VSCPA Letter to Eric Cantor on 'More Likely Than Not' Provision
August 23, 2007
The Honorable Eric I. Cantor
House Committee on Ways and Means
329 Cannon House Office Building
Washington, D.C. 20515
Re: Tax Return Reporting Standards for Preparers
Dear Congressman Cantor,
On behalf of the 8,300 members of the Virginia Society of CPAs (VSCPA), we urge you to support 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, the provision in 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.
The provision results in a major change in tax policy, but was not the subject of a hearing. Thus, the full consequences of this provision were not studied by Congress. The change in standards resulting from this legislation impacts several fundamental policies related to the representation of taxpayers and causes the following serious problems, not only for tax return preparers, but also for taxpayers and the government:
- The provision raises the tax return reporting standards for preparers above the standards for taxpayers, creating the potential for conflicts of interest between preparers and their clients.
- 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.
- 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 is sometimes 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.
- A disclosure made under a system with a “more likely than not” standard could be viewed as a concession on the merits.
- 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 percent 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 VSCPA recommends that the section 6694 tax return preparer standards be equalized with the taxpayer standards as described in the following two criteria: For tax shelter (“tax avoidance”) items, the “more likely than not” standard should continue to apply. For non-tax shelter (“non-tax avoidance”) items, the “substantial authority” standard should apply to tax return preparers and taxpayers alike.
Thank you for your consideration of this issue.
Sincerely,
Monique T. Valentine, CPA
Chair of the VSCPA Board of Directors
LAST UPDATED 8/23/2007
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