A provision in a bill that recently made its way through the House would correct the imbalance between tax payers and preparers that was created by legislation last year.Changes to the Tax Code by the Small Business and Work Opportunity Act of 2007 tightened the disclosure requirements for tax preparers under Code Sec. 6694 by requiring preparers to disclose any tax positions taken by a taxpayers that didn’t meet the code’s “more likely than not” standard.
Since this raised the standard for tax preparers to a level above the standard for taxpayers, it created the potential for conflicts of interest between preparers and their clients.
Now, H.R. 6049, the Energy and Tax Extenders Act, would amend the code to modify the standards for imposing penalties on preparers for understatements of tax to require:
1. Substantial authority for a position with respect to an item on a tax return if such position was not disclosed with the return; and,
2. A reasonable basis for a position that was disclosed.
The “more likely than not” standard generally requires a reasonable belief that the tax position has a better-than-50-percent chance of being accepted by the IRS or a court. The substantial authority standard is considered a 40 percent chance of success, while the “reasonable basis” is met by a one-in-three chance of success.
GOOD FOR CPAS
“We greatly appreciate House Ways and Means Committee chair Charles Rangel’s commitment to pass the provision,” said Barry Melancon, president and chief executive officer of the American Institute of CPAs. “It’s a top priority for the AICPA and CPAs across the country.”
“We believe legislation is the only way to correct the flawed law passed by Congress ... that raised the tax return reporting standards for tax return preparers to a level higher than required of taxpayers,” added AICPA vice president for taxation Tom Ochsenschlager.
“These are very much needed,” agreed Clint Stretch, managing principal of tax policy for Deloitte Tax LLP. “The provisions put in last year that caused preparers to have higher standards of conduct than the people they would be advising are just plain mischievous,” he said. “They create incentives for taxpayers to go without advice, and they clearly need to be changed.”
Stretch pointed out that the unsettled nature of the tax law precludes tax preparers from meeting the “more likely than not” standard in many instances: “The higher standard is inappropriate. There are too many areas of tax law that are uncertain because the law has never been expressed beyond the statute in so many cases.”
The law change last year did three things, explained Ed Karl, director of advocacy for the AICPA Tax Division. “It raised the amount of the penalty from $250 to the greater of $1,000 or half the preparer fee; it broadened its applicability from just income tax returns to all types of federal returns — estate, gift, excise, payroll, etc.; and it raised the standard a preparer has to meet in order to give advice to a client for undisclosed positions on a return from a realistic possibility of success to the ‘more likely than not’ standard.”
“The first two are fine with us,” said Karl. “The concern we have is with the change in standards that leapfrogged the preparer standard over that required for taxpayers. If the taxpayer can meet that standard but the preparer can’t, it’s not a healthy position to be in. And it’s not good for the government where preparers are not able to give advice to taxpayers in complicated situations.”
With the provision having passed in the House of Representatives, Karl observed, “The question is whether the Senate Finance Committee will put in the provision. The original provision [which made the standards unequal] came from the Finance Committee staff.”
The administration budget proposal had a similar fix to the problem as the proposed legislation, Karl noted. “It’s fairly clear from Treasury and the IRS that the differing standards for preparers and taxpayers doesn’t work, and they’re trying to manage as best they can,” he said. “The Senate has acknowledged that it’s a problem, but their initial idea was to raise the taxpayer up to the preparer standard. The Treasury says that’s not a good idea.”
“The problem is in interpreting the law at the ‘more likely than not’ level,” he said. “In many areas, it’s impossible to say that your position is more likely than not to be the correct position. You can say you’ve done a lot of research, but you don’t know what the courts or the IRS will say. Treasury doesn’t want to put taxpayers in the same position that preparers are in now.”
WAIT, THERE’S MORE!
Meanwhile, other provisions included in the bill are an extension of the research and development tax credit, an optional itemized deduction for state sales taxes, and deductions for tuition expenses and renewable-energy incentives. The package does not provide for a patch for the individual Alternative Minimum Tax, although the House and Senate are expected to address the issue later this year.
“Once again, Congress seems to be heading toward using a piecemeal, temporary approach, rather than one of providing long-term certainty to address a wide range of recurring tax issues,” said Deloitte’s Stretch. “Essentially, the tax writers are passing hard decisions on long-term tax policy on to the next administration and Congress to tackle.”
“The frustration for taxpayers is in the on-again, off-again nature of the provisions, especially in the alternative and renewable energy areas,” he said. “Those are areas where credits are very important to peoples’ investment decisions. They can’t look out and see that there will always be a credit there, especially with the deficits we’ve had in the last few years.”
“There could be a real fight on these when they get to the Senate,” Stretch predicted.
