Warning: IRC Section 6694 Amended!

Robert B. Wolf, Esq., of Tener, Van Kirk, Wolf & Moore, P.C., periodically issues his "P & T Hot Tips" to an email list. His message on June 24, 2007, related to the recent amendment by Congress of Section 6694 of the Internal Revenue Code that now affects all preparers of federally-filed tax returns. He highlights an important change.

This change was also noted on the CPA Success Blog, maintained for the Maryland Association of CPAs, in an entry dated June 11, 2007, entitled "Relief granted for 'more-likely-than-not' effective date":

Part of a larger Iraq war funding bill, the tax act includes a revision of section 6694 of the Internal Revenue Code. The revision stipulated that the more-likely-than-not provision was to have been effective for returns prepared after the date of enactment, which was May 25, 2007.

The AICPA had claimed that the transitional relief was “urgent” in order to “avoid extreme inequity, uncertainty and administrative burden.” The AICPA's request also cited the “impending June 15 filing deadline for certain fiscal year filers and the lead time needed for e-filing.”

The "transitional relief" requested by the American Institute of Certified Public Accountants (AICPA) was announced by the IRS on June 11, 2007, in its Press Release entitled "Transitional Penalty Relief Provided to Tax Return Preparers":

The Internal Revenue Service and Treasury Department today released Notice 2007-54, providing guidance and transitional relief for the return preparer penalty provisions amended by the Small Business and Work Opportunity Act of 2007. The new amendments are effective for returns prepared after May 25, 2007.

The new law amended several provisions of the Internal Revenue Code to extend the return preparer penalties under section 6694 to preparers of all tax returns, including estate and gift tax returns, employment tax returns, and excise tax returns. Prior to the new law, these penalties applied only to the preparers of income tax returns. The new law also increased the amount of the penalties and changed the standards of conduct that must be met by return preparers in order to avoid penalties under section 6694.

The transitional relief provided by Notice 2007-54 will apply to all returns, amended returns and refund claims due on or before December 31, 2007, including those returns, amended returns and refund claims filed pursuant to extensions to file due on or before December 31, 2007; to 2007 estimated tax returns due on or before January 15, 2008; and to 2007 employment and excise tax returns due on or before January 31, 2008.

Bob's Wolf's brief commentary -- and his warning -- follow.

Section 6694 of the IRC was amended as part of the Iraq Appropriations Bill to revise and raise the standards for tax preparers and those who provide advice, the result of which ends up on a return (that means us estate and tax planners I think).

It extends the penalties to estate and gift tax returns and, with some transitional relief of 2007 (not much) requires that tax preparer must have " a reasonable belief that the position would more likely than not be sustained on its merits".

If disclosure of the facts is made on the return, the bar is somewhat lower: the penalty is not imposed if there is a reasonable basis for the position (perhaps one in three as the standard was prior to the Act).

Those are tough standards, and without getting into further details, are tougher than the standards for the taxpayer him or herself. And it may apply to those who supply advice even if they are not signing the returns.

Note also this is tougher than section 10.34 of Circular 230 which allows a practitioner to take a position on a return if it is not frivolous as long as disclosure is made.

This sort of makes us into meteorologists in determining the chances a position is substantively correct. And the penalties are not $250 anymore, but up to the "gross income" from the "conduct".

The worst part of it may be that the imposition and determinations are all in the discretion of the IRS. Pretty tough!

It looks the rights of taxpayers to tax advice and counsel are a lot less than the rights of other litigants. Imagine those standards in a civil or a criminal case context!

Be careful out there. The new rules underscore the risks we take as preparers and advisors. We are at significant risk if we advise a position that doesn't have a good fighting chance!

If you would like to receive Bob's "P&T Hot Tips" directly (& free), contact him at: RWolf50@aol.com. His further contact information is: 920 Oliver Building, 535 Smithfield Street, Pittsburgh, PA 15222 (Ofc: 412-281-5580; Fax: 412-281-6115). I am certain that he would add you to his mailing list if you make a request.

Update: 07/02/08:

On June 19, 2008, the Internal Revenue Service issued a notice of proposed rulemaking and notice of public hearing regarding Tax Return Preparer Penalties under Sections 6694 and 6695 (PDF, 218 pages). For background and links, see: EE&F Law Blog post "IRS Proposes Final Preparer Penalty Regs" (07/02/08), as further updated.