Standard Federal Tax Committee Reports related to §6694

FEDERAL INCOME TAX

Joint Committee Summary of P.L. 110-28 (Small Business and Work Opportunity Tax Act of 2007) ... 2008FED ¶39,955.185

Committee Reports on P.L. 101-239 (Omnibus Budget Reconciliation Act of 1989) ... 2008FED ¶39,955.19

Committee Report on P.L. 94-455 (Tax Reform Act of 1976) is at 1973-3 (Volume 2) CB 357. ... 2008FED ¶39,955.20

COM-RPT, 2008FED ¶39,955.185, Joint Committee Summary of P.L. 110-28 (Small Business and Work Opportunity Tax Act of 2007)

Joint Committee Summary of P.L. 110-28 (Small Business and Work Opportunity Tax Act of 2007)

.185Understatement of taxpayer's liability by return preparer. --

Present Law

An income tax return preparer is defined as any person who prepares for compensation, or who employs other people to prepare for compensation, all or a substantial portion of an income tax return or claim for refund. Under present law, the definition of an income tax return preparer does not include a person preparing non-income tax returns, such as estate and gift, excise, or employment tax returns.

An income tax return preparer who prepares a return with respect to which there is an understatement of tax that is due to an undisclosed position for which there was not a realistic possibility of being sustained on its merits, or a frivolous position, is liable for a first-tier penalty of $250, provided the preparer knew or reasonably should have known of the position.For purposes of the penalty, an understatement is generally defined as any understatement with respect to any tax imposed by subtitle A (i.e., income taxes). An income tax return preparer who prepares a return and engages in specified willful or reckless conduct with respect to preparing an income tax return is liable for a second-tier penalty of $1,000.

Explanation of Provision

The provision broadens the scope of the present-law tax return preparer penalties to include preparers of estate and gift tax, employment tax, and excise tax returns, and returns of exempt organizations.

The provision also alters the standards of conduct that must be met to avoid imposition of the penalties for preparing a return with respect to which there is an understatement of tax. First, the provision replaces the realistic possibility standard for undisclosed positions with a requirement that there be a reasonable belief that the tax treatment of the position was more likely than not the proper treatment. The provision replaces the not-frivolous standard accompanied by disclosure with the requirement that there be a reasonable basis for the tax treatment of the position accompanied by disclosure.

The provision also increases the first-tier penalty from $250 to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim with respect to which the penalty is imposed. The provision increases the second-tier penalty from $1,000 to the greater of $5,000 or 50 percent of the income derived (or to be derived) by the tax return preparer.

Effective Date

The provision applies to tax returns prepared after the date of enactment. --Joint Committee on Taxation, Technical Explanation of the Small Business and Work Opportunity Tax Act of 2007 May 25, 2007 (JCX-29-07).

Sec. 7701(a)(36)(A).

Sec. 6694.

COM-RPT, 2008FED ¶39,955.19, Committee Reports on P.L. 101-239 (Omnibus Budget Reconciliation Act of 1989)

Committee Reports on P.L. 101-239 (Omnibus Budget Reconciliation Act of 1989)

.19 Return preparer penalties. --The bill revises the present-law penalties that apply in the case of an understatement of tax that is caused by an income tax return preparer. First, the bill provides that if any part of an understatement of tax on a return or claim for refund is attributable to a position for which there was not a realistic possibility of being sustained on its merits and if any person who is an income tax return preparer with respect to such return or claim for refund knew (or reasonably should have known) of such position and such position was not disclosed or was frivolous, then that return preparer is subject to a penalty of $250. The penalty is not imposed if there is reasonable cause for the understatement and the return preparer acted in good faith. The committee has adopted this new standard because it generally reflects the professional conduct standards applicable to lawyers and to certified public accountants. The committee believes that this standard of behavior is stricter than present law, so that negligent behavior subject to penalty under present law will continue to be subject to penalty under this new standard.

The committee intends that imposition of this penalty not lead to an automatic referral to the Internal Revenue Service Director of Practice. The committee believes that the IRS should exercise discretion in referring the specific cases to the Director of Practice. The committee also intends that, in exercising this discretion in response to this provision, the IRS not generally expand its investigations of preparer penalty cases.

In addition, the bill provides that if any part of an understatement of tax on a return or claim for refund is attributable to a willful attempt by an income tax return preparer to understate the tax liability of another person or to any reckless or intentional disregard of rules or regulations by an income tax return preparer, then the income tax return preparer is subject to a penalty of $1,000. The committee intends that rules parallel to those discussed above, which provide that specified disclosure tends to demonstrate that there was no intentional disregard of rules and regulations for purposes of the negligence penalty, also apply to this penalty. * * *

Effective Date. --The modifications to the return preparer penalties apply to documents prepared after December 31, 1989. * * *. --House Committee Report.

Conference Agreement. --The conference agreement follows the House bill. --Conference Committee Report.

.195 Authority to counterclaim for balance of penalty in partial refund suits. --The bill clarifies that, where taxpayers utilize the provisions of present law (other than with respect to frivolous income tax returns) that permit partial (rather than full) payment of certain penalties to obtain judicial review of the imposition of these penalties, the United States may counterclaim as part of the same lawsuit for the remainder of the penalty. Present law may prohibit a counterclaim of this nature; thus, an additional lawsuit must be brought even if the taxpayer loses the case brought after partial payment of the tax. The committee believes that multiple court cases with respect to the same issue wastes scarce judicial resources. Consequently, the committee permits all issues relating to these penalties to be considered in one lawsuit.

Effective date. --* * * The provision relating to counterclaims is effective on the date of enactment. * * *. --House Committee Report.

Conference Agreement. --The conference agreement follows the House bill. --Conference Committee Report.

.196 Disclosure of certain information by return preparers. --The bill provides that the IRS regulations relating to the use of tax information by return preparers are to provide that a return preparer may disclose tax information to another return preparer solely for purposes of quality or peer reviews. The purpose of this provision is to enable a return preparer to obtain the benefits of having another return preparer review the first preparer's work. The bill does not permit disclosure of this information by the IRS for these purposes.

Effective Dates. --* * * The provision relating to disclosures by return preparers is effective on the date of enactment. * * * of H.R. 3299. --House Committee Report.

Conference Agreement. --The conference agreement follows the House bill. --Conference Committee Report.