The IRS has provided guidance (Notice 2008-46) on the implementation of the return preparer penalties under Sec. 6694, which were amended by the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA).
SBWOTA replaced the prior-law Sec. 6694 requirement—applicable to income tax return preparers who knew or reasonably should have known of an undisclosed return position—that there be a realistic possibility that the position will be sustained on its merits, with a requirement that there be a reasonable belief that the position’s tax treatment was more likely than not the proper treatment. SBWOTA also expanded the scope of the return preparer penalties to include preparers of estate and gift tax returns, employment and excise tax returns, and returns of exempt organizations.
Notice 2008-13, issued by the Service in December 2007, describes categories of returns and other documents to which Sec. 6694 could apply. The notice lists specific tax and information returns and other documents that the IRS considers to be within or specifically outside the scope of Sec. 6694.
Notice 2008-46 adds to the lists of returns in Notice 2008-13. Among the tax returns added to the list of returns subject to Sec. 6694 are Form 1040NR, U.S. Nonresident Alien Income Tax Return, and several returns in the Form 1120 series. Included in the list of information returns are Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 5471, Report by Shareholders of a Foreign Corporation.
The preparation of certain forms outside the scope of Sec. 6694(a) may subject a preparer to a Sec. 6694(b) willful or reckless conduct penalty if the forms are prepared willfully to understate a tax liability on a return or claim for refund or recklessly or with intentional disregard of rules or regulations. The only forms of this type that Notice 2008-46 adds to the list of documents are Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests.
The notice is effective as of April 16, 2008.