I. May 2007 Revisions to IRC Section 6694
In May 2007, the tax return preparer penalty provisions in section 6694 of the Internal Revenue Code were revised by the Small Business and Work Opportunity Act of 2007. The Act (1) raised the tax return reporting standards for preparers; (2) broadened the scope of the penalty; and (3) increased the amount of the penalty.
New Reporting Standards. The tax return preparer standard for an undisclosed position was raised from "realistic possibility" of success to the "reasonable belief that the position would more likely than not be sustained on its merits" if challenged (RB/MLTN). The tax return preparer standard for a disclosed position was raised from "not frivolous" to "reasonable basis."
Broader Scope. The scope of the section 6694 preparer penalty was broadened to include not only income tax returns, but also estate, gift, employment, and excise tax returns and returns of exempt organizations.
Higher Penalty Amount. The penalty for understatements due to unreasonable positions was increased from $250 to the greater of $1,000 or 50% of the income derived (or to be derived). The penalty for understatements due to willful or reckless conduct was increased from $1,000 to the greater of $5,000 or 50% of the income derived or to be derived.
Effective Date. The revisions initially were effective for returns prepared after May 25, 2007, the date the Act was enacted. However, in Notice 2007-54, the IRS postponed the operative dates for these rules, generally until 2008. (See below.)
II. Transitional Relief
- June 7, 2007 AICPA Letter. The AICPA urged Treasury and the IRS to provide transitional relief regarding the effective date fro the revisions to section 6694.
- Notice 2007-54. Transitional relief was provided on June 11, 2007 in Notice 2007-54.
III. AICPA Legislative Effort and October 2008 Revision to IRC Section 6694
In response to the May 2007 revisions to section 6694, the AICPA aggressively pursued a legislative effort to lower the preparer standard for undisclosed, non-tax shelter positions to "substantial authority," the standard applicable to taxpayers for such positions.
- July 10, 2007 AICPA Letter to the Chairmen and Ranking Members of the House Ways and Means Committee and the Senate Finance Committee.
- July 12, 2007 AICPA Cover Letter to the Chairman and Ranking Member on the House Ways and Means Committee's Subcommittee on Oversight and to the Chairman and Ranking Member of the Senate Finance Committee's Subcommittee on Taxation, IRS Oversight, and Long-Term Growth.
On October 3, 2008, as part of the Emergency Economic Stabilization Act of 2008, the tax return reporting standards for preparers were revised. The new standards applicable to preparers are: (1) for non-tax shelter items, "substantial authority" for undisclosed positions and "reasonable basis" for disclosed positions; and (2) for tax shelter items and reportable transactions, in general, RB/MLTN. For purposes of the section 6694 preparer penalty provisions, a "tax shelter" is defined as a partnership, entity, plan, or arrangement a significant purpose of which is the avoidance or evasion of Federal income tax.
IV. AICPA Regulatory Effort
The AICPA provided comments to the IRS and Treasury regarding guidance needed under the revised section 6694 preparer penalty provisions. See the following letters for AICPA recommendations:
Initial AICPA Recommendations
- September 14, 2007. AICPA requests immediate guidance from the IRS on certain issues, to facilitate the transition to the new section 6694 standards.
- November 7, 2007. AICPA offers comments to the IRS on: the application of the transitional rule t non-signing preparers; disclosure requirements for non-signing preparers; and specific forms to which section 6694 applies.
- March 17, 2008. AICPA offers recommendations to the IRS and Treasury regarding guidance t be issued under section 6694 and related provisions.
- April 21, 2008. AICPA offers supplemental recommendations to the IRS and Treasury regarding section 6694 issues that are specific to the estate, gift, and trust tax practice areas.
AICPA Comments on Proposed Regulations
- August 7, 2008. AICPA offers comments to the IRS and Treasury on the proposed regulations issued on June 17, 2008 regarding section 6694 and related provisions.
- March 13, 2009. AICPA comments to the IRS on Notice 2009-5, particularly commending the IRS and Treasury on providing the interim penalty compliance rules contained in section C.