November 7, 2007
Mr. Michael E. Hara
Internal Revenue Service
Room 5529W
1111 Constitution Avenue, N.W.
Washington, DC 20224
Re: Section 6694 Guidance
Dear Mr. Hara:
On September 14, 2007, the AICPA submitted comments to you regarding immediate guidance
needed by return preparers as a result of the recent revisions to the preparer penalty rules in section
6694 of the Internal Revenue Code. In those comments, we mentioned several broader issues
(“Phase 2 issues”) related to the preparer penalty rules that should be addressed and indicated that
we would provide you with comments on those issues at a later date. This letter offers comments on
three of those issues: application of the transitional rule to non-signing preparers; disclosure
requirements for non-signing preparers; and the specific forms to which section 6694 applies. For
purposes of this letter, it is assumed that the definition of “non-signing preparer” continues
unchanged.
1. Application of the Transitional Rule to Non-Signing Preparers
Clarification is needed regarding the application of the Notice 2007-54 transitional relief to nonsigning preparers. To eliminate the current ambiguity, we urge you to specifically state that the
transitional relief for non-signing preparers applies to advice given on or before December 31, 2007,
which we believe is the intent.
We note that this approach would be consistent with the earliest possible effective date for
application of the new preparer standard (“reasonable belief that the tax treatment of each position
on the return would more likely than not be sustained on its merits”) for purposes of Circular 230,
under the recently proposed Circular 230, section 10.34.
2. Disclosure Requirements for Non-Signing Preparers
a. Overall approach in existing regulations is sound.
We believe the overall approach to disclosure by non-signing preparers in the regulations under
section 6694 appropriately balances the constraints encountered by non-signing preparers with the
interests of the government and the tax practitioner community in fair and effective tax
administration. Thus, we believe that a non-signing preparer should continue to be viewed as having
satisfied his or her disclosure responsibilities under section 6694(a) with respect to a position that
does not satisfy the reporting standard for undisclosed return positions (reasonable belief that the
Mr. Michael E. Hara
November 7, 2007
Page 2
position would more likely than not be sustained on its merits) if the position satisfies the reporting
standard for disclosed return positions (reasonable basis) and either (i) the position is adequately
disclosed by the taxpayer, or (ii) the non-signing preparer informs the taxpayer or the signing
preparer, as applicable, of any opportunities to avoid penalties with respect to the position by
disclosure. Similarly, we believe that a non-signing preparer should continue to be viewed as having
satisfied his or her disclosure responsibilities under section 6694(b) with respect to a position
contrary to a rule or regulation if the position has a reasonable basis and either (i) the taxpayer
actually discloses the position, or (ii) the advice by the non-signing preparer includes an appropriate
disclosure statement.
b. Non-signing preparers should not be responsible for actual disclosure by taxpayers.
The current regulations do not penalize a non-signing preparer if a position is not actually disclosed
by the taxpayer or the signing preparer. We believe that this aspect of the current regulations should
remain unchanged. In part, this is because a non-signing preparer frequently has no control over, or
access to, the return. The non-signing preparer, therefore, may not know how his or her advice
ultimately was reflected on the taxpayer’s return, whether the position was disclosed, or whether a
Form 8275, for example, was properly completed. In many cases, the taxpayer might not want to
furnish the non-signing preparer with this type of information for confidentiality or other reasons,
particularly if the return was large and complex and the non-signing preparer’s involvement was
confined to only a relatively small portion of the return, even if substantial when viewed alone.
These problems may be compounded for return positions spanning multiple years. In such a case,
the non-signing preparer in year one may have had no contact with the taxpayer in subsequent years
and even less of an opportunity to review the return or influence a taxpayer to disclose in a
subsequent year.
c. Non-signing preparers should not be required to advise taxpayers to disclose when disclosure
is not in the taxpayer’s best interest.
Treasury has publicly recognized that the amendment to section 6694 has created potential conflicts
between tax return preparers and taxpayers. Leaving aside how these potential conflicts are
addressed with respect to signing preparers, the potential conflicts with respect to non-signing
preparers can be avoided by following the approach in the current regulations.
We do not believe it is appropriate to define the propriety of a preparer’s conduct independent of the
preparer’s responsibilities to his or her client. Subjecting a non-signing preparer to a section 6694
penalty absent actual disclosure where the taxpayer is not required to disclose the position to avoid a
penalty creates a conflict of interest between the preparer and the preparer’s client. If the rules are
not clarified, the preparer will be required to recommend disclosure, even where that is not in the
interest of the taxpayer (or, presumably, the tax system given the parameters of the taxpayer penalty
provisions and the adverse administrative consequences of too many disclosures).
The current regulations reflect the practicalities of the non-signing preparer’s role by requiring the
non-signing preparer to recommend disclosure to the taxpayer only where disclosure is required by
the taxpayer (i.e., cases where disclosure will allow the taxpayer to avoid penalty exposure). We
believe that this approach should be followed in any revisions to the existing regulations.
