Taxation & Estate Planning

TAX PREPARER PENALTIES - PROPOSED REGULATIONS

By Charles Rubin

The IRS has issued Proposed Regulations under §6694, to assist tax return preparers in avoiding penalties under that provision. So long as tax return preparer has a "reasonable basis" for a return position, the penalty can be avoided through proper disclosure if the position later turns out to be wrong. The Proposed Regulations provide significant detail as to what will constitute proper disclosure. Notably, "boilerplate" language to clients to meet the disclosure requirements will not be acceptable.

A quick summary of the Proposed Regulations as to preparers who sign the return, based on how an erroneous reporting issue is characterized, is as follows:

a. There was no "reasonable basis" for the filing position. In this situation, the penalty will almost always apply.

b. There was a "reasonable basis," but not "substantial authority" for the filing position. To avoid a penalty, the preparer must meet disclosure requirements. This will either mean full disclosure to the IRS in accordance with its disclosure rules, or in the case of an income tax return, the preparer delivers the prepared return with proper disclosures to the taxpayer.

c. There was "substantial authority," but no reasonable belief by the preparer that the position was more likely than not reported correctly. Again to avoid a penalty, the preparer must meet disclosure requirements. In this situation for an income tax return, the preparer can meet the disclosure requirements by advising the taxpayer of the applicable penalties and penalty standards.

d. The preparer had a reasonable belief that the reported position was more likely than not reported correctly. In this case, no penalty will apply (with or without disclosure).

Different rules apply for preparers who do not sign the return. Further, the above general rules are subject to various particular refinements in the Proposed Regulations. A more detailed outline of the new provisions can be read here (or click on the .docstock icon below).

Summary of Proposed Regulation Regarding Tax Return Preparer Penalties - Get more Legal Forms

Full post as published by Rubin on Tax on July 06, 2008 (boomark / email).