The proposed regulations on preparer penalties, released on June 17, are the latest iteration of rules that tax practitioners should consider carefully when recommending and executing tax strategies. Not heeding them can result in stiff penalties or, worse, the loss of the right to continue to practice tax law and serious damage to a firm’s reputation in the client community.The simple reality is that those responsible for recommending prospective tax strategies are almost always drawn back into the matter by the signing return preparer once the transaction is completed. They are asked about tax benefit matters what was intended and whether things turn out as expected. That after-the-fact advice is enough to subject the practitioner to the label “return preparer” for purposes of the preparer penalties.

If the position taken on the transaction was sufficiently aggressive as to possibly not have greater than a 50-50 chance of being sustained in court and the practitioner (or the tax planner now turned preparer) does not recognize that fact through disclosure, they will be subject to the new, almost draconian preparer penalties, possible referral to the Internal Revenue Service Office of Professional Responsibility and, in some cases, referral to the practitioner’s professional licensing board for censure.

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