Sec. 6694 Tax Return Reporting Standards for Preparers

By Jeffrey R. Hoops, CPA

The Sec. 6694 tax return reporting standards applicable to tax return preparers were increased as part of the Iraq war funding legislation enacted on May 25, 2007 (P.L. 110-28). The standard increased from “realistic possibility of success” to “more likely than not” (MLTN) for undisclosed nontax-shelter items.

Although the increase in the standards was a major change in tax policy, it was not the subject of a hearing and was not based on a recommendation from Treasury. The change came as a surprise even to the IRS (the IRS Chief Counsel said the Service had been “blindsided” by the act’s provision).

Since May 2007, the AICPA Tax Division has undertaken a significant legislative effort to “cure” the problems created by the new MLTN standard by generally equalizing the Sec. 6694 tax return preparer standards with the taxpayer standards at “substantial authority” for undisclosed nontax-shelter items.

On December 6, 2007, Representatives Joseph Crowley (D-NY) and Jim Ramstad (R-MN) introduced H.R. 4318 (there are now 23 co-sponsors), which would equalize the taxpayer and preparer standards for undisclosed, nontax-shelter items at the current taxpayer level of “substantial authority.” The AICPA currently is working to get a similar bill introduced in the Senate and to get as many co-sponsors as possible for these bills. Also, on February 4, 2008, Treasury released the General Explanations of the Administration’s Fiscal Year 2009 Revenue Proposals (also known as the Blue Book), which contains a legislative proposal very similar to H.R. 4318. 

Concurrent Regulatory Focus

With the May 25, 2007, enactment of the MLTN standard, the Tax Division immediately contacted the IRS and Treasury regarding numerous issues with the changes, but particularly with the effective date. A detailed comment letter was submitted on June 7, 2007, and Treasury moved four days later to defer the legislative effective date until 2008. Members and staff worked throughout 2007 with the IRS and Treasury, through numerous calls and meetings, to provide the practical information necessary for the law’s implementation. Detailed comment letters were also submitted to the IRS and Treasury on September 14, 2007, and November 7, 2007.

On December 31, 2007, the IRS issued Notice 2008-13, offering interim guidance on the implementation of the May 2007 changes to Sec. 6694, and Notice 2008-11, clarifying prior transitional relief granted with respect to those changes. In addition, it issued Notice 2008-12, providing interim guidance on Sec. 6695 return preparer signature requirements. The guidance in these notices alleviates certain tax return preparer issues about the current filing season.

The notices address a number of the AICPA’s concerns. In particular, Notice 2008-13 contains an alternative approach to comply with Sec. 6694 reporting standards for a position for which there is substantial authority but for which a preparer does not have a reasonable belief that the position would more likely than not be sustained on the merits. This interim guidance will help members get through the 2007 tax season in compliance with these rules and will “buy time” to pursue a legislative solution.

The Tax Division continues its critical efforts in this area by providing feedback to the IRS and Treasury as they draft final regulatory guidance. Developments have been communicated to members through a series of e-alerts, which, together with other resources, are available on the AICPA website at the Tax Center.   



Mr. Hoops chairs the AICPA Tax Division’s Tax Executive Committee. DC Currents heightens awareness of the Tax Division’s activities and apprises readers of tax policy, technical issues, and other practice support matters.


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