Tax Preparers and New Tax Penalties

Sometimes, with all the changes and information to obtain when preparing taxes it is easy to forget about the simple things. If you are a tax preparer you may well know about Rev. Proc 2008-14 which imposes a new penalty on tax preparers. Stating the obvious is that the new Rev. Proc. 2008-14 has more to do with your client than not. It is your client whose income is under scrutiny along with you as the person preparing their income taxes. So of course there is something about this new penalty that the tax payer should know about.

An Overview of Rev. Proc 2008-14

First and foremost are the actual changes Rev. Proc. 2008-14 has brought

about. Here is an overview of what tax preparers need to know. The purpose of the

update is:

- For purpose of reducing the understatement of income tax under section 6662(d) relating to the substantial understatement aspect of the accuracy-related penalty,

- For the purpose of avoiding the preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns.[i]

With this also comes a change in the standards of reporting income taxes. The realistic possibility of success (RPOS) is raised to a reasonable belief that the position would more likely than not be sustained on its merits (MLTN). Various tax forms have been edited to accommodate the changes and must be accurate when completing them. Not only should tax preparers use the correct forms you must also be intuitive and use keen judgment in reporting your client's taxes.

Penalties for violating Rev. Proc. 2008-14 are determined as follows:

- 6662(d) a substantial understatement if the amount exceeds the greater of

10% of the amount required to be shown on the return for the taxable year or

$5,000.

- 6662(d)(2)(B)(ii) an understatement: the excess of the amount of tax required

to be shown on the return for the taxable year over the amount of tax

required to be shown on the return reduced by any rebate.[ii]

- 6694(a) if not disclosed a penalty equal to the greater of $1,000 or 50% of

the income derived by the preparer with respect to the return or claim.[iii]

The disclosure and determination of disclosure are where MLTN standards apply. If a

filed income tax return shows a substantial understatement as defined above and the tax

preparer knew with substantial certainty, knew or should have known of the discrepancy,

the preparer is liable for the error. The preparer in this case is subjected to the penalty as mentioned above.

Purpose and Use of Procedure

The procedure is primarily a disclosure statement. The goal of the changes as stated above is to cut down on understatements to seek more accurate disclosures from income taxes prepared and reported by tax preparers. The way in which tax preparers can avoid the fees is to be sure that tax payers are disclosing, to the tax preparer's knowledge, the most appropriate information and have proof available about what is being disclosed. Tax preparers can avoid discrepancies by using appropriate forms and filling them out completely and correctly. The new MLTN standard, which is a step above the former RPOS standard and is an update of Rev. Proc. 2006-48, 2006-47 I.R.B.,[iv] were created specifically as a part of Rev. Proc. 2008-14 to tighten gap between factual and actual information reported pertaining income tax understatements. In its entirety, this means the tax preparer has to be more conscious and concise about what they are reporting for the tax payer.

Furthermore, if you are aware of any discrepancies in what your client, the tax payer

is reporting you must encourage the tax payer to disclose the information. If you do not

reveal information when preparing the tax payer's income taxes you can face a penalty.

Interpreting the Overview for how it may affect tax payers

First, you should consider your relationship with your client, the tax payer. Because of the new penalty you might want to prepare taxes treading lightly when taking the new MLTN and consequences of ignoring the new standard and penalty into consideration. The tax payer may want to be more aggressive in the approach to filing their taxes. This would create a gap that may cause you and your client to see things differently and it more likely than not will concern the stipulations explained in the Rev. Proc. 2008-14. In order to serve your client better you should completely understand the new procedure, apply the changes and know how much information about Rev. Proc.2008-14 should be shared with your client. Here's what tax payers need to know about how Rev. Proc. 2008-14 will affect them and their income tax return:

- Tax prepares are held accountable and charged for ignoring a disclosure that he or she should be or is aware of.

- There are forms that are specific for certain disclosures and they must be filled out completely, be accurate and have proof of the disclosures in case presenting the proof is necessary.

- Tax prepares still have your best interest in mind when preparing your taxes.

Your Concerns/Tax Payer Concerns

Since your concerns and your tax payer's concerns may conflict because of the new MLTN stipulations. Although you both may want to draw the most amount in a refund from the IRS or the least amount in a bill due to the IRS, you may want to be able to do this as accurately as possible without facing any penalties. Tax payers may not be concerned with penalties that are not applied to them and may not understand tax preparer's cautions. After all, the tax payer is not subjected to any of these penalties when you are preparing their taxes. Even if you suggest a disclosure of something and the tax payer decides not to disclose the information you would be penalized for not signing the return if you choose not to as well as possibly still face liability in preparing a return that has not been properly disclosed. In general, some believe the new standards may also "entice IRS agents to pursue additional fines."[v] Given this possibility with the new procedure, the higher standards and you, as a preparer facing a potential penalty, you may be enticed to go overboard in disclosing items. Your over zealous attempts to abide by the new standards may defeat the purpose of the disclosure procedure. Your goal should be to inform tax payers about new penalties and forms and to prepare their taxes while avoiding understatements.

Bottom Line

As a preparer you can be successful in retaining clients as well as abiding by the new procedures. The most important thing is knowing when to communicate and what to communicate to your client, the tax payer and the IRS. New penalties like Rev. Proc. 2008-14 may not be so bad if you understand them completely.

[i] Rev. Proc. 2008-14

[ii] 6662(d) defines an understatement as the excess of the amount of tax required to be shown on the return for the taxable year over the amount of the tax required to be shown on the return for the taxable year over the amount tax that is shown on the return reduced by any rebate (within the meaning of section 6211 (b) (2)).

[iii] Rev. Proc. 2008-14

[iv] Rev. Proc. 2006-48, 2006-47 I.R.B IRS Tax Attorney, Presented by Alvin Brown and Associates,www.irstaxattorney.com

[v] Taxing changes: what's different about tax preparer penalties? David Conrad, California CPA