AICPA Preparer Penalty Task Force
Recommendations for Guidance under Section 6694 and Related Provisions
March 17, 2008
The AICPA Preparer Penalty Task Force has prepared the following recommendations regarding
guidance to be issued under Internal Revenue Code section 6694 and related provisions. In order
to expedite the submission of these recommendations, the AICPA’s formal review procedures
were waived with respect to this document. As a result, these recommendations do not constitute
the official position of the AICPA. The AICPA may submit formal comments when section
6694 guidance is issued in proposed form.
Please note that these recommendations focus on issues unique to the income tax. Estate and gift
tax, and possibly other tax issues, will be addressed in a later submission if necessary.
In adopting the interim rules for tax return preparer disclosure in Notice 2008-13, Treasury and
the Internal Revenue Service have established a sound framework for implementing Congress’s
objectives in amending section 6694. The approach taken in the Notice strikes an appropriate
balance between the requirements for return disclosure and sound tax administration. We
applaud the government’s approach because it reduces unnecessary disclosures and complexity
without sacrificing overall compliance or tax administration needs. We recommend that
Treasury and the Service build upon the framework established by Notice 2008-13 as they
develop guidance in this area, and our recommendations generally have been developed under
the assumption that this framework will be retained. If Treasury and the Service adopt a
different approach to tax return preparer disclosure, many of our recommendations below may
need to be revised.
I. “Tax Return Preparer” Subject to Section 6694
A. Scope and Application of Section 6694 to Non-Signing Preparers
We believe that the concept of the non-signing preparer is central to fair and effective
enforcement of section 6694 and the operation of the self-assessment system. Accordingly, we
strongly recommend that the current core principles of the regulations concerning non-signing
preparers be preserved as the regulations are revised. In our view, the IRS clearly has the
authority to regulate non-signing preparers under section 6694. The 1976, 1989, and 2007 Acts
and their legislative histories are consistent with a broad definition of “preparer” and certainly do
not require that non-signing preparers be excluded from the ambit of section 6694. Moreover,
regulations under sections 7701 and 6694 have applied a broad definition of “preparer” for more
than 30 years. We do not believe that the 2007 amendments to section 6694 reasonably can be
read as an invitation to narrow the class of individuals providing tax services to which section
We appreciate that there are, and have been for many years, challenges in applying the preparer
penalty provisions to persons who do not physically prepare tax returns. Nonetheless, we believe
that the rules for non-signing preparers are important in defining the roles and duties of signing
preparers, particularly because signing preparers may, under appropriate circumstances,
reasonably rely on others including non-signing preparers to avoid penalties. In addition, we
believe that the non-signing preparer rules recognize the incontrovertible proposition that, in
many cases, individuals who do not sign the return play a very significant role in the ultimate
content of the return or claim and any related understatements.
For the same reasons, we would not support a restriction of the definition of non-signing preparer
to only those individuals who review, draft, or discuss the actual return. Inclusion of individuals
who do not review, draft, or discuss the actual return promotes the policies behind the section
6694 penalty. Any attempt to limit the section 6694 penalty to those individuals who physically
interact with the return presupposes that the tax return preparation process is a mechanical
exercise and much more static than it often is, particularly in the case of complex returns.
Adopting this approach would treat those persons who provided advice later in the return
preparation process as preparers, while excluding from the definition those who advised at an
earlier stage, regardless of the substantive impact of the advice they render on the tax return. For
example, a large corporation is likely to determine many of its tax return positions in
consultation with numerous legal, financial and tax advisors over the course of the tax year, not
merely after the year has ended and the filing deadline looms.
We believe that the conduct of non-signing preparers should be regulated under section 6694. It
makes sense and is more efficient to have both signing and non-signing preparers subject to
similar consequences under section 6694, rather than having signing preparers subject to section
6694 proceedings (and possibly Circular 230 proceedings) and non-signing preparers subject
only to Circular 230 proceedings (or no proceedings at all depending upon how the amendments
to section 10.34 of Circular 230 are finalized).
Many of our recommendations below are based on the assumption that the concept of non-
signing preparers will continue under the revised regulations. We would need to re-evaluate
many of our recommendations below if non-signing preparers were excluded from the scope of
the revised section 6694 regulations, or if the categories of persons potentially subject to a
section 6694 penalty otherwise were substantially narrowed.
B. “Substantial Portion” of a Return
1. Definition of a “Substantial Portion” of a Return
Notice 2008-13, at section B.3, interprets “substantial portion” as meaning:
[A] schedule, entry, or other portion of a tax return or claim for refund that, if adjusted or
disallowed, could result in a deficiency determination (or disallowance of refund cla im)
that the preparer knows or reasonably should know is a significant portion of the tax
liability reported on the tax return (or, in the case of a claim for refund, a significant
portion of the tax originally reported or previously adjusted). This clarifies that any
determination as to whether a person has prepared a substantial portion of a tax return
and thus is considered a tax return preparer will depend on the relative size of the
deficiency attributable to the schedule, entry, or other portion.
We agree with this emphasis on the importance of the relative size of the deficiency and the
knowledge of the advisor. We also believe the current rule appropriately takes into account other
factors such as the relative length or complexity of the portion and the relative amount of the tax
liability or refund. Thus, the above-quoted language should supplement the current guidance in
reg. section 301.7701-15(b)(1).
2. Application of the “Substantial Portion” Concept to an Amended Return
As noted above, Notice 2008-13 indicates that, with respect to a claim for refund, the
“substantial portion” test should be based on the tax originally reported or previously adjusted.
We recommend that this approach be adopted with respect to amended returns and claims for
refund. Consequently, whether an item is a substantial portion of the return will be determined
identically with reference to the amounts on the original return for positions on original returns
and on amended returns.
3. Potential Revision to the “Substantial Portion” Safe Harbor
Safe Harbor Based on Percentage of Tax for All Taxes
We recommend, as a safe harbor with respect to all types of tax, that a person who prepares a
schedule, entry, or other portion of a tax return or claim for refund will not be deemed to have
prepared a substantial portion of the return or claim if the tax attributable to the schedule, entry
of other portion prepared is less than 10% of the tax required to be shown on the return or claim.
Additional Safe Harbor - Income Tax
Current reg. section 301.7701-15(b)(2) provides as a safe harbor the following objective rule for
determining when a person will not be deemed to have prepared a “substantial portion” of an
income tax return:
(2) For purposes of applying the rule of paragraph (b)(1) of this section, if the schedule,
entry, or other portion of the return or claim for refund involves amounts of gross
income, amounts of deductions, or amounts on the basis of which credits are determined
which are --
(i) Less than $2,000; or
(ii) Less than $100,000, and also less than 20 percent of the gross income (or
adjusted gross income if the taxpayer is an individual) as shown on the return or
claim for refund,
then the schedule or other portion is not considered to be a substantial portion. If more
than one schedule, entry or other portion is involved, they shall be aggregated in applying
the rule of this paragraph (b)(2). … This paragraph shall not apply to a person who
prepares all of a return or claim for refund.
This provision was promulgated in November 1977 and no adjustments have been made to it
since then. Based on the Bureau of Labor Statistics’ Inflation Calculator
(http://www.bls.gov/cpi/), and the CPI in 1977 versus the CPI in 2008, $2,000 in 1977 is
equivalent to $6,966 in 2008 buying power, and $100,000 in 1977 is equivalent to $348,317 in
2008 buying power.
We recommend that the dollar amounts in the reg. section 301.7701-15(b)(2) safe harbor be
updated to $10,000 and $400,000, respectively, and periodically be revisited as warranted.
Additional Safe Harbor - Other Taxes
We recommend that similar safe harbors also be provided with respect to the preparation of tax
returns and claims for refund for taxes other than the income tax, such as estate and gift tax. We
look forward to working with you on these issues.
