The recent hearings by the Internal Revenue Services on its proposed preparer penalty rules under Code Section 6694 were the proverbial "last shot" for any concerns to be voiced before the rules become final.Five organizations - including the American Institute of CPAs, the American Society of Appraisers, Padgett Business Services, the National Association of Bond Lawyers, and H&R Block - took the opportunity to testify, while everyone acknowledged the efforts put in by the Treasury and the IRS.

"It's standard to begin by thanking the government, but in this case they really did a wonderful job," said Tom Ochsenschlager, the AICPA's vice president for taxation, who attended the hearings. "They worked extremely hard, and got out their advice in short order."

Moreover, he noted, the service's position is a "very reasonable position, given the statute they were working with."

Changes to the Tax Code by 2007 legislation require preparers to disclose to the IRS any tax position taken by taxpayers that failed to meet the Tax Code's "more likely than not" standard. Since this raised the standard for preparers to a higher level than that of taxpayers, it created the potential for conflicts of interest between taxpayers and preparers. Although there are a number of bills and some support in Congress to correct the imbalance, none have made it into law.

Interim guidance in Notice 2008-13 and recently proposed regulations allow preparers to disclose to their clients, rather than the IRS, the difference between the reporting standards and document the advice.


Ed Swails, an executive director with Big Four firm Ernst & Young, testified on behalf of the AICPA. His points included the following recommendations for the final regulations:

A Clarify when a tax return preparer is required to sign a return. There's significant confusion and uncertainty regarding whether a preparer is required to sign a return in other than the most obvious cases, according to Swail. This is particularly true when a preparer reviews a tax return that has been prepared by the taxpayer or employees of the taxpayer.

A Permit reliance on the taxpayer's legal conclusions that the preparer believes the taxpayer was competent to provide. The sentence in the proposed regs that prohibits a preparer from relying on a taxpayer's legal conclusions can be interpreted as changing the government's longstanding position that preparers can rely on taxpayer information regarding items that involve mixed issues of fact and law, such as basis, earnings and profits, depreciation, and inventory, if the preparer has no reason to believe that such information is inaccurate or incomplete, noted Swails.


The proposed reg's discussion on due diligence might provide an incentive to lower standards of practice and could limit the willingness of practitioners to give advice to taxpayers, according to Roger Harris, chief executive of Padgett Business Services and former chair of the IRS Advisory Council, who testified.

"The regulations state that the IRS will look to all the facts and circumstances, including the tax return preparer's diligence. In determining the level of diligence in a particular situation, the tax preparer's experience with the area of federal law and familiarity with the taxpayer's affairs, as well as the complexity of the issues and facts, will be taken into account."

"This language could lead one to believe that the service is rewarding the less-prepared tax return preparer - if you will, creating a race to the bottom, rather than lending a boost to the pursuit of excellence and best practices," Harris said. He urged the IRS "to always encourage the pursuit of higher standards of knowledge and industry best practices."


Problems associated with the inclusion of employment tax forms within the purview of the preparer penalties are entirely different than the income tax area, according to Harris. "There are a number of important, and yet controversial, issues in which the service has been unwilling or just plain unable to provide sufficient guidance to taxpayers and tax return preparers," he said. "The two biggest problem areas are the employee-independent contractor and reasonable-salary issues."

"For example," he said, "a new small business client comes in. He or she has 20 workers, none of which were classified as employees. I convince the owner that eight of them should be classified as employees. What if the IRS says the real number should be 13 employees? Without guidance, should I tell the owner, 'Stop, I can't talk to you about your employment tax issues'?"

According to Harris, the preparer can send the taxpayer to a payroll company, fix the obvious problems with the payroll and then over-comply with the disclosure requirements of the new penalty regime, or not comply. The second choice will weaken the e-filing program, since preparers will be forced to send in paper disclosure forms.

He recommended the option of the preparer disclosing to the taxpayer and contemporaneously documenting the advice in the preparer's files, as opposed to requiring an attachment to the return, similar to the option for income tax returns.


Jay Fishman, chair of the American Society of Appraisers' Government Relations Committee, noted that under certain circumstances, appraisers could be regarded as non-signing preparers subject to the new penalties.

"Appraisers do not know, and are ethically prohibited from knowing, the many financial elements comprising the return for which a valuation is being performed," he said, and urged the IRS to clarify that appraisers do not possess knowledge of the ingredients of a return sufficient to be considered non-signing preparers.

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