Mr. Michael E. Hara
November 7, 2007
Page 3
The Service and Treasury also have the same authority to address the manner of disclosure in the
non-signing preparer context under the newly revised section 6694 as they had under the previous
version of section 6694. We appreciate that in some instances (primarily where a return position
satisfies the substantial authority, but not the more likely than not standard) this approach means that
a non-signing preparer may advise on a position that does not satisfy the more likely than not
standard without also advising the taxpayer to disclose the position. However, this result is
consistent with the approach in the current regulations that non-signing preparers are required to
advise taxpayers of disclosure when such disclosure is required by the taxpayer.
Moreover, the plain language of the statute only directly addresses signing preparers. The concept
of the non-signing preparer was created as part of the government's exercise of its authority to
administer the tax laws. Therefore, the clarification we recommend does not undercut the Service’s
and Treasury’s implementation of the new statutory regime, and is consistent with the government's
inherent authority to adopt workable rules as to non-signing preparers.
d. Recommended revisions to the current regulations.
Reg. section 1.6694-2 – Advice to taxpayers
Reg. section 1.6694-2(c)(1) and (2) must be revised, respectively, to substitute “reasonable basis”
for the current “not frivolous” disclosure standard and to define “reasonable basis.” The advice a
non-signing tax return preparer must give a taxpayer under reg. section 1.6694-2(c)(3)(ii)(A) with
respect to a return position that does not satisfy the standard for undisclosed return positions
(reasonable belief that the position would more likely than not be sustained on its merits) must be
revised to reflect that standard, the fact that the taxpayer may have a lower reporting standard, and
the application of section 6694 to taxes in addition to income taxes.
We have indicated two alternative approaches to addressing the content of a non-signing preparer’s
disclosure advice to taxpayers under reg. section 1.6694-2(c)(3)(ii)(A), below. We would
recommend Alternative 1, as it helps simplify the rules and better aligns them with section 10.34(c)
of Circular 230.
Alternative 1
The first sentence of reg. section 1.6694-2(c)(3)(ii)(A) would be deleted and replaced with the
sentence set forth below. The remainder of reg. section 1.6694-2(c)(3)(ii)(A) (i.e., starting with “If
the advice with respect to the position is in writing . . .”) would remain unchanged. The new first
sentence would read as follows:
(A) Advice to taxpayers. If a nonsigning preparer provides advice to the taxpayer with
respect to a position and the nonsigning preparer does not reasonably believe that the
position satisfies the more likely than not standard, disclosure of that position is adequate if
the advice includes a statement informing the taxpayer of any opportunity to avoid any
taxpayer penalties reasonably likely to apply to the position by disclosure, if relevant, and of
the requirements for disclosure.
Mr. Michael E. Hara
November 7, 2007
Page 4
Alternative 2
We have provided Alternative 2 to demonstrate how the regulation might be updated to reflect the
Act, but we believe this more technical approach is too cumbersome. In addition, in today’s
environment, this approach may lead to unintended “boilerplate” on most tax advice, with more
drawbacks than benefits. Further, the specificity of Alternative 2 means it would become outdated if
legislation were enacted to equate the taxpayer and preparer standards.
In the case of income tax, the advice to a taxpayer can continue to address the taxpayer’s potential
exposure to the substantial understatement penalty (with revisions reflecting the disparity in taxpayer
and preparer standards). In the case of taxes other than income tax, we would recommend that the
advice to a taxpayer be phrased in more general terms. Although the negligence penalty, for
example, applies to taxes other than income tax, there is no disclosure exception to the negligence
penalty. Accordingly, we would recommend that the first sentence of reg. section 1.66942(c)(3)(ii)(A) be revised, that a new second sentence be added after the first sentence, and that the
remainder of reg. section 1.6694-2(c)(3)(ii)(A) (i.e., starting with “If the advice with respect to the
position is in writing . . .”) be left unchanged. The changes to the first sentence and the new second
sentence are as follows:
(A) Advice to taxpayers. If a nonsigning preparer provides advice to the taxpayer with
respect to a position and the nonsigning preparer does not reasonably believe that the
position satisfies the more likely than not standard, disclosure of that position is adequate
if the advice relates to income tax and includes a statement that the taxpayer may be
subject to a penalty under section 6662(d) if the position lacks substantial authority and
is not adequately disclosed in the manner provided in §1.6662-4(f) (or in the case of a tax
shelter item, regardless of whether there is substantial authority for the position or
whether the position is adequately disclosed). If the advice relates to a tax other than
income tax, and the nonsigning preparer does not reasonably believe that the position
satisfies the more likely than not standard, disclosure of that position is adequate if the
advice includes a statement informing the taxpayer of any opportunity to avoid any
penalties reasonably likely to apply to the position by disclosure, if relevant, and of the
requirements for disclosure.
