The following article is from the BNA Tax Management Weekly Report. To see the full report and take a trial to the BNA Tax and Accounting Center, visit this site.
By Diane Freda, reporter for BNA’s Daily Tax Report
Representatives from the tax preparation industry August 18 asked the Internal Revenue Service for clarification on the application of regulations it proposed in June (REG-129243-07) that would allow preparers to generally avoid penalties in situations where they do not meet the new “more likely than not” standard for tax positions by disclosing that information to the taxpayer.
Speakers at an IRS hearing on the rules asked for clarification:
- of when they can rely on a taxpayer's “legal conclusions” on federal tax issues, and
- of whether appraisers who do fair market valuations of businesses should be subject to tax preparer penalties.
They also pointed out some unintended consequences that may result from small businesses having to comply with the new rules, which in addition to implementing the new standard for tax positions would also implement other provisions from the Small Business and Work Opportunity Act of 2007.
That act revised standards of conduct for preparers to avoid higher penalties, expanded the definition of tax return preparer, and broadened the scope of preparer penalties to include returns other than just income tax returns.
One proposed provision that has drawn comments from many practitioners would allow a preparer to generally rely in good faith without verification on information furnished by the taxpayer, but says a preparer “may not rely on information provided by taxpayers with respect to legal conclusions on Federal tax issues.”
Several commenters have said the two provisions conflict with each other.
“We frankly really did not understand the full scope or intent of that provision or why that should be carved out from the general requirement that before you can rely on any piece of information, you must have no evidence it is incomplete, incorrect, et cetera,” said Edward Swails, executive director of Ernst and Young, who spoke on behalf of the American Institute of Certified Public Accountants.
Conclusions on Federal Tax Issues.
The proposed rules would allow a tax return preparer to “rely in good faith and without verification” on information furnished by another adviser, another tax return preparer, or other party—including when the adviser or tax return preparer is within the tax return preparer's same firm.
But they stipulate that reliance on the taxpayer's conclusions on federal tax issues is precluded.
Preparers are not allowed to “ignore the implications of information furnished to the preparer or actually known by the tax return preparer, and must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete,” the proposed rules said.
Brian Donahue, H&R Block director of government relations, said H&R Block Tax Institute wants clarification on what kinds of taxpayer representations would fall under the definition of “legal conclusions.” There are many instances in which general information furnished by a taxpayer is a legal conclusion for federal tax purposes, he said. Some examples would be marriage and divorce.
“Is a tax return preparer expected to ask a client who represents himself or herself as single if he or she has ever been married, or expected to ask a client who represents himself or herself as married to produce a marriage certificate?” he asked. “What would a tax preparer be expected to do if a taxpayer represents himself as married under common law, but that is not represented in that state?”
The same type of question comes up in relation to children or custody where the taxpayer represents an individual as his or her child, adopted child, or foster child, Donahue said. Taxpayers frequently list children in the home as a son or daughter although that may not legally be the case.
Ownership of property is another example, he said. Taxpayers sometimes believe they have 100% ownership of a personal residence when they only own a life estate. Or married couples believe that assets jointly titled are owned by only one spouse.
Appraisers as Preparers.
Appraisers are worried they will be considered to be nonsigning preparers under the proposed rules. Michele Miles with the Institute of Business Appraisers said if that is the case, they may be required to choose between the generally accepted standards for that industry and “safe but sometimes inaccurate opinions.”
The latter will “unacceptably cross the line into advocacy,” she said.
The starting point for many returns is the appraisal report, she said. The business appraisal report defines the value of the business interest owned by the taxpayer's estate or the value of a taxable gift. However, that value has not been defined as the value that has a greater-than-50% likelihood of being sustained on the merits by IRS, as the proposed rules would do. Thus, the proposed regulations would require the appraiser to make a choice in order to land in the safe harbor and not be considered a tax preparer.
An appraiser would be required to warn the taxpayer that the appraiser's judgement may be questioned and recommend not an applicable discount but merely a safe one, she said.
“A developed body of knowledge exists to guide appraisers but in the end, business appraisal is always a judgment call,” she said.
Appraisers Subject to Other Controls.
Also speaking on appraisals, Jay Fishman, a business appraiser representing the American Society of Appraisers and other appraisal organizations, argued that because appraisers are already subject to competency, ethics, and accountability requirements, as well as increased penalties for valuation understatements under the Pension Protection Act of 2006, they should not fall under the proposed tax preparer rules.
He urged IRS to say that appraisers are not nonsigning tax preparers because they are not involved in preparing “a substantial portion” of a tax return. Most of the time the appraisal is performed without the appraiser actually seeing the return or knowing all the financial elements of it, he said.
An appraiser may be told a property appraisal or 75% interest in a closely held business may be the keystone of the estate tax, “but I really don't know, because I don't see any other aspect of the decedent's estate. I am quarantined to just what I am asked to do,” he said.
Employment Taxes.
Section 6694, which sets out the tax preparer penalties, is not applied easily in the employment tax area, said Roger Harris, president of Padgett Business Services. This could lead to shopping around for the tax preparer who will give the most desirable advice.
He questioned whether each of the four employment tax filings in a year for a small business would be subject to a penalty. In addition, he asked what would happen if 20 of the workers were correctly classified for employment tax purposes but three or four were classified improperly.
“Would we have met your standards? How will we be measured?” he asked.
He also said if a payroll company cannot be penalized and tax preparers can be held to a higher standard, there would be some unintended consequences. “If all the people who follow the rules do is send those people back in the marketplace, they will continue to search until they find someone who allows them to operate the way they choose to operate. The service will get less compliance rather than more,” he said.
In another issue plaguing preparers for larger firms, AICPA also recommended clarification on when a preparer is required to sign a return, because significant confusion exists as to whether and when a tax preparer is a signing tax preparer. “This is particularly true when the preparer reviews a return that has been prepared by the taxpayer or the taxpayer's employees or where there are multiple firms involved in the preparation,” Swails said.
AICPA also said a preparer who reviews the return should not be treated as the person responsible for overall substantive accuracy of the return and should not have to sign as a preparer unless there is an engagement letter or other written agreement stating that a reviewer will sign, or if all the facts and circumstances warrant that.
The following article is from the BNA Tax Management Weekly Report. To see the full report and take a trial to the BNA Tax and Accounting Center, visit this site. |