C. Distinction between Preparing a Return and Providing Clerical and Mechanical
Current section 7701 regulations exclude from the definition of income tax return preparer
persons who only perform typing, reproduction, or other mechanical assistance. We understand
this provision also covers ministerial acts that do not involve the exercise of judgment or
discretion and non-substantive alterations, such as a correction or change limited to a
transposition error, misplaced entry, spelling error, or arithmetic correction. We recommend that
this approach be continued.
We also recommend that the application of this rule with regard to software providers, payroll
service companies, and service bureaus be the subject of additional guidance.
D. One Preparer Per Firm Rule
Under section 7701, both the individual who prepares a return or claim for refund for
compensation, and the employer of that individual, may be tax return preparers. As such, both
the individual preparer and the firm that the individual preparer is associated with may be subject
to preparer penalties.
1. Current Regulations
The current regulations provide that no more than one individual associated with a firm may be
subject to a penalty under section 6694. If a signing preparer is associated with a firm, the only
individual in that firm liable for the penalty will be the signing preparer. If no individual
associated with the firm is the signing preparer, only the individual with overall supervisory
responsibility for the advice given by the firm with respect to the return or claim for refund is
subject to the penalty. This is the so-called one preparer per firm rule. The corollary to this rule
under the regulations is that, in the case of multiple persons from a firm who provide advice with
respect to a return or claim for refund, the signing preparer (or if there is none, the individual
with overall supervisory responsibility for the return) cannot claim reliance on advice from
another person in the firm as a defense to the penalty.
We have concerns regarding the equitable application of the penalty to individual preparers when
there are multiple preparers of a return within the same firm. This emphasis on the signing
preparer, combined with imposition of the penalty on a per-return or claim for refund basis,
rather than a per-position basis, unfairly allows noncompliant preparers to avoid a penalty, while
exposing the compliant preparer to a penalty. The current approach ignores the fact that there
may be multiple understated positions on any one return or claim for refund and that each
position could be prepared by a different preparer.
2. Position-Based Approach
We urge Treasury and the IRS to use this opportunity to rationalize the structure of signing and
non-signing preparers from the same firm, based on a focus on positions rather than returns. We
offer the following recommendations to fairly impose liability based on the behavior of the
individual preparer, not based on whether the preparer or someone in the preparer's firm happens
to be the signing preparer.
First, we recommend that the current regulations be revised to eliminate the provision in reg.
section 1.6694-1(b) whereby the signing preparer associated with a firm, and no other individual
associated with the firm, is the preparer of the return or claim for purposes of section 6694. The
focus of the regulation instead should be the identification of the person with the overall
supervisory responsibility for the position resulting in the understatement. The regulations
should clarify that: (1) the person with overall supervisory responsibility for a position, whether
or not that person is signing the return, is the preparer of that position for section 6694 purposes,
and (2) more than one individual associated with a firm could be subject to penalty with respect
to the same return, provided that each individual had the overall supervisory responsibility for a
different position on the return that resulted in an understatement of tax. For a discussion of the
amount of penalty, see Part VII, infra.
Second, to avoid the prospects of each person associated with the firm denying overall
responsibility for a position on the return, we recommend that the regulations adopt a rebuttable
presumption that the person signing the return has the overall supervisory responsibility for each
position on the return, with the signing preparer having the opportunity to demonstrate to the
Service that another person associated with that firm should be deemed to be the preparer of one
or more positions.
To illustrate these points, assume a practitioner who is a non-signing preparer is consulted by the
signing preparer, and advice is given by that non-signing preparer affecting a position on a tax
return. The advice does not satisfy the section 6694 reporting standards. The non-signing
preparer of the position should be subject to a potential preparer penalty regardless of whether he
or she is associated with the same firm as the signing preparer. The presumption that the penalty
with respect to that position should be imposed against the signing preparer would be overcome
if the signing preparer demonstrated to the Service that he or she acted reasonably in relying on
the advice of the non-signing preparer. In that instance, the non-signing preparer who provided
the advice would be the preparer of that position for purposes of section 6694.
E. Multiple Preparers from Different Firms with Respect to a Single Position on a Tax
We recommend that the regulations clarify when, if ever, there can be more than one preparer,
each associated with a different firm, with respect to a single position on a tax return. We
believe that, except in rare and unusual circumstances, there should be one preparer per position.
F. Clarification Regarding Signing Returns in Review Engagements
The current regulations only take into account two kinds of tax return preparation: (1) the
situation where the preparer, or someone at the preparer's direction, actually completes the
return, claim, or schedule; and (2) the situation where the preparer provides advice with respect
to the determination of the existence, characterization, or amount of an entry on a return or claim
The current regulations do not address the commonly encountered situation in which a taxpayer
engages a practitioner to review all or part of a tax return or claim for refund that has already
been completely or partially prepared by the taxpayer (including the taxpayer's employees or the
general partner in the case of a partnership) or another preparer. In such a situation, we
recommend that the determination of whether the reviewer is required to sign the return or claim
for refund should be based on all of the facts and circumstances including the scope of services
to be provided and the reviewer's relative responsibility for the overall substantive accuracy of
the return in relation to the taxpayer or the other preparer who completed the return. There
should be a presumption in the regulations that a preparer who reviews a return is not primarily
responsible for the overall substantive accuracy of a return or claim for refund, and therefore not
required to sign it, unless:
there is a written agreement stating that the reviewer will sign the return; or
facts and circumstances otherwise demonstrate that the reviewer has taken primary
responsibility for the overall substantive accuracy of the return or claim for refund.
II. Reporting Standards
A. More Likely Than Not / Reasonable Belief
1. More Likely Than Not
We recommend that the more likely than not standard be defined as follows:
The more likely than not standard is met with respect to an item or a position if there is a
greater than 50-percent likelihood of the tax treatment of that item or position being sustained
on its merits.
We also recommend that this definition be used for both section 6662 and section 6694 purposes.
We suggest that the definition be placed in a new regulation section under section 6662, with a
cross-reference in the section 6694 regulations to that definition.
2. Reasonable Belief
We recommend that “reasonable belief” be defined in the section 6694 regulations as follows:
For purposes of section 6694(a)(2)(B), a tax return preparer is considered to have a
reasonable belief that the tax treatment of an item or a position is more likely than not to be
sustained on its merits if the tax return preparer analyzes the pertinent facts and authorities,
and based on that analysis, reasonably concludes in good faith that there is a greater than 50-
percent likelihood that the tax treatment of that item or position will be upheld if the IRS
challenges it. For purposes of this analysis, the authorities described in § 1.6662-4(d)(3)(iii),
or any successor provision, may be taken into account; however, the possibility that a return
will not be examined, that an issue will not be raised on examination, or that an issue will be
settled, may not be taken into account.
Alternatively, for purposes of section 6694(a)(2)(B), a tax return preparer is considered to
have a reasonable belief that the tax treatment of an item or a position is more likely than not
to be sustained on its merits if the tax return preparer reasonably relies in good faith on the
oral or written advice of another advisor that there is a greater than 50-percent likelihood that
the tax treatment of that item or position will be upheld if the IRS challenges it. Any advice
relied upon for purposes of this provision must meet the standards described in paragraph 
of this section.
The determination of whether a tax return preparer has a reasonable belief that an item or a
position satisfies the more likely than not standard is based on all facts and circumstances,
including the steps taken by the tax return preparer in identifying the relevant facts and law,
and the good faith of the tax return preparer in applying the law to the relevant facts.
Factors that may be relevant to determining whether a tax return preparer’s belief is a
reasonable belief include, but are not limited to:
the tax return preparer’s experience, education, and professional qualifications;
the complexity, uniqueness or highly technical nature of the Code provision at issue;
the relative lack of authoritative guidance available to the practitioner, e.g., whether the
position relates to a recently enacted Code section for which interpretative regulations
are not available; and
the absence of authorities addressing situations similar to the taxpayer’s situation.
