by a court of appeals to which a taxpayer does not have a right of appeal, unless the Tax Court adopts the holding of the court of appeals. Similarly, a private letter ruling is not authority if revoked or if inconsistent with a subsequent proposed regulation, revenue ruling or other administrative pronouncement published in the Internal Revenue Bulletin.
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If anyone in the vast return preparer community has a problem understanding their responsibilities to support positions with the analysis and technical authority highlighted in the 6662 regulations above, then you have an economic death wish. We are dealing with an aggressive set of IRS examiners who will be motivated to go after the penalties. In any examination with an average of three audit changes, the penalties could average $15,000 for each year examined. Any negligence in the return will prompt the $5,000 assessment under section 6694(b) as "reckless." Why not? There is no excuse for negligence under the "substantial authority" standard and, arguably, all return preparer negligence is "reckless" and inexcusable.

I also expect the Service Centers to have software that targets the 6694 penalties anytime there is apparent negligence in any tax return for the 2008 tax year and beyond.

The return preparer professional organizations are creating a disservice to their members for their lack of leadership in giving members a reality check on their need to support positions taken with relevent "analysis" and "substantial authority" sufficient to meet their burden of proof as required by the above regulations. You need to download the regulations cited above and study those regulations. If you do not understand the meaning of those regulations and your responsibility under those retulatins for undisclosed position and disclosed positions, you will need to look for another way to make a living for yourself and your family after the tax returns are filed for the 2008 tax year and beyond.

If you have any questions on any of the above or on any client issue, call 888 712-7690 or e-mail Alvin Brown, Esq. at ab@irstaxattorney.com