Tax Return Preparer Penalties Under Sections 6694 and 6695, 34560-34597 [E8-12898]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 117 (Tuesday, June 17, 2008)]
[Proposed Rules]
[Pages 34560-34597]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-12898]



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Part IV





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1, 20, 25, et al.



Tax Return Preparer Penalties Under Sections 6694 and 6695; Proposed 
Rule

Federal Register / Vol. 73, No. 117 / Tuesday, June 17, 2008 / 
Proposed Rules

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, 25, 26, 31, 40, 41, 44, 53, 54, 55, 56, 156, 
157, and 301

[REG-129243-07]
RIN 1545-BG83


Tax Return Preparer Penalties Under Sections 6694 and 6695

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations implementing 
amendments to the tax return preparer penalties under sections 6694 and 
6695 of the Internal Revenue Code (Code) and related provisions under 
sections 6060, 6107, 6109, 6696, and 7701(a)(36) reflecting amendments 
to the Code made by section 8246 of the Small Business and Work 
Opportunity Tax Act of 2007. The proposed regulations affect tax return 
preparers and provide guidance regarding the amended provisions. This 
document also provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by August 18, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for Monday, August 18, 2008, must be received by Monday, 
August 4, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-129243-07), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
129243-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov/Regs (IRS REG-129243-
07). The public hearing will be held in the IRS Auditorium, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Michael E. Hara, (202) 622-4910, and Matthew S. Cooper, (202) 622-4940; 
concerning submissions of comments, the hearing, and/or to be placed on 
the building access list to attend the hearing, Regina Johnson, (202) 
622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by August 18, 2008. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec. Sec.  1.6060-1(a)(1), 1.6107-1, 1.6694-2(c)(3), 20.6060-1(a)(1), 
20.6107-1, 25.6060-1(a)(1), 25.6107-1, 26.6060-1(a)(1), 26.6107-1, 
31.6060-1(a)(1), 31.6107-1, 40.6060-1(a)(1), 40.6107-1, 41.6060-
1(a)(1), 41.6107-1, 44.6060-1(a)(1), 44.6107-1, 53.6060-1(a)(1), 
53.6107-1, 54.6060-1(a)(1), 54.6107-1, 55.6060-1(a)(1), 55.6107-1, 
56.6060-1(a)(1), 56.6107-1, 156.6060-1(a)(1), 156.6107-1, 157.6060-
1(a)(1), and 157.6107-1. This information is necessary to make the 
record of the name, taxpayer identification number, and principal place 
of work of each tax return preparer, make each return or claim for 
refund prepared available for inspection by the Commissioner of 
Internal Revenue, and to document that the tax return preparer advised 
the taxpayer of the penalty standards applicable to the taxpayer in 
order for the tax return preparer to avoid penalties under section 
6694. The collection of information is required to comply with the 
provisions of section 8246 of the Small Business and Work Opportunity 
Tax Act of 2007. The likely respondents are tax return preparers and 
their employers.
    Estimated total annual reporting burden: 10,679,320 hours.
    Estimated average annual burden per respondent: 15.6 hours.
    Estimated number of respondents: 684,268.
    Estimated frequency of responses: 127,801,426.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1), the Estate Tax Regulations (26 CFR part 
20), the Gift Tax Regulations (26 CFR part 25), the Generation-Skipping 
Transfer Tax Regulations (26 CFR part 26), the Employment Tax and 
Collection of Income Tax at Source Regulations (26 CFR part 31), the 
Excise Tax Procedural Regulations (26 CFR part 40), the Highway Use Tax 
Regulations, (26 CFR part 41), the Wagering Tax Regulations (26 CFR 
part 44), the Foundation and Similar Excise Tax Regulations (26 CFR 
part 53), the Pension Excise Tax Regulations (26 CFR part 54), the 
Excise Tax on Real Estate Investment Trusts and Regulated Investment 
Companies Regulations (26 CFR part 55), the Public Charity Excise Tax 
Regulations (26 CFR part 56), the Excise Tax on Greenmail Regulations 
(26 CFR part 156), the Excise Tax on Structured Settlement Factoring 
Transactions Regulations (26 CFR part 157), and the Regulations on 
Procedure and Administration (26 CFR part 301) implementing the 
amendments to tax return preparer penalties under sections 6694 and 
6695 (and the related provisions under sections 6060, 6107, 6109, 6696, 
and 7701(a)(36)) made by section 8246 of the Small Business and Work 
Opportunity Tax Act of 2007, Public Law 110-28 (121 Stat. 190) (May 25, 
2007) (the 2007 Act).
    In accordance with the 2007 Act, these proposed regulations amend 
existing regulations defining income tax return preparers to broaden 
the scope of that definition to include preparers of estate, gift, and 
generation-skipping transfer tax returns, employment tax returns, 
excise tax returns, and returns of exempt organizations. These proposed 
regulations also revise current