A tax return preparer may reasonably believe that an item or a position satisfies the more
likely than not standard even if a court or other authority ultimately determines that the item
or position does not satisfy the more likely than not standard.
B. “Reasonable Basis”
We recommend that the definition of “reasonable basis” contained in reg. section 1.6662-
3(b)(3) be adopted for purposes of section 6694.
C. Permissible Authorities for Purposes of Determining if Applicable Standards Are
We recommend that the reg. section 1.6662-4(d)(3)(iii) definition of “authorities” that may be
taken into account in determining whether a position satisfies the reasonable belief (see supra,
Part II.A.2) or reasonable basis standards should be expanded to include “well-reasoned treatises,
articles in recognized professional tax publications, and other reference tools and sources of tax
analyses commonly used by tax advisers and preparers of returns.” 1 This expanded definition of
“authorities” is especially important when little, if any, primary source law is directly on point.
Absent an expanded definition of “authorities,” practitioners often may have difficulty discerning
whether a position is more likely than not to prevail if challenged.
D. Time When the Applicable Standards Must be Satisfied
With the exception of the clarifying revision noted below, we recommend that the rules
contained in Notice 2008-13 be adopted for purposes of determining when a return is deemed
prepared and, thus, when the standards are to be applied with respect to a position taken on a tax
return. For the sake of clarity and simplicity, we recommend one revision to the language, to
provide that a return is deemed prepared on “the date it is signed by the preparer,” instead of “on
the date reflected by the tax return preparer’s signature.”
We believe that the reliance principles set forth below are relevant for the purpose of
determining both reasonable belief and reasonable cause and recommend that the final
regulations adopt this approach.
1. Reliance on Information Furnished by the Taxpayer
We recommend continuation of the current rule in reg. section 1.6694-1(e), with two
First, the regulations should be clarified to provide that third-party reports, advice, opinions, and
similar documentation are not treated as information furnished by the taxpayer, but rather are
covered under reliance rules in other parts of the regulations. See below for our
recommendations concerning reliance on such third-party information.
Second, preparers should be permitted to rely on estimates provided by the taxpayer under rules
similar to the AICPA Statements on Standards for Tax Services No. 4, Use of Estimates, attached
as Appendix A. Under those rules, unless prohibited by statute or by rule, a taxpayer’s estimates
may be used in the preparation of a tax return if it is not practical to obtain exact data and if the
preparer determines that the estimates are reasonable based on the facts and circumstances
See AICPA Statement on Standards for Tax Services, Interpretation No. 1-1.
known to him or her at the time the return is prepared. The taxpayer’s estimates should be
presented in a manner that does not imply greater accuracy than exists, but specific disclosure
that an estimate is being used should only apply in unusual circumstances.
2. Reliance on Previously Filed Tax Returns
We recommend that the revised regulations provide that a tax return preparer may rely in good
faith, without verification, upon a tax return that has previously been filed with the Service,
regardless of whether the return is furnished to the preparer by the taxpayer or by a third party.
Taxpayers and preparers have long faced serious penalties and other sanctions for inaccurate tax
returns; consequently, it is reasonable for preparers to place a high degree of reliance on such
returns. Thus, a tax return preparer would not be required to independently verify or review
items reported on that tax return to determine if the items met the current standard requiring a
reasonable belief that the position would more likely than not be sustained on the merits, or the
current standard requiring a reasonable basis for a position, as the case may be. The tax return
preparer, however, may not ignore the implications of information furnished to the preparer or
actually known to the preparer. The tax return preparer also must make reasonable inquiries if
the tax return or an item thereon appears to be incorrect or incomplete. In addition, the preparer
should confirm that the return has not been adjusted by examination or otherwise, such that
reliance on the information contained in the previously filed return for the current purpose would
not be reasonable. Such approach is consistent with the approach set forth in Notice 2008-13,
sections D and E.
3. Reliance on Advice Provided by Other Tax Professionals
Current reg. section 1.6694-2(d)(5) provides that a preparer may establish reasonable cause
based on the preparer’s reliance on the advice of another preparer if such reliance is reasonable
and in good faith. We believe the government should retain this concept in the reasonable cause
section of the section 6694 regulations, but also believe that the preparer should be able to rely
on such advice to establish a reasonable belief that a position is more likely than not to prevail.
Further, we recommend that the ability to rely on advice be expanded to include advice rendered
by all tax professionals, not just tax return preparers. Under the current regulations, some tax
professionals who provide advice will not be treated as tax return preparers. For instance, a tax
professional who only provides prospective advice would not be treated as a tax return preparer,
but the tax return preparer should nevertheless be able to rely on advice provided by the non-
preparer to the same extent that the preparer can rely on the advice of another preparer.
4. Reliance on Information Provided by Third Parties Other than Tax Professionals
The current regulations do not directly address reports and documentation provided by
professionals other than tax professionals. However, because this type of information is similar
to advice provided by tax professionals, a preparer should be permitted to rely on this
information if such reliance is reasonable. We recommend that the regulations specifically
permit a preparer to rely on appraisals, valuations, actuarial information, economic analyses, and
other similar types of information if such reliance is reasonable. Factors to be taken into account
in determining whether reliance is reasonable include, among other things, whether the
information is reasonable on its face, whether the information is still current, and whether the
preparer reasonably believes that the person providing the information has the requisite
qualifications and skill.
III. Requirements for Determining the Tax Treatment of Uncertain Items
We recommend that safe harbors be created regarding the application of the section 6694
standards to: (1) items that do not distort income; and (2) items that are supported by a generally
accepted administrative or industry practice, as described below. We also recommend that the
annual disclosure revenue procedure (or an alternative revenue procedure) specify the
circumstances under which the section 6694 standards for disclosure will be deemed to have
been satisfied regarding such items.
A. Items That Do Not Distort Income
We recommend that a safe harbor be established concerning the application of section 6694
standards to items that do not distort income. Specifically, where there is a disagreement
between the Service and the taxpayer concerning the appropriate year for the reporting of an item
of income, loss, deduction, or credit, we recommend that the regulations provide that no
understatement of a liability should be deemed to exist for purposes of section 6694 if: (1) there
is no distortion of income with respect to the year in which the taxpayer reported the item; (2)(a)
in the case of an item related to an issue of cost recovery (e.g., depreciation or amortization), the
tax year in which the item is claimed is not more than seven years before and not more than
seven years after the year in which the Service establishes the item should have been claimed;
and (2)(b) in the case of an item related to an issue other than cost recovery, the tax year in
which the item is claimed is not more than two tax years before and not more than two tax years
after the year in which the Service establishes the item should have been claimed.
We further recommend that an objective safe harbor be established specifying that if the item of
income, loss, credit or deduction at issue is less than a fixed percentage (e.g., 5 percent) of the
gross income (or adjusted gross income in the case of an individual), then the amount will be
deemed not to have resulted in a distortion of income for purposes of this rule.
We also recommend that the annual disclosure revenue procedure (or an alternative revenue
procedure) address the circumstances under which the section 6694 standard for disclosure
should be deemed to have been satisfied for such items.
The following examples illustrate the above recommendations:
Example 1. The Service disallows a portion of the depreciation deduction for a specific piece of
property claimed for a tax year because of its determination that the appropriate MACRS class of
the property is 7 years, not 5 years as claimed by the taxpayer. Assuming there is no distortion
of income, for purposes of section 6694 no understatement of liability would be deemed to exist
because the tax year in which the deduction was claimed by the taxpayer is not more than seven
years before the tax year in which the Service would allow the depreciation deduction.
Example 2. A partnership receives an amended Form 1099 reflecting additional income two
days before the filing deadline. The Form 1065 and related Schedules K-1 have been completed
and the state partnership returns are being prepared. The partnership decides, due to the
significant burden it would create, that the partnership will report the additional income from the
amended Form 1099 in the following tax year. Assuming there is no distortion of income, for
purposes of section 6694, no understatement of liability would be deemed to exist because the
tax year in which the income is reported is not more than two years after the year in which the
Service would establish the item should have been claimed.
