The New Tax Preparer (and Advisor) Penalty Standards Under Code Sec. 6694: A More (or Less) Likely Than Not World

The Small Business and Work Opportunity Tax Act of 2007 raises the penalty amounts for reckless conduct and for recommending (or advising on) a position on a tax return that does not meet a more likely than not if challenged by the government threshold for non disclosed positions. Previously the penalty with respect to a "tax position" violation was $250; under the new law, it is $1,000 or, if greater, 50% of the income derived by the preparer from the preparation of the return that is subject to the penalty. In addition, the penalty for reckless conduct, a willful attempt to understate a tax liability or intentional disregard of rules or regulations - the "second tier" penalty of Section 6694 - is increased to $5,000 from $1,000. There are problems with the new law. Primary among them is the serious tax policy failing in requiring a preparer to "disclose" in a situation that may not require the taxpayer to disclose. Of almost equal concern is the potential administrative nightmare that the IRS faces as preparers begin insisting on inclusion of, perhaps, millions of disclosure statements in tax returns.