Treasury Department General Explanations of the Administration's Fiscal Year 2009 Revenue Proposals (Blue Book)

February 5, 2008

Treasury Department : Blue Book : Fiscal year 2009 revenue proposals
General Explanations of the Administration's Fiscal Year 2009 Revenue Proposals
Department of the Treasury  February 2008   
GENERAL EXPLANATIONS OF THE ADMINISTRATION'S FISCAL YEAR 2009 REVENUE PROPOSALS

CONFORM PENALTY STANDARDS BETWEEN PREPARERS AND TAXPAYERS

Current Law

Recently enacted legislation modified the standards of conduct that must be met to avoid imposition of penalties for preparing a return with respect to which there is an understatement of tax. For undisclosed positions, a tax return preparer must have a reasonable belief that the position would more likely than not be sustained on the merits. For disclosed positions, there must be a reasonable basis for the position. There is no penalty if the preparer has reasonable cause and good faith with respect to the position taken on the return.

Taxpayers are subject to a variety of accuracy-related penalties for underpayments of tax. For undisclosed positions that do not involve a significant purpose of tax avoidance or certain reportable transactions, taxpayers may avoid accuracy-related penalties if there is or was substantial authority for the position that caused the understatement of tax. For positions involving tax shelters and certain reportable transactions, the taxpayer must have a reasonable belief that the position would more likely than not be sustained on the merits.

Reasons for Change

The increase in applicable standards in order for a preparer to take an undisclosed position on a return and avoid preparer penalties may result in conflicts of interest between preparers and their taxpayer clients. These conflicts should not be addressed by increasing the standards generally applicable to taxpayers to avoid accuracy-related penalties because such an increase would present significant administrative concerns and would result in unfair application of the accuracy-related penalty. In addition, the more likely than not standard for preparers presents concerns when applied to many routine reporting positions.

Proposal

The standard applicable to preparers when taking a position not disclosed on a return would be the substantial authority standard. Because the determination as to whether a transaction has a significant purpose of tax avoidance or evasion is inherently subjective to the taxpayer, the preparer standard applicable to tax shelters would also be substantial authority. However, a preparer would be required to have a reasonable belief that the position would more likely than not be sustained on the merits when taking a position with respect to a transaction determined to have a potential for tax avoidance or evasion to which section 6662A applies. The standard applicable to preparers for disclosed positions would remain at reasonable basis. No penalty would be asserted against a preparer if the preparer has reasonable cause and good faith.

Revenue Estimate