Reg. section 1.6694-2 – Advice to another preparer
The advice a non-signing tax return preparer must give another preparer under reg. section 1.66942(c)(3)(ii)(B) with respect to a return position that does not satisfy the standard for undisclosed
return positions does not have to change (apart from substituting the more likely than not standard
for the realistic possibility standard). We recommend, however, that it be clarified to reflect more
clearly what we believe was its original intent. Thus, the first sentence of reg. section 1.66942(c)(3)(ii)(B) could be revised to read as follows:
(B) Advice to another preparer. If a nonsigning preparer provides advice to a signing
preparer with respect to a position that the nonsigning preparer does not reasonably believe
satisfies the more likely than not standard, disclosure of that position is adequate if the advice
includes a statement that disclosure under section 6694(a) is required.
Mr. Michael E. Hara
November 7, 2007
Page 5
Reg. section 1.6694-3
The advice a non-signing preparer must give to a taxpayer under reg. section 1.6694-3 in the case of
a position contrary to a rule or regulation does not need to be revised based upon the statutory
change to section 6694.
The advice a non-signing preparer must give to another preparer under reg. section 1.66943(e)(2)(ii) with respect to a return position that is contrary to a rule or regulation sentence should be
clarified in the same manner as for the section 6694(a) penalty. Accordingly, this sentence would
read:
(ii) Advice to another preparer. If a nonsigning preparer provides advice to a signing
preparer with respect to a position that is contrary to a rule or regulation, disclosure of that
position is considered adequate if the advice includes a statement that disclosure under
section 6694(b) is required.
e. The form of a non-signing preparer’s disclosure advice should continue to be flexible.
Both reg. section 1.6694-2 and reg. section 1.6694-3 are flexible as to how a non-signing preparer is
to provide advice concerning disclosure. Each regulation states that if the advice with respect to a
position is in writing, the statement concerning disclosure also must be in writing, and if the advice
with respect to a position is oral, the advice concerning disclosure also may be oral. The regulations
further provide that the determination as to whether oral advice concerning disclosure was in fact
given is based on all facts and circumstances, and that contemporaneous documentation generally is
sufficient to establish that the disclosure advice was given. See reg. section 1.6694-2(c)(3)(ii)(A)
and (B) and reg. section 1.6694-3(e)(2)(i) and (ii).
We believe this flexible approach makes sense and should be continued in the upcoming guidance.
There are too many different factual settings in which a non-signing preparer might provide advice
to attempt to prescribe any particular disclosure format.
3. Specific Forms to Which Section 6694 Applies
Under prior law, section 6694 applied only to income tax returns. The new law broadens the scope
of section 6694 to include, in addition to income tax returns, estate and gift tax returns, employment
tax returns, excise tax returns, and returns of exempt organizations.1 This expansion has led to
questions about which documents should be treated as "tax returns" for purposes of section 6694.
Because section 6694 applies to understatements of tax under the Internal Revenue Code, we
recommend that the term "tax return" generally encompasses only a document that satisfies both of
the following: (1) it is filed with the IRS, and (2) it computes and reports a tax liability under the
internal revenue laws (i.e., Title 26 of the United States Code) or it is an income tax return. In
1
Staff of Joint Committee on Taxation, Technical Explanation of the Small Business and Work Opportunity Tax Act of
2007 and Pension Related Provisions Contained in H.R. 2206 as Considered by the House of Representatives, JCX-2907.
Mr. Michael E. Hara
November 7, 2007
Page 6
addition, section 6694 would not apply to a form that merely provides an estimate of the tax liability
without further computation.
To clarify this matter, we request that IRS publish guidance to specifically identify, on a form-byform basis, which tax forms are treated as tax returns for purposes of section 6694. We would be
pleased to work with you on expediting this project.
4. Additional Phase 2 Issues
We will submit comments to you on the remaining Phase 2 issues in the near future. Those issues
are listed below:
1. Definition of “reasonable belief”;
2. Requirements under section 6694 for determining the tax treatment of immaterial items;
3. Expansion of annual revenue procedure to avoid excessive disclosures;
4. Definition of tax return “preparer” in reg. section 301.7701-15, including:
a. Definition of a “substantial portion” of a return,
b. Application of the “substantial portion” concept to an amended return,
c. Potential revision to the “substantial portion” safe harbor; and
d. Distinction between preparing a return and providing clerical and mechanical
services.
5. Reliance on information provided by the taxpayer or another preparer.
In addition, we will be happy to provide you with comments on any other issues of concern to you.
Please let us know if there are any additional matters on which you would like input.
We would be pleased to discuss these comments with you or others at any time. If you have any
questions about this matter, please contact me, at (212) 773-2858, or [email protected]; Alan
R. Einhorn, Chair of the AICPA Preparer Penalty Task Force, at (202) 879-4966 or
[email protected]; Edward S. Karl, AICPA Director, at (202) 434-9228, or [email protected];
or Jean E. Trompeter, AICPA Technical Manager, at (202) 434-9219, or [email protected].
Sincerely,
Jeffrey R. Hoops
Chair, AICPA Tax Executive Committee
Mr. Michael E. Hara
November 7, 2007
Page 7
cc:
Thomas J. Kane
James C. Gibbons
Anita Soucy
Matthew S. Cooper