Under new § 6694, effective for federal tax returns prepared after May 25, 2007, a tax advisor or return preparer may face penalties if he or she does not have a reasonable belief that an undisclosed position that he or she advised or placed on the return is "more likely than not to be sustained on its merits." The legislation imposes a return preparer standard for disclosed positions of “reasonable basis with adequate disclosure.” The new preparer standards apply to all federal tax returns, not just income tax returns (e.g., excise tax returns, gift and estate and generation-skipping tax returns, employment tax returns, and tax returns for tax-exempt organizations, etc.) whether the return is original, amended, or a claim for refund. Failure to satisfy the new return preparer standard may lead to the imposition of significant penalties on a “signing” or “non-signing” return preparer and his or her firm.
On December 31, 2007, the Treasury and the IRS issued a second set of transitional guidance rules (“Interim Guidance”) implementing the May 25, 2007 legislative changes and announced a planned overhaul of the preparer penalty regulations expected to be completed later this year. The Interim Guidance (particularly Notice 2008-13) clarifies, modifies, and in part reverses aspects of the original transition relief provided under § 6694 in Notice 2007-54. The interim rules will be in effect until the overhaul of the current return preparer penalty regulations is complete.
Treasury has promised to finalize the regulations this year and is widely expected to release new proposed regulations in the coming weeks under § 6694 and related penalty provisions in §§ 6662, 6664, and 7701, clarifying, coordinating, and implementing these provisions.
The program will review the proposed regulations if then released and/or published comments, including consideration of how the regulatory tests and operating rules are different from the earlier interim guidance. Additionally, the panelists will discuss how the new standards work, steps you need to take to comply with the standards in different contexts, and the relationship of new § 6694 to Circular 230’s ethics rules governing practice before the IRS.