6694 - Trap on Notice 2009-5

Notice 2009-5, I.R.B. 2009-3, December 15, 2008 – Transitional Rules
Conclusions reached in treatises, legal periodicals, legal opinions, or opinions rendered by tax professionals (including tax return preparers) are not authority. The authorities underlying such expressions of opinion, if applicable to the facts of a particular case, however, may give rise to substantial authority for the position. Solely for purposes of section 6694(a), a tax return preparer nevertheless will be considered to have met the standard in section 6694(a)(2)(A) if the tax return preparer relies in good faith and without verification on the advice of another advisor, another tax return preparer, or other party. Factors used in evaluating a tax return preparer's good faith reliance on the advice of another are found in § 1.6694-2(e)(5)
COMMENT: On its face, the above quoted language of Notice 2009-5 appears to be a broad based limitation (loophole) on the “substantial authority standard. However The reference to §1.6694-2(e)(5) in turn is implicitly a reference back to §1.6694-1 (e)(1), as qualified by the appropriate inquiries standard, which cross references 1.6694-2(e). This is a sophisticated trap for unwary tax return preparers. Therefore, tax return preparers must make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit to determine if the “substantial authority” standard of conduct under §1.6662-4 (d) is applicable.

This interpretative analysis makes it clear to me that the “reliance” language quoted is a trap for the unwary tax return preparer as the result of the cross reference to § 1.6694-2(e)(5). It is my view that the limitations of §1.6694-1 (e)(1), with its requirement to affirmatively verify IRS Code and regulations compliance, is applicable to (e)(5).

If you have any questions about this analysis, call Attorney Bown at 703 425-1400