6694 safe harbor rules

Bryon Christensen, attorney-advisor, Treasury Office of Tax Policy, spoke during a teleconference on the final 6694 regulations sponsored by the American Bar Association Section of Taxation. Mr. Christensen warned that the five-percent safe harbor for nonsigning preparers in final Code Sec. 6694 regulations is not meant to be used as a strategy to circumvent the regulations, a Treasury Department official cautioned on January 13, 2009. Christensen said that the Treasury Department and the IRS will watch for abuses of the safe harbor. "Practitioners should not structure the time in which they give advice to avoid being treated as a preparer under the rules.”
The report on the webcast notes that the final regulations include a safe harbor for nonsigning preparers. In determining whether an individual is a nonsigning preparer, any time spent or advice given with respect to events that have occurred that is less than five-percent of the aggregate time incurred by the person with respect to the position(s) giving rise to the understatement will not be taken into account in determining whether an individual prepared a "substantial portion" of the return.
After reading the web cast report, I looked at the following language in the final regulations:
§ 301.7701-15(b)(2) Definition of a non-signing tax return preparer

(i) In general . A nonsigning tax return preparer is any tax return preparer who is not a signing tax return preparer but who prepares all or a substantial portion of a return or claim for refund within the meaning of paragraph (b)(3) of this section with respect to events that have occurred at the time the advice is rendered. In determining whether an individual is a nonsigning tax return preparer, time spent on advice that is given after events have occurred that represents less than 5 percent of the aggregate time incurred by such individual with respect to the position(s) giving rise to the understatement shall not be taken into account. Notwithstanding the preceding sentence, time spent on advice before the events have occurred will be taken into account if all facts and circumstances show that the position(s) giving rise to the understatement is primarily attributable to the advice, the advice was substantially given before events occurred primarily to avoid treating the person giving the advice as a tax return preparer, and the advice given before events occurred was confirmed after events had occurred for purposes of preparing a tax return.

Alvin Brown, as a tax attorney, often prepares opinions on specific tax return issues. It there is a “safe harbor” rule, I would love to use it to eliminate any risk in any case that the law firm is not a tax return preparer. As I read the rule, if there are two attorneys who contributed to the position, the one with less than 5% is not a return preparer. I have no idea why Treasury thinks that this rule can be abused because there will always be one attorney within the law firm who was the principal who researched and drafted the position paper. There would only be one person per firm as a return preparer. I do not see the problem that concerns Treasury.

If Alvin Brown drafts an opinion for a CPA firm, but one of the CPAs contributed to 95% of the position, then the safe harbor would apply. I do not see this situation arising in the real world. Either the CPA firm will make the decision for the position or Alvin Brown will draft the opinion. The CPA firm strategy would be to rely on the attorney under Notice 2009-5 and be relived of the “substantial authority” standard of conduct.

The real “safe harbor” rule is Notice 2009-5 which was a gift by Treasury to the entire return preparation industry. I assume that Mr. Christensen was part of the donor group who made the gift.

Why focus on the 5% rule, which only applies to ministerial work by one or more persons, where there is always a principal architect of the legal position. That concern is comical when Treasury said in Notice 2009-5 that any return preparer will meet the substantial authority standard if they rely on another person. Then it would be the person relied upon who would be the return preparer. The “safe harbor” is Notice 2009-5 which applies for the 2008 tax year that will be filed in 2009.

If Mr. Christensen wants explain why he cautioned about the 5% saft harbor but gave every tax return preparer a way to escape the substantial authority standard (a safe harbor that can contain the navy of every country in the world), then he should send me an e-mail at ab@irstaxattorney.com.