Notice 2008-13 and Section 6694(a)(2(B) make it clear that the standard for disclosure is higher than the substantial authority standard. The return preparer is considered to have a reasonable belief that the tax treatment of an item is more likely than not the proper tax treatment if the tax return preparer analyzes the pertinent facts and authorities in the manner describe in Reg. 1.6662-4(d)(3)(ii) and, in reliance upon that analysis, reasonably concludes in good faith that there is a greater than 50% likelihood that the tax treatment of the item will be upheld if challenged by the IRS.

Notwithstanding the attempt in Notice 2008-13 to write a 50% guidance test for the more likely than not standard, and taking account the lesser reasonable basis standard, each of the standards are subjective and therefore will always be subject to the discretionary review of the IRS.

Discretionary determinations by the IRS are very often made by over-zealous IRS examiners. For this

reason an important consideration is the ability of a tax return preparer as an advocate and the ability of a tax return preparer to represent taxpayers before the IRS. Only enrolled agents, CPAs, and attorneys qualify to represent taxpayers before the IRS. A large portion of the tax preparers are not authorized to represent taxpayers before the IRS. It is among those qualified to represent taxpayers before the IRS where the quality of "advocacy" becomes important to deal with the subjective and discretionary issues under the new standards for "analysis" and technical support.

Taking into account the difficulty of quantifying the more likely than not standard, it is best to lean towards providing the best possible analysis and technical authority, rather than run the risk of understating the analysis and authority. More is better than less where the objective of the memorandum (either for a disclosed or undisclosed position) is to convince the IRS that there the position taken is technically justified given the subjective elements of the more likely than not standard.

REACTION TO MORE LIKELY THAN NOT STANDARD

The return practitioner industry has expressed its distain and criticism for the more likely than not standard described in Section 6694(a)(2)(B). The National Association of Tax Professionals, The American Bar Association, and The American Institute of Certified Public Accountants are some of the professional organizations expressing views in favor of the lesser substantial authority standard in lieu of the more likely than not standard. Some of the argument against the more likely than not standard is, as follows: it will increase the cost of tax compliance; there is a likelihood that the standard will trigger so many disclosure statements that the disclosures will become practically meaningless; it creates the potential for conflicts of interest between return preparers and taxpayers; it will not always be possible to make such precise determinations for complex legal and factual issues; it will require a significant amount of research and diligence to ensure compliance with the law and thereby increase the cost of tax return preparation; the standard results in a change in the role of a preparer from that of an advocate to that of an "advisor."

The return practitioner and tax consulting industry has been visibly seeking to influence Congress and the President to consider lowering the more likely than not standard. H.R. 4318, introduced December 2007, ³⁵ defines an unreasonable position for an undisclosed position as one without substantial authority for the position but retains the more than likely standard for tax shelters as defined in Section 6662(d)(2(C)(ii) and for reportable transactions to which Section 6662A applies. Treasury´s "General Explanations of the Administration´s Fiscal Year 2009 Revenue Proposals," also known as the "Blue Book," ³⁶ notes that the administration proposes to convert the more likely than not standard to the substantial authority standard based upon conflict of interest principles and notes further:

National Taxpayer Advocate. The National Taxpayer Advocate (NTA) in her 2007 Annual Report to Congress (January 10, 2008) also noted the conflicts of interest between preparers and their clients due to the higher standard for the preparers. ³⁷ The NTA observed that the more likely than not standard may also discourage preparers from interpreting ambiguous tax rules in a taxpayer-friendly manner. ³⁸

Notwithstanding the substantial discomfort with the more likely than not standard contained in Section 6694(a)(2)(B), that standard is expressly stated in Sections 6664(d)(2)(C) and 6695A(c). See also Reg. 1.6664-4(f)(2) dealing with "reasonable cause" based upon legal justification which also uses the more likely than not standard. This longstanding codification of the more likely than not standard has been overlooked by the critics of that standard. Even if the standard is reduced, a reduced standard will still be subjective and give an aggressive IRS ample opportunity to take adverse positions on all of the penalty issues. At the time of examination, the quality of taxpayer representation will be more important than the ultimate standard determined for Section 6694. The quality of "advocacy" cannot be taken for granted. An IRS examiner, his manager, or an IRS Office of Appeals will have to be convinced that the positions taken meet the appropriate standards of analysis and substantiation. For example, weak analysis and substantiation can be effective with successful "advocacy."

One argument in support of the higher more likely than not standard is that there is a need to hold tax return preparers to a professional standard that is higher than the standard for individuals. The IRS and the DOJ have identified widespread abuses by tax return preparers documented in civil and criminal cases, some of whom are enrolled agents and CPAs. Tax return preparers hold themselves out to be competent or expert in preparing tax returns in exchange for compensation; for that reason they should b e held to the higher standard of knowledge and competence. It is basic that in litigated cases, a CPA and an attorney are held to higher standards by reason of their training and expertise. As an example, Reg. 1.6664-4(b) suggests that reliance on a professional tax advisor is considered as an important factor to negate or abate the 20% negligence penalty in determining "reasonable cause" within the meaning of Section 6664(c) of the Code. For even stronger reasons, reliance on a professional tax advisor should be sufficient in most cases to negate both the civil fraud and fraud penalties.

