Preparer Penalty Examples are Just Examples, Chief Counsel Official Reiterates

Practitioners should not rely too heavily on the examples in Notice 2008-13, I.R.B. 2008-3, 282, which illustrate the interim regulations for the new more-likely-than-not preparer standard in Code Sec. 6694, warned Special Counsel, Thomas Kane, IRS Office of Chief Counsel, on January 30. "It's a mistake to try to plan or back yourself into the examples," Kane told practitioners at an event sponsored by the Taxation Section of the District of Columbia Bar Association.

Example 10

Notice 2008-13 includes 12 examples. One example in particular, Example 10, has generated many questions from practitioners, Kane reported.

Example 10 reads: "A corporate taxpayer hires Accountant J to prepare its tax return. Accountant J encounters an issue regarding various small asset expenditures. Accountant J researches the issue and concludes that there is a reasonable basis for a particular treatment of the issue. Accountant J cannot, however, reach a reasonable belief whether the position would more likely than not be sustained on the merits because it was impossible to make a precise quantification regarding whether the position would more likely than not be sustained on the merits. The position is not disclosed on the tax return. Accountant J signs the tax return as the tax return preparer. The IRS later disagrees with this position taken on the tax return. Accountant J is not subject to a penalty under Code Sec. 6694."

"Some practitioners have interpreted Example 10 literally," Bryan C. Skarlatos, a partner with Kostelanetz & Fink, LLP, New York, N.Y., and incoming chair of the Civil and Criminal Tax Penalties Committee of the American Bar Association Section of Taxation, told CCH. "They read the example to mean that, when the law is unclear, one does not have to disclose and no penalty would apply. This is not an accurate interpretation."

"What the IRS intended was for Example 10 to be an example of reasonable cause. The proper analysis is that the practitioner did violate the standard. Nevertheless, the practitioner may be eligible for a reasonable cause/good faith defense on the grounds that the law was so unclear." However, Skarlatos cautioned that practitioners would probably not want to be in the position of having violated the standard and arguing a reasonable cause/good faith defense.

Kane advised practitioners not read too much into Example 10 or any of the other examples. "Don't over- or under-analyze the examples." The examples are designed to illustrate common situations, he added.

Additionally, Notice 2008-13 is interim guidance, Kane reminded practitioners. "It is intended to take us through this filing season and this year." More comprehensive guidance will be published by year end, he predicted.

Internal Guidance

Practitioners are not the only ones struggling to interpret and apply the interim guidance, Kane noted. The IRS is preparing internal guidance for its employees. "We need to make sure our people have a good handle on the administration of the penalty and they are acting consistently with our published guidance."

Pending Legislation

Legislation has been introduced in the House (HR 4318) to equalize the preparer and taxpayer standards at substantial authority. Kane said that the IRS is aware there is pending legislation but the Service must provide guidance under the current statute. The AICPA told CCH that HR 4318 has 13 co-sponsors in the House. The bill has been referred to the House Ways and Means Committee.