IRS will require practitioners to advocate for disclosure of return positions

February 4, 2010

An editorial from E. Lynn Nichols, CPA

The heat is on tax practitioners! Regulators and lawmakers responding to irresponsible tax advice from CPAs and attorneys who were believed to be reputable have produced a steady stream of new rules and regulations regarding disclosure and responsibility for tax return information.

The temperature increased exponentially on Jan. 26, 2010. That’s when IRS Commissioner Shulman announced a proposal to require “large corporations” to disclose uncertain tax positions using a new schedule that will be required to be attached to their annual federal income tax returns.

The proposed rules will apply to all business taxpayers with assets in excess of $10 million who prepare financial statements that require an analysis of such positions in order to comply with Financial Accounting Standards Board Interpretation #48 (FIN 48).

From the return preparer’s point of view, making such a disclosure part of the tax return brings the preparer penalty rules of IRC Sec. 6694 into play. That could mean if my client does not disclose an uncertain return position, I could be subject to a preparer penalty. And, by the way, that penalty is not confined to the returns of large taxpayers.

Outrageous, you say. Not at all, given the mood in Washington related to so-called tax professional’s involvement in bogus tax shelters. At least 12 partners, from three different national firms have either pled guilty or been convicted of conspiracy to defraud the IRS in connection with such activity.

Karen Hawkins, who heads the office of professional responsibility, has spoken very forcefully on the subject. She intends to enforce the rules in Circular 230. Among other things, those rules require a federally authorized tax practitioner to exercise “due diligence” with respect to tax positions.

At least one other federal functionary said, in a speech to members of the AICPA Tax Division, “We intend to leverage tax practitioners to improve compliance.” Once again, it does not matter whether the taxpayer is large or small; the offense is in failing to apply well informed professional judgment to questionable items in a federal income tax return.

That can mean only one thing. The pressure is on those of us who give tax advice and/or prepare income tax returns. The federal tax authorities have the tools and the motivation to punish us.

Exactly what is that authority?

  • Treasury Circular 230. Establishes rules for conduct of anyone who practices before the IRS, including requirements to advise a client of an uncertain return position, to exercise “due diligence” in advising clients on such matters, and to document our support giving any advice.
  • Code Section 6694. Imposes penalties on paid return preparers who sign returns or give advice claiming a return position that is not supported by substantial authority or, if a position has only a reasonable basis, is disclosed using Form 8275.

What must we do?

First, we must impose quality control standards on our tax practice. Client acceptance and retention is an important piece of any quality control system. There are some clients whose attitudes about tax compliance are simply not compatible with professional standards. Second, we must maintain an attitude of “professional skepticism” when dealing with our clients often wishful thinking with regard to federal tax laws. Finally, we must be sure to stay “up-to-date” on tax law, regulations, and court decisions. The price of incompetence can be as much as $5,000 per return. According to Hawkins, that penalty can be followed by action to censure, fine, or suspend the practitioner for violation of Treasury Circular 230.

So, if we plan to stay in the business of preparing federal income tax returns, it makes sense that we invest the time and effort in staying up to date on tax developments, AND we need to take a hard look at the client list with an eye toward terminating any relationship that exposes us to increased risk.


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