Example 3. Taxpayer, a cash-method taxpayer, uses a reasonable estimate of the income he will
receive from a partnership in filing his tax return for 2007. He subsequently receives a Schedule
K-1 from the partnership that reports income in excess of the estimate used on the return.
Relying on reg. section 1.451-1(a), the preparer advises Taxpayer that in lieu of filing an
amended return for 2007, there is substantial authority for reporting the difference between the
estimates and actual income amounts on the 2008 return. The Service subsequently examines
the taxpayer’s returns for 2007 and 2008 and increases the income for the partnership to the
amount on Schedule K-1 for 2007, with the correlative reduction of income for 2008. The
Taxpayer agrees to this adjustment. Assuming there is no distortion of income, no
understatement of liability would be deemed to exist for purposes of section 6694, because the
tax year in which the income was reported is less than two years after the year in which the
Service establishes the item should have been claimed.
B. Items That Are Supported by a Generally Accepted Administrative or Industry
We recommend that a safe harbor be established concerning the application of section 6694
where the taxpayer’s treatment of the item is supported by generally accepted administrative or
industry practice. Specifically, we recommend that the regulations indicate that consideration of
administrative or industry practice is sufficient to take a position on a tax return. The burden
should be on the preparer to establish the fact that the treatment is supported by administrative or
industry practice. Evidence of administrative or industry practice should include, but not be
limited to: (1) written determinations or documents prepared by the IRS in the course of
addressing the appropriate tax treatment of an item; (2) articles, publications, or treatises
pertaining to the industry or a related industry; (3) written determinations prepared by non-tax
governmental bodies charged with the regulation of an industry or the regulation of non-tax
financial statements or reports prepared by the industry; and (4) relevant accounting or tax
literature such as industry audit guides.
We also recommend that the annual disclosure revenue procedure (or an alternative revenue
procedure) address the circumstances under which the section 6694 standards should be deemed
to have been satisfied for such items.
A. Manner of Disclosure
1. Disclosure Requirements for Signing Preparers
We concur with the approach set forth in Notice 2008-13, section G, regarding the means by
which signing preparers can comply with the section 6694(a) and (b) requirements and, therefore
recommend that such an approach be adopted in the forthcoming regulations. We also believe
that the general approach in paragraphs 3 and 4 of Notice 2008-13, section G, should be
extended to other contexts in which there is a disparity between the taxpayer and preparer
penalty standards. This disparity arises in other situations in which the taxpayer would not be
subject to the substantial understatement penalty, including when a potential income tax
understatement would not be substantial, or when the potential understatement relates to tax
other than income tax. The regulations should apply an approach comparable to the Notice
2008-13 approach in these situations.
2. Disclosure Requirements for Non-Signing Preparers
We concur with the overall approach to disclosure by non-signing preparers in the regulations
under section 6694(a) and (b) and in Notice 2008-13, section G, and, therefore, recommend that
the approach be adopted in the forthcoming regulations.
B. Expansion of Alternative Methods of Disclosure
We recommend that the annual disclosure revenue procedure be expanded to reduce unnecessary
disclosures and complexity. We have noted above a number of specific issues that should be
addressed in the annual revenue procedure. For example, we recommend that the revenue
procedure specify the circumstances under which the section 6694 disclosure standards will be
deemed to have been satisfied regarding items that do not distort income and items that are
supported by a generally accepted administrative or industry practice. See III. A and B, above,
for a description of these items.
C. Disclosure Required by Indirect Preparers
1. Passthrough Entities / Notice 2008-13, Exhibits 2 and 3
We recommend that the preparer penalty rules for disclosure in the case of a passthrough entity
be consistent with the taxpayer penalty rules for disclosure in the case of a partnership. Thus,
any disclosure under section 6694 should be required only at the entity level. The preparer
should not have any obligation with respect to the passthrough entity interest holder solely
because the preparer prepared the entity's return.
Except for the Form 1065 and Form 1120S, we disagree with the characterization of the forms
referred to in Exhibit 2 and Exhibit 3 as “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” should only encompass a document that satisfies both of the following
requirements: (1) it is filed with the IRS; and (2) it computes and reports a tax liability under
Title 26 of the United States Code, or it is an income tax return. Only two of the forms referred
to in Exhibit 2 (Form 1120S and Form 1065) arguably compute or report a tax liability, and none
of the forms referred to in Exhibit 3 compute or report a tax liability. Therefore, these forms
should not be treated as tax returns and a preparer of such forms should not be subject to a
section 6694 penalty with respect to them.
2. Other Documents (e.g., Depreciation Schedules and Cost, Expense, or Income
Notice 2008-13, at section A. 2(b), treats as a return to which section 6694 applies any document
that includes information that is or may be reported on a taxpayer’s return or claim for refund, if
the information reported constitutes a substantial portion of a taxpayer’s return or claim for
refund. Examples provided are depreciation schedules and cost, expense or income allocation
While we agree that a person who provides a taxpayer with a depreciation schedule or cost,
expense or income allocation studies could be treated as a preparer subject to section 6694
penalties with respect to items or positions on the return that are based on this information, this
would only occur if the person meets the definition of a preparer (i.e., the person receives
compensation for the preparation and the item or position is a substantial portion of the return or
claim) with respect to the return in the first instance.
In addition, not every person who for compensation prepares any document that will "affect" an
entry on a return should be deemed to be a preparer. For example, the lawyer who merely
drafted a partnership agreement should not be treated as a preparer, the bookkeeper who only
made a ledger entry for the fixed assets should not be a preparer, and the tax advisor who only
provided an opinion on a contemplated transaction should not be treated as a preparer, although
arguably each of these persons was compensated to provide documents that affected the
taxpayer's return. Thus, this category and the example are overly broad and should be narrowed
V. Reasonable Cause
The reasonable cause exception in section 6694 is a crucial component of the preparer penalty
regime, providing relief in a range of potential penalty situations, such as those that result from
unforeseen circumstances or situations beyond the control of the preparer. We believe that the
current regulations provide appropriate criteria for that exception.
As stated earlier, we believe that the reliance provisions in II.E.1–4, above, are relevant for
purposes of determining both reasonable belief and reasonable cause. We recommend that the
section 6694 guidance so provide.
Regarding the reasonable cause exception in other Code sections, in the list of issues we
previously submitted to you, we noted the need for guidance regarding the following issues:
The definition of “significant purpose” under sections 6662, 6662A, and 6664; and
The ability to rely on disclosure in establishing a reasonable cause exception for purposes
of section 6664 with respect to significant purpose transactions.
We are continuing to develop recommendations concerning guidance needed regarding the
reasonable cause exception. We will submit recommendations on that subject at a later date.
VI. Application of Section 6694
A. Forms to Which Section 6694 Applies
We request that IRS maintain published guidance, similar to the interim guidance in Notice
2008-13, that specifically identifies, on a form-by-form basis, which tax forms are in the
following categories for purposes of section 6694:
1. Tax returns reporting tax liability (Notice 2008-13, Exhibit 1); and
2. Information returns that report information that is or may be reported on another tax return
that may subject a tax return preparer to the section 6694(a) penalty if the information reported
constitutes a substantial portion of the other tax return (Notice 2008-13, Exhibit 2).
With respect to forms that would not subject a tax return preparer to the section 6694(a) penalty
unless prepared willfully in any manner to understate the liability of tax on a return or claim for
refund or in reckless or intentional disregard of rules or regulations (Notice 2008-13, Exhibit 3),
please see the discussion in IV. C, above.
