Thursday, January 27, 2005
Burgess J.W. Raby & William L. Raby have published Frivolity, Tax Practitioners, and the Tax Law, also available on the Tax Analysts web site as Doc 2005-1617, 2005 TNT 17-42. Here is the Introduction:
The Senate version of what became the American Jobs Creation Act of 2004 would have given the IRS much greater latitude to impose a § 6694(a) penalty on a return preparer. Current law authorizes the $250 penalty if an undisclosed position lacks "a realistic possibility of being sustained on its merits" or if a disclosed position is frivolous. The Senate change, which did not survive the conference, would have raised "nonfrivolous" to the same reasonable basis standard applicable to taxpayers under § 6662(d)(2)(B)(ii)(II). Instead, there is a wide gap between the standard that applies to taxpayers (reasonable basis) and to tax preparers (not frivolous), and especially so when it comes to the positions that are deemed to be properly disclosed merely by being placed on the tax return under the annually revised revenue procedure, the latest revision of which is Rev. Proc. 2004-73, 2004-51 IRB 999.
Practitioners concerned about their own exposure to penalties, especially since the increased IRS emphasis on practitioner standards, have asked us to help clarify the difference between a frivolous position and one that is nonfrivolous. They are usually not so much concerned about § 6694 as they are about § 10.34(a) of Circular 230, which repeats § 6694's requirement that a disclosed return position not be frivolous and extends that requirement to tax advice as well. The Circular 230 answer is that "a position is frivolous if it is patently improper." That, however, may be begging the question. After all, what is "patently improper"? It would mean something is obviously wrong. Thus, the answer to the original query would be that frivolity is a little like pornography -- you know it when you see it. Another response is that if the practitioner could not even explain the taxpayer's position to a study group of experienced colleagues without bursting out laughing, it is probably frivolous (the so-called giggle test). This article is our attempt to put a little more flesh on the bones of "frivolous" and "patently improper."