The Internal Revenue Service and the Treasury Department have implemented enhanced standards of conduct for tax preparers.
Notice 2008-13 provides guidance regarding implementation of the tax return preparer penalty provisions. In 2008, the Treasury Department and the IRS intend to revise the regulatory scheme governing tax return preparer penalties, which has remained substantially unchanged since the late 1970s.
Section 8246 of the Small Business and Work Opportunity Tax Act of 2007 amended several provisions of the Tax Code to extend the application of the income tax return preparer penalties, as well as alter the standards of conduct that must be met to avoid imposition of the penalty for preparing a return that reflects an understatement of liability, and increase the applicable penalties.
Among other matters, the notice said that a tax return preparer will be found to have acted in good faith when the tax return preparer relied on the advice of a third party who is not in the same firm as the tax return preparer and who the tax return preparer had reason to believe was competent to render the advice. The advice may be written or oral, but in either case the burden of establishing that the advice was received is on the tax return preparer.
A tax return preparer is not considered to have relied in good faith if the advice is unreasonable on its face; the tax return preparer knew or should have known that the third party advisor was not aware of all relevant facts; or the tax return preparer knew or should have known, at the time the tax return or claim for refund was prepared, that the advice was no longer reliable due to developments in the law since the time the advice was given. The notice provides several examples of how these situations might work, and the IRS is seeking comment on the notice.
For undisclosed positions on a tax return, the new law replaced the realistic possibility standard with a requirement that there be a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits. In cases in which the taxpayer discloses the position on the tax return, the notice implements the new law that states there must be a reasonable basis for the tax treatment of the position taken on the tax return.
"On the good side it alleviated one of the biggest concerns, which is the conflict of interest between the preparer and client," said Bill Smith, director of the national tax office at CBIZ Accounting, Tax & Advisory Services. "When there's a difference between the comfort level the taxpayer can have and the preparer can have, the new rules say the preparer will be OK if he advises the client of the difference between the two and contemporaneously documents that at the substantial authority level."