B. Interaction of Transfer Pricing, Valuations and Section 6662(e) with Section 6662(d)
Underpayments of tax under section 482 ("transfer pricing underpayments") are subject to the
accuracy-related penalty under section 6662(e) and (h) (relating to substantial valuation
misstatements and gross valuation misstatements). Under this penalty regime, taxpayers will not
be subject to the section 6662(e) penalty, even if there is an adjustment, if the requirements of
reg. section 1.6662-6(d) regarding reasonable selection of transfer pricing methods and
contemporaneous documentation are satisfied. A taxpayer can satisfy these requirements by
engaging an outside advisor to prepare appropriate documentation, or by performing an analysis
itself, concluding in either case that a certain range of prices is consistent with a reasonable
application of an appropriate transfer pricing methodology. The applicable regulations require
the documentation to be delivered to the IRS within 30 days of request.
Under reg. section 1.6664-4T, a taxpayer may establish reasonable cause and good faith with
respect to transfer pricing underpayments if the taxpayer satisfies the requirements of reg. section
1.6662-6(d). Reg. section 1.6664-4 further provides that a taxpayer will not satisfy the
reasonable cause and good faith exception with respect to transfer pricing underpayments if the
taxpayer does not satisfy the requirements of reg. section 1.6662-6(d). Therefore, adequate
disclosure (on Form 8275, Form 8275-R, or pursuant to the annual revenue procedure) will not
satisfy, and is not a component of satisfying, the requirements of reg. section 1.6662-6(d) and
reg. section 1.6664-4.
Accordingly, because transfer pricing adjustments are subject to section 6662(e) and section
6662(h), and should not be subject to the section 6662(c) and 6662(d) penalties, the section 6694
standards should be deemed satisfied if the taxpayer satisfies the requirements of
contemporaneous documentation under reg. section 1.6662-6(d). Similarly, the section 6694
regulations should provide that the taxpayer’s adoption of any price within a range that satisfies
the taxpayer's reg. section 1.6662-6(d) transfer pricing documentation and methodology should
not require additional disclosure, on Form 8275, Form 8275-R or otherwise, beyond the existing
requirement that the documentation be provided by the taxpayer to the IRS promptly upon
In other situations, a transfer pricing position may satisfy the level of confidence required by the
preparer penalty standards if it is consistent with the reasonable choice and application of best
method standards prescribed by reg. section 1.6662-6(d), even though documentation is not
complete. We are continuing to develop recommendations concerning guidance in this area.
VII. Determination of the Penalty Amount
A. Total Amount of Penalty
The penalty amount under section 6694(a) with respect to each return or claim is the greater of
$1,000 or 50% of the income derived (or to be derived) by the preparer with respect to the return
or claim. If the section 6694(b) penalty applies, the penalty amount is the same except $5,000
applies instead of $1,000. The penalty can be imposed against both an individual preparer and
the preparer's firm, or against multiple preparers, as discussed above.
Crafting rules for computation of the penalty will be very complex given the fact that it may be
imposed against both the firm and the individual, and the fact that income derived with respect to
the individual is not simply defined. Given the complexity of these issues, we have not made
specific recommendations, but we offer these broad principles that should be applied in
developing rules to calculate the amount of the penalty. First, the total penalty imposed with
respect to the services performed by any one firm (i.e., the firm and the individual preparers
associated with the firm) with respect to a return or claim for refund should not exceed the
greater of 50% of the income received by the firm for preparation of the return or claim for
refund, or $1,000 ($5,000 if under section 6694(b)). The determination of whether fees are
attributable to transaction planning or preparation should be based on all of the facts and
circumstances using the definition of preparation we have outlined in these comments.
Similarly, the penalty imposed against any single individual in his or her role as preparer should
not exceed the greater of 50% of the income received by the individual based on a reasonable
allocation methodology, or $1,000 ($5,000 if under section 6694(b)).
Second, with respect to income derived or to be derived, we believe that for both the firm and the
individual, the term “income” should be interpreted as net income, rather than gross income. We
believe that it is inappropriate to measure an individual preparer’s portion of a section 6694
penalty using income derived with respect to a return or claim based on the total gross fees
received by the firm or partnership. Using gross fees as a determination of “income” is
inappropriate and inaccurate as this measure does not reflect the true cost to a firm or partnership
of the return preparation including overhead costs. If Congress wanted gross income or fees to
be the measure of the “income” it would have specified that in the statute, as is the case in other
penalty sections of the Internal Revenue Code. Instead, Congress chose to have the section 6694
penalty computed with reference to “income derived (or to be derived).” Also, using gross fees
as a benchmark may very well overstate the “income derived” by that individual preparer. A
facts and circumstances standard should be used to make this determination.
Example. CPA firm is retained to prepare a federal income tax return for $30,000. Senior
Manager, an employee of the firm, has annual compensation of $50,000 and works 2,000 hours
per year. He is the sole person involved in the preparation of the return and spends 500 hours
preparing it. Is the "income derived” by Senior Manager with respect to the return $12,500 (25%
of $50,000) or $30,000 for purposes of section 6694? We believe that $12,500 is the more
appropriate measure of income derived by Senior Manager. The result would not change if
Senior Manager were a partner in the firm.
We recommend that any section 6694 penalty based on “income derived” with respect to a return
or claim, before any allocation to an individual preparer, be based on a calculation of net income
applicable to that return or claim. The allocation of the net amount to a preparer could be based
on compensation, partnership income, or any other reasonable method. Because there are
numerous methods of determining an allocation of the “net income,” additional guidance is
needed regarding how that allocation is to be made.
Clarification also is needed regarding how to determine the “income derived (or to be derived)”
when the preparation of a federal tax return or claim for refund at issue is part of a larger
engagement. This is especially true for very large returns or claims where there may be multiple
signing and non-signing preparers involved with the return or claim.
B. Stacking of Penalties / Coordination with Other Penalty Provisions and Circular 230
Section 6694 imposes a monetary penalty on all individuals who prepare all or a substantial
portion of a tax return, as well as on any person or firm that employs such an individual preparer.
Individuals authorized to practice before the Internal Revenue Service under section 10.3 of
Circular 230 and their employers are also subject to a monetary penalty under Circular 230 of up
to 100% of the amount of gross income derived (or to be derived) from conduct violating the
requirements of Circular 230.2 For your reference, we have attached, as Appendix B, the AICPA
comments on Notice 2007-39, regarding Circular 230 monetary penalties, submitted to Treasury
and the IRS on August 22, 2007.
On September 26, 2007, Treasury proposed amendments to section 10.34 of Circular 230 that
would incorporate the requirements of section 6694. The Notice of Proposed Rulemaking (REG-
138637-07) indicated that:
31 U.S.C. 330(a), as amended by the American Jobs Creation Act of 2004.
The Treasury Department and the IRS have determined that the professional standards under
§ 10.34 of Circular 230 should conform with the civil penalty standards for return preparers.
Previously, for example, on June 20, 1994 (59 FR 31523), the regulations were modified to
reflect more closely the rules under section 6694 and professional guidelines. The standards
with respect to tax returns in §10.34(a) of these proposed regulations have been amended to
reflect changes to section 6694(a) of the Internal Revenue Code made by the Small Business
and Work Opportunity Tax Act of 2007.
We agree with the objective of adopting consistent definitions and standards under section 6694
and Circular 230. However, by adopting a Circular 230 standard that mirrors the requirements of
section 6694, individuals authorized to practice before the Internal Revenue Service and their
employers could be subject to two separate monetary penalties for the same conduct under
section 6694 and 31 U.S.C. 330. Neither the legislative history of the amendments to section
6694 made by the Small Business and Work Opportunity Tax Act of 2007 nor the legislative
history of the adoption of the monetary penalties for a Circular 230 violation enacted by the
American Jobs Creation Act of 2004 indicate that Congress intended or even considered the
imposition of both these penalties for the same conduct.
