Guidance on Sec. 6694 Preparer Penalty Issued

By Alistair M. Nevius, J.D.

The IRS has issued guidance on the implementation of the Sec. 6694 preparer penalty and has identified returns that can make preparers subject to both the Sec. 6694 and Sec. 6695 penalties (Notice 2009-5 and Rev. Proc. 2009-11). At the same time, the Service issued final regulations under Sec. 6694 (T.D. 9436). The regulations are discussed in this month's Tax Trends.

In October 2008, Sec. 6694(a) was amended by the Emergency Economic Stabilization Act, P.L. 110-343 (EESA), to provide that generally a return position will be treated as unreasonable (and therefore subject to the Sec. 6694 penalty) unless there is substantial authority for the position or the position has a reasonable basis and is properly disclosed.

Notice 2009-5 provides interim guidance to return preparers on the effect of the EESA changes on prior guidance that the IRS issued after the 2007 amendments to Sec. 6694, the definition of "substantial authority," and interim penalty compliance rules for tax shelters.

Prior Guidance

After Sec. 6694 was amended in May 2007 by the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA), the IRS issued Notices 2007- 54 and 2008-11, providing transition relief for advice given and for all returns and claims for refund filed after May 24, 2007, and before January 1, 2008 (except employment and excise tax returns, for which the transition relief applied through January 31, 2008). Notice 2009-5 says that practitioners can continue to rely on the transitional relief rules in those notices.

Notice 2008-13 provided guidance on standards of conduct applicable to return preparers under the "more likely than not" (MLTN) standard that was enacted by SBWOTA (and then repealed by EESA). Since the standard has generally been lowered to "substantial authority," preparers no longer need to comply with the Notice 2008-13 rules. However, because the MLTN standard was not repealed for tax shelter or Sec. 6662A reportable transactions, the Notice 2008-13 rules will continue to apply to tax shelter and reportable transaction positions on returns or claims for refund filed before the enactment of EESA.

Substantial Authority

Notice 2009-5 provides that for purposes of Sec. 6694(a), "substantial authority" will have the same meaning as it does in Regs. Sec. 1.6662-4(d)(2), and the analysis provided for in Regs. Secs. 1.662- 4(d)(3)(i) and (ii) will apply in determining whether substantial authority exists for a position.

Tax Shelter Interim Rules

For purposes of Sec. 6694(a), a tax shelter position will not be deemed to be an unreasonable position if there is substantial authority for the position and the return preparer advises the taxpayer of the penalty standards applicable to the taxpayer if the transaction is deemed to have a significant purpose of tax avoidance.

If a nonsigning preparer provides advice to another preparer regarding a tax shelter position, the position will be deemed not to be an unreasonable position if there is substantial authority for the position and the nonsigning return preparer provides a statement to the other preparer about the penalty standards applicable to the preparer under Sec. 6694.

These interim tax shelter penalty compliance rules do not apply to reportable transactions described in Sec. 6662A. Preparers may rely on Notice 2009-5 until the IRS issues further guidance.

Rev. Proc. 2009-11

SBWOTA extended the application of the return preparer penalties to preparers of all types of returns (not just income tax returns) and amended Sec. 6695(b) to impose a penalty on all return preparers who fail to sign a return or claim for refund when required to by the regulations. The final regulations issued December 15, 2008, define "return" and "claim for refund" for these purposes to include only returns and claims for refund that are specifically identified in published IRS guidance.

Under those regulations, Rev. Proc. 2009- 11 identifies categories of returns under which the Sec. 6694 return preparer penalty or Sec. 6695 signature penalty could apply. The revenue procedure includes a long list of tax returns and information returns, including forms in the 706, 941, 990, 1040, 1041, 1120, and 5500 series of returns.

The revenue procedure was effective January 1, 2009, for all returns and claims for refund filed after that date.

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