July 10, 2007
The Honorable Charles B. Rangel
Chairman
House Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20515
The Honorable Max Baucus
Chairman
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510
The Honorable Jim McCrery
Ranking Member
House Committee on Ways and Means
1106 Longworth House Office Building
Washington, DC 20515
The Honorable Charles E. Grassley
Ranking Member
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510
Re: Tax Return Reporting Standards for Preparers
Dear Chairmen and Ranking Members:
The American Institute of Certified Public Accountants (“AICPA”) requests a correction
to problems created by the May 25, 2007 enactment of a tax provision found in section
8246 of the U.S. Troop Readiness, Veteran’s Care, Katrina Recovery, and Iraq
Accountability Appropriations Act of 2007 (“the Act”).
Specifically, among other changes, section 8246 of the Act increased the tax return
reporting standards applicable to tax return preparers under section 6694 of the Internal
Revenue Code for undisclosed, non-tax avoidance items, from the “realistic possibility of
success” standard to the “more likely than not” standard. As under prior law, if that
reporting standard cannot be satisfied and the preparer wants protection from the possible
imposition of an understatement penalty, a disclosure of the item on the return is
necessary.
Section 8246 of the Act is a major change in tax policy, but it was not the subject of a
hearing. Thus, the full consequences of this provision were not studied by Congress.
Also, this change was not based on a recommendation from the Treasury Department. In
its “Blue Book” of recommended legislation, issued in February 2007, Treasury did
address the section 6694 penalty, but only recommended an increase in the dollar amount
of the penalty. Treasury did not recommend a change in the preparer standards. Even the
IRS Chief Counsel commented about the sudden and unexpected change to section 6694,
noting that the IRS had been “blindsided” by the provision in the Act.
The section 6694 understatement penalty was added to the Internal Revenue Code in
1989, as part of an overhaul of the entire penalty regime. At that time, in contrast to the
lack of consideration given to making the recent change to the section 6694 reporting
The Honorable Charles B. Rangel
The Honorable Max Baucus
The Honorable Charles E. Grassley
The Honorable Jim McCrery
July 10, 2007
Page 2 of 3
standards, there were two years of congressional hearings and study, several extensive
reports by an IRS task force created to study the penalty regime, and meetings and input
from various professional organizations. Reporting standards and their implications to
the tax system and tax policy are too important to be given no consideration prior to a
change.
The change in standards resulting from this legislation impacts several fundamental
policies related to the representation of taxpayers and causes serious problems, not only
for tax return preparers, but also for taxpayers and the government.
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First, because the change raises the tax return reporting standard for preparers
above the standard for taxpayers (“substantial authority”), it creates the potential
for conflicts of interest between preparers and their clients; as a result, it affects
the nature of the representation of taxpayers and a taxpayer’s right to
representation.
Second, applying the “more likely than not” standard to a tax return preparer
results in a fundamental change in the role of the preparer, from that of an
advocate to that of an advisor
Third, it will be extremely difficult, if not impossible, to determine the probable
correctness of the treatment of some routine items with the degree of certainty
required for the higher “more likely than not” standard because: (1) there
sometimes is little guidance for the tax treatment of an item at the time the item
must be reported on a return; and (2) the proper treatment of an item frequently
depends on an analysis of unique or unusual facts and circumstances that were not
contemplated in published guidance.
Fourth, a disclosure made under a system with a “more likely than not” standard
could be viewed as a concession on the merits.
Fifth, the potential penalties on a preparer for failure to satisfy that high standard
are so severe that preparers will feel compelled to protect themselves by urging
their clients to include disclosures for virtually every item for which there is even
the slightest uncertainty regarding the proper treatment. (Fines under section
6694 and Circular 230 could be imposed on the preparer, possibly totaling up to
150% of fees derived from the return. In addition, the preparer could be subject
to disciplinary action by the IRS Office of Professional Responsibility.) These
excessive disclosures for routine tax return positions will overburden tax
administration, thereby defeating the purpose of the disclosure system and also
undermining the electronic filing initiative, which currently is not capable of
processing a large number of disclosures in a return.
To avoid this disruption to our tax system, the AICPA recommends that the section 6694
tax return preparer standards be equalized with the taxpayer standards. For tax shelter
(“tax avoidance”) items the “more likely than not” standard should continue to apply.
The Honorable Charles B. Rangel
The Honorable Max Baucus
The Honorable Charles E. Grassley
The Honorable Jim McCrery
July 10, 2007
Page 3 of 3
For non-tax shelter (“non-tax avoidance”) items, the “substantial authority” standard
should apply. The rationale for these recommendations is set forth in the enclosed
comments.
The AICPA is the national, professional association of CPAs, with approximately
330,000 members, including CPAs in business and industry, public practice, government,
and education; student affiliates; and international associates. Our members advise
clients on federal, state, and international tax matters and prepare income and other tax
returns for millions of taxpayers. They provide services to individuals, not-for-profit
organizations, small and medium-sized businesses, as well as America’s largest
businesses. It is from this broad perspective that we offer our thoughts today.
We would be pleased to discuss this matter with you or others at any time. If you have
any questions about this matter, please feel free to contact me at (212) 773-2858 or
jeffrey.hoops@ey.com; Thomas P. Ochsenschlager, AICPA Vice President - Taxes at
(202) 434-9209 or tochsenschlager@aicpa.org; or Edward S. Karl, AICPA Director at
(202) 434-9228, or ekarl@aicpa.org.
Sincerely,
Jeffrey R. Hoops
Chair, Tax Executive Committee
cc:
Janice Mays, Chief Counsel, House Committee on Ways and Mean
John L. Buckley, Chief Tax Counsel, House Committee on Ways and Means
Jon Traub, Minority Chief Counsel, House Committee on Ways and Means
Russ Sullivan, Majority Staff Director, Senate Finance Committee
Patrick Heck, Chief Counsel, Senate Finance Committee
Mark Prater, Minority Chief Counsel, Senate Finance Committee
Thomas Barthold, Acting Chief of Staff, Joint Committee on Taxation
Eric Solomon, Assistant Secretary (Tax Policy), Treasury