Given that section 6694 applies to all tax return preparers and that it fixes the amount of the
applicable penalty (whereas 31 U.S.C. 330 merely caps the amount of the monetary penalty for
Circular 230 violations), we believe that section 6694 should be used as the primary penalty for
conduct that violates both section 6694 and section 10.34 of Circular 230.
Finally, we also recommend that the regulations under section 6694 be drafted to avoid the
application of the section 6694 penalty in cases covered by any other penalties.
VIII. Conformity of the Preparer Standards in Section 6694 and Circular 230
We also believe that the preparer standards in section 6694 and the preparer standards in Circular
230 should generally conform. We support using the definitions for key terms (e.g., the more
likely than not standard and the reasonable basis standard) for purposes of section 6694 and
Circular 230. Adding a cross-reference in Circular 230 to the relevant Internal Revenue Code
section will ensure that the Circular 230 provision remains current. In addition, for your
reference, we have attached, as Appendix C, the AICPA comments, submitted December 11,
2007, on proposed regulations for section 10.34 of Circular 230.
IX. Effective Date
We recommend that the effective date for the final regulations allow for a reasonable period of
time during which practitioners can study the final provisions, educate themselves, and establish
processes and procedures to support compliance. Consideration should be given to when in the
filing season the regulations are published and the time it will take preparers to understand and
implement the new rules. Thus, the precise wording of the effective date should be dependent on
when the final regulations are published. In addition, we urge the government not to make the
regulations effective immediately upon publication in the Federal Register and instead provide
some period of time to incorporate the new rules into practice.
AICPA Statements on Standards for Tax Services
No. 4, Use of Estimates
Statement on Standards for Tax Services No. 4, Use of Estimates
1. This Statement sets forth the applicable standards for members when using the taxpayer’s
estimates in the preparation of a tax return. A member may advise on estimates used in the preparation of
a tax return, but the taxpayer has the responsibility to provide the estimated data. Appraisals or valuations
are not considered estimates for purposes of this Statement.
2. Unless prohibited by statute or by rule, a member may use the taxpayer’s estimates in the
preparation of a tax return if it is not practical to obtain exact data and if the member determines that the
estimates are reasonable based on the facts and circumstances known to the member. If the taxpayer’s
estimates are used, they should be presented in a manner that does not imply greater accuracy than exists.
3. Accounting requires the exercise of professional judgment and, in many instances, the use of
approximations based on judgment. The application of such accounting judgments, as long as not in
conflict with methods set forth by a taxing authority, is acceptable. These judgments are not estimates
within the purview of this Statement. For example, a federal income tax regulation provides that if all
other conditions for accrual are met, the exact amount of income or expense need not be known or
ascertained at year end if the amount can be determined with reasonable accuracy.
4. When the taxpayer’s records do not accurately reflect information related to small expenditures,
accuracy in recording some data may be difficult to achieve. Therefore, the use of estimates by a taxpayer
in determining the amount to be deducted for such items may be appropriate.
5. When records are missing or precise information about a transaction is not available at the time
the return must be filed, a member may prepare a tax return using a taxpayer’s estimates of the missing
6. Estimated amounts should not be presented in a manner that provides a misleading impression
about the degree of factual accuracy.
7. Specific disclosure that an estimate is used for an item in the return is not generally required;
however, such disclosure should be made in unusual circumstances where nondisclosure might mislead
the taxing authority regarding the degree of accuracy of the return as a whole. Some examples of unusual
circumstances include the following:
a. A taxpayer has died or is ill at the time the return must be filed.
b. A taxpayer has not received a Schedule K-1 for a pass-through entity at the time the tax return is to be
c. There is litigation pending (for example, a bankruptcy proceeding) that bears on the return.
d. Fire or computer failure has destroyed the relevant records.
AICPA Comments on Notice 2007-39,
Disciplinary Actions under Section 822
of the American Jobs Creation Act of 2004
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Notice 2007-39
Disciplinary Actions under Section 822
of the American Jobs Creation Act of 2004
AICPA Tax Practice Responsibilities Committee
AICPA Approved by:
Tax Executive Committee
Submitted to the Internal Revenue Service
CC:PA:LPD:PR (Notice 2007-39)
1111 Constitution Avenue, N.W., Washington, DC. 20224
August 22, 2007
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Notice 2007-39
Disciplinary Actions under Section 822
of the American Jobs Creation Act of 2004
Notice 2007-39 (Notice) provides preliminary guidance to practitioners, employers, firms and
other entities that may be subject to monetary penalties under 31 U.S.C. section 330, as amended
by Section 822 of the American Jobs Creation Act of 2004 (Act). This Notice also invited
comments from the public regarding rules and standards relating to monetary penalties under 31
U.S.C. section 330.
The AICPA has a longstanding track record of establishing high professional standards for our
CPA members, including the AICPA Code of Professional Conduct and our enforceable
Statements on Standards for Tax Services. These standards provide meaningful guidance to
CPA members in the performance of their professional responsibilities. These standards also
provide the foundation for many states’ ethical rules for CPAs which, as a practical matter,
extends the application of our rules to many CPAs regardless of AICPA membership. We
believe the AICPA's focus on professional standards contributes to the public awareness of the
professionalism that is associated with CPAs, as well as the AICPA.
Accordingly, we respectfully submit the following comments.
The guidance contained in the Notice is part of the ongoing efforts by the Treasury Department
and the IRS to generally enhance standards of federal tax practice for all tax practitioners.
Although we support these efforts and goals, we believe that some aspects of this guidance
regarding monetary penalties should be changed and other aspects should be clarified.
A. Comments Requested by the IRS
1. Appropriate Factors to Consider when Determining Whether a Monetary Penalty Is
Congress intended to add monetary penalties to the previously available sanctions which may be
imposed upon practitioners, such as suspension or disbarment from practice before the Treasury
Department or censure. It did not intend to create a separate penalty regime. As such, we
believe the tiered approach of current Section 10.52 of Treasury Department Circular 230
provides the appropriate initial factors to consider when determining whether a monetary penalty
is appropriate. Section 10.52 delineates two categories of actionable behavior: (1) willfully
violating any provision of Circular 230 (other than Section 10.33); or (2) recklessly or through
gross incompetence (as defined in Section 10.51(l)) violating Sections 10.34, 10.35, 10.36 or
As with the other sanctions that existed before the Act, monetary penalties should be considered
for the types of behaviors that endanger the integrity of our tax system and the orderly
administration of that system.
The factors to consider in determining whether a monetary penalty is appropriate depend on the
facts and circumstances of the prohibited conduct. However, although not determinative, the
following are examples of additional factors to be considered in determining whether a
monetary penalty is appropriate:
a. The extent to which compliance with Circular 230 or the orderly administration of
Circular 230 would be appropriately enhanced by using monetary penalties instead of,
or in addition to, the other available sanctions of private reprimand, censure,
suspension or disbarment from practice before the IRS;
b. The extent to which a monetary penalty might be disproportionate to the misconduct;
c. The nature and extent of resources assigned by a firm towards training in professional
practice matters and promoting compliance with relevant professional
d. The existence of policies and procedures furthering professional conduct of
practitioners in a firm, and to administer and enforce compliance;
e. The extent of a firm or entity's compliance with Section 10.36 of Circular 230;
f. Whether prompt action was taken to correct the noncompliance after the prohibited
conduct was discovered;
g. Measures taken to prevent a recurrence of a similar misconduct in the future;
h. The extent of injury to the client, public, or tax administration;
i. The frequency of the misconduct;
j. The duration of the misconduct; and
k. The extent to which the conduct was intentional.
2. Factors that Should Be Considered in Declining to Impose a Monetary Penalty
The Notice allows a monetary penalty to be imposed on a firm for acts of a practitioner having
an agency relationship with the firm without consideration of whether the practitioner may have
acted outside the scope of this agency. We believe this inappropriately subjects a firm to a strict
liability and puts a firm at unfair risk for the acts of a partner or employee acting beyond the
established scope of his or her agency relationship with the firm.