Given the new technical standards for analysis and substantial authority , it would be patently inconsistent to claim that the technical standards for clients should be applied to their technical advisors and tax professionals who have a far higher background, experience, training, and education on tax matters. Competent tax professionals seek out ongoing training and education when held to higher standards, thereby improving their knowledge and reducing avoidable mistakes. The background and experience of the taxpayer are taken into account as factors to consider by judicial authority in dealing with the terms "negligence" and "tax fraud."

The interest in the tax preparation and consulting industry to reduce the Section 6694 standards is

self-serving to minimize the risk for non-disclosed positions. One can argue that taxpayers have a different goal to be served by competent tax return preparers and consultants who can give them advice, counsel and technical support at the highest possible level and who have the ability to justify positions taken in a tax return.

Notwithstanding the controversy dealing with the more likely than not standard, the NTA in her 2007 Report to Congress stated that the new Section 6694 penalties "may effectively deter noncompliance by preparers" and also result in "a cascading effect" such collection efforts have on the compliance of the preparers´ present and future clients. ³⁹ The IRS agreed with the NTA that the Act may decrease noncompliance by preparers and quite possibly increase compliance by their clients. In addition to protecting taxpayers from being harmed by unscrupulous return preparers, the larger compliance impact is a goal of the IRS.

It is an obvious point that the threat of high penalties on tax return preparers for the failure to disclose unreasonable positions encourages "disclosure" to the IRS, and that disclosure will make everyone more cautious. Aggressive positions will be identified, and the new visibility will cut down on "audit roulette," a gamble that the IRS will not audit the tax return within the three-year statute of limitations described in Section 6501(a). Taxpayers do not want to invite audit investigations and tax return preparers do not want to face the new stiff penalties.

Joint Committee Overlooks Revenue Effects. The fact that the new penalties will impact positively on tax compliance was missed by the Joint Committee on Taxation in its revenue estimates for the increased penalties on tax return preparers. 40 The revenue raised from the understatement of tax liability by return preparers was estimated to be: $3 million in 2008; $5 million in 2009; $6 million in 2110; $8 million in 2111, etc. for a total of $82 million for the years 2007- 2017. The aggregate revenue raised for filing erroneous refund claims was estimated to be $98 million for the years 2007-2017. Those revenue estimates are naive.

Prior to the Act the 6694 penalties were not a focus of the IRS in civil and criminal examinations because the penalties were small. Responsible tax return prepares will make disclosures previously not made and prudent taxpayers will likely be more conservative in the positions taken in their tax returns. Without question the NTA is correct in stating that the new Section 6694 penalties will improve tax compliance. Reasonable and conservative tax return preparers and their clients are likely to hold back on aggressive tax positions.

The criticism of the more likely than not standard may be misplaced. The motivation for disclosure by the tax return preparers is the treat of penalties , not the disclosure standard. In Notice 2008-13, the test for a position to be accepted under the more likely than not standard is more than 50%; it has been estimated the substantial authority test is quantified at 40%. Does anyone think that the 10% difference will have much of an impact on an aggressive IRS examiner? Will that that 10% make a difference in the judgment of conservative or nervous return preparers to file a disclosure statement with the IRS? There is ambiguity on all of the standards used if the positions taken are not disclosed to the IRS under the reduced standard. An IRS examiner may not be less aggressive regardless of the standard, and the taxpayer is equally at risk for the negligence penalty. Regardless of the standard, the larger penalties are likely to be the force driving disclosures of unreasonable positions to the IRS. Even under a reduced standard of authority, the issue of conflict of interest remains. Contrary to expectations of the tax industry, taxpayers with complex factual and legal issues will still need to document their tax return with a discussion of the applicable law and the application of the facts to the law with the goal of persuading the IRS not to select the return for examination.

COMPARISON OF STANDARDS

The reasonable basis standard for disclosed positions under Section 6694(a)(2)(C)(ii) must be compared to the substantial authority and to the more likely than not standard for undisclosed positions. There is one very significant issue for taxpayers dealing with complex factual or legal issues. If one or more of the positions taken in a tax return is disclosed to the IRS, no Section 6694 penalties will be triggered, and more importantly, there will be no negligence penalty for clients if the reasonable basis standard is met. Regulation 1.6662-3(b)(3) defines reasonable basis as follows:

As noted above, the reasonable basis standard applicable to disclosed positions is lower than the substantial authority standard advocated by the tax profession industry. Nevertheless, it is difficult to quantify the differences in the standards and the nuances between the standards. These standards are subjective. However, if the disclosed position is examined by the IRS, the legal memorandum used to support the position taken should cite Reg. 1.6662-3(b)(3) in its entirety. One can never assume that the IRS examiners are well trained and have a comprehensive knowledge of the tax law. Very often and IRS examiner will routinely take an adverse position and then place the burden of proof on the taxpayer to prove that the adverse position is erroneous. An analysis of the law applicable to the position would help to deter the routine adverse position before it is the subject of an IRS determination. The strategy, as always, is to have sufficient technical support attached to a tax return for disclosed positions to minimize the potential that the IRS will select the tax return for examination.