We recommend that the IRS decline to impose monetary penalties against a firm for actions
outside the scope of the agency relationship. Evaluating behavior by taking into account the
applicable scope of agency, based on the facts and circumstances, properly implements the
statutory standard that the firm "knew, or reasonably should have known, of such conduct."
We also recommend that when another monetary penalty has been imposed on the same behavior
under the authority of another penalty provision, the IRS should decline to impose a further
monetary penalty under this provision. For example, it would not be appropriate to impose a
Circular 230 monetary penalty if the practitioner or firm has paid or has been assessed a penalty
under section 6694 for the same behavior.
Assume a practitioner gave written tax advice that the outcome of a matter was more
likely than not the correct treatment, then prepared and signed the taxpayer's return,
reflecting the written advice previously rendered, without preparing any disclosure with
the return or advising the taxpayer with respect to any disclosure. The IRS asserts that
the practitioner did not have a reasonable belief that the position would more likely than
not be sustained on its merits, due to recklessness.
Although the IRS may assert monetary penalties under section 6694 or Circular 230, we
believe that imposing both penalties at the same time for the same behavior would be a
punitive measure that would not improve compliance with Circular 230 or be in
furtherance of sound tax administration. Note: Assessing both penalties would result in
up to 150 percent of the income derived (or expected to be derived) being subject to
penalties, which does not appear to be consistent with Congressional intention.
Finally, there will be instances where it will be difficult to determine the gross income derived
(or to be derived) by practitioners, as discussed below. We believe this factor should be taken
into account, with the result that monetary penalties against the firm, and not the individual
practitioner(s), should be considered until such time as guidance is provided regarding the
determination of a practitioner's share of gross income.
3. Mitigating Circumstances that Should Be Considered when Determining the Amount
of a Monetary Penalty
The mitigating circumstances that should be considered when determining the amount of a
monetary penalty depend on the facts and circumstances of the particular misconduct. Examples
a. The nature and extent of training taken by the practitioner, or provided by a firm to
practitioners in the relevant areas of ethics and professional responsibility;
b. The adequacy of resources that a practitioner, employer, firm or other entity devotes
to promote compliance with relevant ethics and performance of professional
responsibilities, taking into account the size of the firm and the nature of its tax
c. The frequency and duration of misconduct by the practitioner, employer, firm or other
d. The extent of injury to the client, public, or tax administration; and
e. Whether prompt action was taken to correct the noncompliance after the prohibited
conduct was discovered.
B. Additional Comments on Notice 2007-39
1. Imposing Monetary Penalties in General
We believe that the non-monetary sanctions under Circular 230 generally are sufficient to
adequately discipline individual practitioners (employees and partners of a firm) for misconduct.
Monetary penalties should, therefore, only be imposed when the misconduct is so serious that
any other sanction under Circular 230 is not adequate.
In addition, it would be inappropriate to impose a monetary penalty against a firm where the
practitioner acted outside the scope of the agency relationship with the employer relative to the
Circular 230 conduct.
2. Special Rule for Larger Engagements
The Notice has a special rule for so-called larger engagements. Under the Notice, if a single
prohibited act is an integral part of a larger engagement, the penalty will be imposed up to the
gross income derived (or to be derived) from the larger engagement. The Notice includes no
guidance on (1) when an engagement is considered to be “larger;” or (2) what constitutes “an
integral part of a larger engagement.” This special rule for larger engagements should be
reconsidered with the goal of issuing clearer guidance that focuses only on the income derived
from the prohibited conduct as required by the Act.
For example, assume a firm provides several different kinds of federal tax advice to a single
client, all relating to a large acquisition the client is undertaking. Under the engagement letter
between the firm and the taxpayer, the following tax services are to be provided: transfer pricing
documentation studies, mergers and acquisitions structuring advice and advice relating to tax
treaties. Three teams of the firm's partners and employees advise on these three categories of
issues, reflecting their own specialized practices and experiences. The IRS Office of
Professional Responsibility (OPR) believes that prohibited conduct in violation of Circular 230
occurred with respect to the written advice on tax treaties. We believe the Notice should be
clarified to indicate that, in such instances, (1) only the gross income reasonably related to the
written tax advice on tax treaties should be included; and (2) any gross income related to other
aspects of the larger engagement should not be included. Similar problems arise if the
engagement is for tax and non-tax services.
3. Determining “Gross Income”
We anticipate significant practical difficulties in determining a practitioner’s share of the gross
income attributable to the misconduct. It is, therefore, critical that Treasury clarify how the
practitioner’s gross income attributable to the misconduct should be determined in the case of a
practitioner who is an employee or partner of a firm. Measuring the practitioner’s gross income
attributable to the misconduct by reference to the fees received by the entity may overstate the
income actually earned by the practitioner. Instead, we recommend the practitioner’s gross
income be determined based on an allocation of compensation or partnership income received by
the practitioner that is attributable to the misconduct. While such an allocation may be complex,
we believe it will lead to a fairer result.
4. Total Amount of Monetary Sanctions
The statute and Notice are unclear as to the aggregate amount of monetary penalties that may be
imposed against a practitioner and his or her firm with respect to a given act of misconduct.
Section 822 states that “[s]uch penalty shall not exceed the gross income derived (or to be
derived) from the conduct giving rise to the penalty…” The Notice states that “The aggregate
amount of the monetary penalty (or penalties) imposed by the Secretary for any prohibited
conduct may not exceed the gross income derived by the practitioner and the employer, firm, or
other entity in connection with such prohibited conduct.”
We believe that the aggregate amount of the penalties imposed on the practitioner and the firm
should not exceed 100% of the fees paid by the client with regard to the misconduct (whether
paid by the client to the firm or directly to the practitioner) and that the guidance should make
that limitation clear. For example, if the client pays the firm $8,000 in fees attributable to the
misconduct, and also pays $2,000 in fees attributable to the misconduct directly to the
practitioner, the aggregate amount of the penalties imposed on the practitioner and the firm
should not exceed $10,000.
5. Suggested Change to Example 1
We believe Example 1 is confusing and misleading in that it appears to suggest that the "creation,
promotion and marketing" of “tax advantaged strategies” are prohibited activities under Circular
230. Although the IRS may appropriately look at idea creation, marketing or promoting in
assessing whether a firm or individual acted properly, such activities in connection with “tax
advantaged strategies” are not necessarily prohibited any more than “tax advantaged strategies”
are necessarily prohibited. In fact, Sections 10.35(b)(5) and 10.35(e)(2) specifically contemplate
the issuance of written "marketed opinions" that comply with Circular 230.
We believe Example 1 should be rewritten to state that OPR has determined that one or more
specific violations of Circular 230 occurred in particular situations regarding Strategy X. We
suggest the violation be described in detail, such as the reckless failure by Attorney A to exercise
appropriate due diligence or in relating the law to the relevant facts when providing written tax
advice to a client regarding Strategy X.
6. Procedural Safeguards and Guidance Regarding Procedures
We believe monetary penalties reinforce the need for strong procedural safeguards under
Circular 230 (see the AICPA's March 6, 2006 comments on the proposed Circular 230
regulations). In particular, we believe that before any final decision to impose monetary
penalties is made, that the affected practitioners and firms have access to a meaningful and
independent review of OPR's decision to impose such penalties.
In addition, these additional sanctions on practitioners and firms reinforce the need for the IRS to
have well-targeted and consistent guidance on when IRS professionals are to make referrals to
AICPA Comments on Proposed Regulations, REG-138637-07
Regarding Standards with Respect to Tax Returns
Comments on Proposed Regulations, REG-138637-07
Regarding Standards with Respect to Tax Returns
AICPA Preparer Penalty Task Force
AICPA Approved by:
Tax Executive Committee
Submitted to the Internal Revenue Service
1111 Constitution Avenue, N.W., Washington, DC. 20224
December 11, 2007
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
COMMENTS ON PROPOSED REGULATIONS, REG-138637-07,
TO AMEND CIRCULAR 230, SECTION 10.34,
REGARDING STANDARDS WITH RESPECT TO TAX RETURNS
Prior to the recent revisions to section 6694 of the Internal Revenue Code, the practitioner
standards in section 10.34 of Circular 230 generally conformed with the section 6694(a) tax
return reporting standards for return preparers. The Small Business and Work Opportunity Act of
2007, signed into law on May 25, 2007, revised the section 6694 reporting standards. The
Preamble to Proposed Regulations REG-138637-07 indicates that these proposed regulations
were issued to conform the practitioner standards in section 10.34 of Circular 230 to the new
standards in section 6694(a).
Many commentators expressed concerns about several aspects of the proposed regulations. In
response to these concerns, representatives from the IRS and Treasury noted that the language in
the proposed regulations was merely “placeholder language” and that, after addressing the more
pressing need for guidance under section 6694, any necessary revisions to the proposed
regulations would be addressed.3
In anticipation of further consideration of these proposed regulations, we respectfully submit the
following comments. For purposes of this letter, it is assumed that the definition of “non-signing
preparer” continues unchanged.
We agree that the practitioner standards in Circular 230, section 10.34, should generally conform
with the tax return preparer standards of section 6694(a). We also support using identical
definitions of key terms (e.g., the more likely than not standard and the reasonable basis
standard) for purposes of Circular 230 and the preparer and taxpayer penalty provisions.
We are concerned, however, about certain requirements that could apply to preparers under
proposed section 10.34(a). We also believe that guidance is needed regarding certain additional
issues under section 10.34. Our specific comments follow.
Stamper, D. (2007). Officials Pledge to Clean Up Preparer Penalties, 2007 TNT 192-5.
Signing Preparer Requirements
Language of section 10.34(a) needs to be clarified.
As currently drafted, proposed section 10.34(a) states:
A practitioner may not sign a return as a preparer unless the practitioner has a
reasonable belief that the tax treatment of each position on the return would
more likely than not be sustained on its merits (the more likely than not
standard), or there is a reasonable basis for each position and each position is
adequately disclosed to the Internal Revenue Service.
This language has been interpreted by some as, in effect, requiring the practitioner to audit each
and every item on the return. Such a requirement would be inconsistent with the requirements of
section 6694 and the regulations thereunder. Requiring practitioners to possess a reasonable
belief regarding the tax treatment of “each position on the return” can be read to impose a far
greater burden than the “knew (or reasonably should have known) of [a] position” language that
currently forms the basis underlying the section 6694(a) penalty.
We recommend that the first sentence of section 10.34(a) be revised to be more consistent with
that of prior section 10.34(a), for example:
A practitioner may not sign a tax return as a preparer if the practitioner
determines that the tax return contains a position for which the practitioner does
not have a reasonable belief that the position would more likely than not be
sustained on its merits (the more likely than not standard), unless the position
has a reasonable basis and is adequately disclosed to the Internal Revenue
Preparer should not have to ensure that the disclosures are ultimately filed.
We believe that the signing preparer has an obligation to prepare the appropriate disclosures
required under section 10.34(a) and to include them in the return presented to the taxpayer.
However, the preparer should not have an obligation to ensure that the disclosures are ultimately
filed with the Internal Revenue Service. Although a signing preparer has control over a return
while it is being prepared, the preparer may provide the return to the client for signature and
mailing. Providing the client a completed Form 8275 or Form 8275-R with a return does not
guarantee that the client will actually file that form with the return. Accordingly, we recommend
that the signing preparer be treated as satisfying the disclosure requirement of section 10.34(a)(2)
if the disclosure is prepared and provided to the client with the completed return.
Nonsigning Preparer Requirements
Overall approach in existing regulations is sound.
We believe the overall approach to disclosure by non-signing preparers in prior section
10.34(a)(2) and the current 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 with respect to a position that does not satisfy the reporting standard for
undisclosed return positions (reasonable belief that the 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.
Non-signing preparers should not be responsible for actual disclosure by taxpayers.
A non-signing preparer is not in a position to know if an item is actually disclosed by the
taxpayer or the signing preparer. 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.
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 prior section 10.34 and the current
section 6694 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 sanction
under Circular 230 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).
We also recommend that the following additional issues under section 10.34 be addressed.
Although these are not new issues, the need for guidance in these areas has increased with the
increase in reporting standards and potential sanctions for violations.
Guidance for Purposes of Circular 230, Section 10.34, and IRC Section 6694
1. “Authorities”. The proposed amendments to section 10.34 indicate that the
authorities described in reg. section 1.6662-4(d)(3)(iii), i.e., primary source materials, may be
taken into account in determining whether the more likely than not and reasonable basis
standards are satisfied, but do not indicate whether other sources also may be taken into account.
We recommend that the definition of “authorities” that may be taken into account in determining
whether a position satisfies the more likely than not or reasonable basis standards should be
expanded to include “well-reasoned treatises, articles in recognized professional tax publications,
and other reference tools and sources of tax analyses commonly used by tax advisers and
preparers of returns.”4 This expanded definition of “authorities” is especially important when
little, if any, primary source law is directly on point. Absent an expanded definition of
“authorities,” practitioners will have difficulty discerning whether a position is more likely than
not to prevail if challenged. (The definition of “authorities” that may be taken into account in
determining if the preparer reporting standards in section 6694 and the taxpayer reporting
standards in section 6662 are satisfied also should be expanded.)
2. “Tax return”. The definition of “tax return” for purposes of section 10.34 (and
section 6694) should be clarified. Currently, for Circular 230 purposes, section 10.2(a)(6)
merely indicates that the term “tax return” includes an amended tax return and a claim for
3. Annual Disclosure Revenue Procedure. Section 10.34 should be clarified to provide
that disclosure in accordance with the annual disclosure revenue procedure 5 will be considered
adequate for purposes of section 10.34, just as it is for purposes of section 6694(a). Further, the
items covered by the annual disclosure revenue procedure should be expanded; this will reduce
the burden of practitioners filing overly conservative disclosures which the Service will not find
useful and the Service being inundated with a large number of unnecessary disclosures for
routine return positions.
See AICPA Statement on Standards for Tax Services, Interpretation No. 1-1.
For example, Rev. Proc. 2006-48, 2006-47 I.R.B. 934.
Reasonable Cause and Good Faith
1. Express Reasonable Cause Exception. Circular 230, section 10.34 (or 10.52) should
be revised to state expressly that a practitioner (or firm) acting with reasonable cause and in good
faith will not be considered to have violated section 10.34 (or, alternatively, that any violation
will not be considered willful, reckless or grossly incompetent for purposes of section 10.52).
The preambles to earlier versions of section 10.34 indicate that reasonable cause and good faith
is inconsistent with willful, reckless or grossly incompetent violations. 6 In view of the
heightened reporting standard and the increased sanctions, Circular 230 should expressly provide
a reasonable cause exception.
2. Factors to Consider. Factors similar to those set forth in reg. section 1.6694-2(d)(3)
should be incorporated into Circular 230 for purposes of a reasonable cause exception. In
determining whether the reasonable cause exception to a section 6694 penalty will apply, reg.
section 1.6694-2(d)(3) provides that the Service will consider such factors as the: (1) nature of
the error; (2) frequency of errors; (3) materiality of errors; (4) preparer’s normal office practice;
and (5) reliance on advice of another preparer.
* * *
See, e.g., T.D. 8545, 59 FR 31523, June 20, 1994: “The existing standard of discipline eliminates the need for an
express reasonable cause and good faith exception in that willful, reckless, or grossly incompetent violations of
Circular 230 are inconsistent with reasonable cause and good faith.”