Regulation 1.6662-4(d)(2) compares the substantial authority standard with the more likely than not standard, as follows:

Without question there is a singular advantage to tax return preparers for disclosure of an unreasonable position because the reasonable standard, needing merely the relevance and substantiation of one of the authorities noted in Reg.1.6662-4(d)(3)(iii). Yet, the identification by a return preparer that the position taken is unreasonable will likely be absorbed into the IRS computers as a "red flag" that needs to be addressed by an increasingly aggressive IRS examiner under marching orders to help close the Tax Gap.

Section 6694(a)(2)(B) will impose 6694 penalties for an undisclosed position if there is not a reasonable belief that the position would more likely than not be sustained on its merits.

Section D of Notice 2008-13 deals with the term reasonable belief and notes that this standard is met if:

1. The tax return preparer analyzes the pertinent facts and authorities in the manner described in Reg. 1.6662-4(d)(3)(ii);
2. The preparer relies upon that analysis;
3. The preparer reasonably concludes that the greater than 50% standard has been met; and 4. The reliance is made in good faith.

Although the term reasonable belief is a subjective term, these issues are normally resolved by the facts and circumstances in each case.

Notice 2008-13 refers to Reg. 1.6694-1(e)(1) to measure the extent to which a return preparer can rely on unverified information provided by the taxpayer. Regulation 1.6694-1(e)(1) provides the general rule that for purposes of Sections 6694(a) and (b), the preparer generally may rely in good faith without verification upon information furnished by the taxpayer. The tax return preparer is not required to audit, examine, or review books

and records, business operations, or documents or other evidence in order to verify independently the taxpayer´s information. However, the preparer may not ignore the implications of information furnished to the preparer or actually known by the preparer. The preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Additionally, some provisions of the Code or regulations require that specific facts and circumstances exist—for example, that the taxpayer maintain specific documents before a deduction may be claimed. The tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulation as a condition to the claiming of a deduction. The premise of the above rule is that the tax return preparer must interview the taxpayer and review the information submitted by the taxpayer.

The information reviewed may include schedules prepared by another tax return preparer provided the schedule appears to be correct and complete. ⁴² The return preparer may also rely on professional advice. ⁴³ It makes no difference if the schedule relied upon or advice was provided by a preparer within or without the same tax preparation firm. In each instance, there is no penalty even if the schedule or advice was erroneous. If one of the items reported requires a separate IRS Form needed to report or substantiate an item reported, the failure to inquire about the required Form will result in a Section 6694 penalty. ⁴⁴ If the return preparer inquires about a specific IRS Form and the taxpayer does not give a truthful reply to the return preparer, there is no Section 6694 penalty if there is a resulting underpayment of tax. ⁴⁵

It is extremely important to document the information received from a taxpayer. That is the only way that a return preparer is able to establish that the data is sourced from a specific taxpayer. If the data received is from a third-party bookkeeper or from software data, the return preparer must have signatures from

the taxpayer to acknowledge that the data is sourced from the taxpayer. Tax "organizers" to be completed by taxpayers and interview data should be signed and dated by the taxpayer. When a tax return preparer is audited, a sample of the clients will be interviewed. The singular issue when the client is interviewed by the IRS during an examination is whether one or more numbers in the tax returns was sourced from the client or originated by the tax return preparer. During an examination of a return preparer for the possible application of the Section 6694 penalty, the IRS will most likely cover the return preparer compliance issues in Section 6695. ⁴⁶ Clients of return preparers may be expected to be intimidated by IRS civil or criminal examiners, and those clients will always be asked to identify or origin of one or more numbers. That question should be anticipated by the careful return preparers, and that underscores the need to document client data as sourced from the client.

Tax returns must be timely filed in order to avoid the 25% late filing penalty of Section 6651. Since tax returns are affidavits, filed under penalties of perjury, one must be very careful to include data that is documented and accurate. If a tax return is filed with incomplete information, estimated data, data that cannot be currently substantiated or similar matters, one should attach to the tax return a disclosure statement that identifies to the IRS each of these maters or items that are incomplete or estimated. This disclosure will normally be sufficient to prevent the IRS from raising a "false statement" issue under the Section 7206 felony statute.

Taxpayer data should be kept for at least six years. Section 6531 provides that the statute of limitations for prosecuting tax fraud is six years. Given the apparent high priority of the IRS and the Department of Justice to scrutinize return preparer fraud, it would be wise for everyone to hold six-year records. ⁴⁷ Any criminal examination of a return preparer will automatically encompass their clients for possible conspiracy to commit tax fraud.