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regulations to amend the standards of conduct that must be met to avoid 
imposition of the tax return preparer penalty under section 6694. In 
addition, these proposed regulations reflect changes to the computation 
of the section 6694 tax return preparer penalty made by the 2007 Act. 
These regulations also amend current regulations under the penalty 
provisions of section 6695 to conform them with changes made by the 
2007 Act expanding the scope of that statute beyond income tax returns. 
The Treasury Department and the IRS intend to finalize these proposed 
regulations by the end of 2008, with the expectation that the final 
regulations will be applicable to returns and claims for refund filed 
(and advice given) after the date that final regulations are published 
in the Federal Register, but in no event sooner than December 31, 2008.

History of the Tax Return Preparer Penalty Provisions

    The 2007 Act amended section 6694 to expand the definition of tax 
return preparer, broaden the scope of the tax return preparer penalties 
to include preparers of returns other than income tax returns, revise 
the standards of conduct that tax return preparers must meet to avoid 
imposition of penalties, and change the computation of the tax return 
preparer penalties. The 2007 Act did not amend a number of other Code 
sections related to tax return preparer conduct, nor did it directly 
address the tax regulations, published guidance, and case law that have 
developed since enactment of the preparer penalty regime as part of the 
Tax Reform Act of 1976, Public Law 94-455 (90 Stat. 1688) (October 4, 
1976) (the 1976 Act).
    The Treasury Department and the IRS believe that the recent 
amendments to the tax return preparer penalty provisions necessitate a 
comprehensive review and overhaul of all the tax return preparer 
penalties and related regulatory provisions. These proposed regulations 
are the first significant step in this process. Because the proposed 
regulations were drafted with consideration of the existing regulations 
and the legislative history of the statutory provisions that were 
amended by the 2007 Act, a brief review of the legislative and 
regulatory history leading up to the recent amendments is appropriate 
in order to place the proposed regulatory changes reflecting the 2007 
Act amendments in context.

The Tax Reform Act Of 1976

    The provisions in section 7701(a)(36) defining income tax return 
preparers, and the provisions in sections 6694, and 6695, imposing 
various penalties on income tax return preparers, were first enacted by 
the 1976 Act. Sections 6107 and 6109, imposing an obligation on return 
preparers to furnish and maintain copies of returns and include an 
identifying number on those returns, were also enacted by the 1976 Act.
    As originally enacted, section 7701(a)(36)(A) defined the term 
income tax return preparer to mean any person who prepared for 
compensation, or who employed one or more persons to prepare for 
compensation, any income tax return or income tax claim for refund, or 
a ``substantial portion'' of such return or claim. Section 
7701(a)(36)(B) excluded from the definition of income tax return 
preparer persons who merely provided mechanical assistance in the 
preparation of a return or claim for refund, or who prepared returns 
and claims as an employee of the taxpayer or in a fiduciary capacity. 
The legislative history to the 1976 Act explained that whether or not a 
portion of a return constituted a substantial portion of a tax return 
was to be determined by examining both the length and complexity of 
that particular portion of the return and the amount of tax liability 
involved. The legislative history noted, however, that the filling out 
of a single schedule would generally not be considered a substantial 
portion of that return unless that particular schedule was the dominant 
portion of the entire tax return. The legislative history also provided 
that a person who prepared a return for compensation may be an income 
tax return preparer even though that person did not actually place 
figures on a taxpayer's return. See S. Rep. No. 94-938, 94th Cong., 2d 
Sess. 349-359 (1976).
    As originally enacted, section 6694(a) imposed a ``first tier'' 
penalty of $100 if any part of an understatement was due to the 
negligent or intentional disregard of rules or regulations by an income 
tax return preparer. Section 6694(b) imposed a ``second tier'' penalty 
of $500 if any part of an understatement was due to a willful attempt 
in any manner to understate tax liability by an income tax return 
preparer. Section 6695(b) imposed a penalty of $25 if an income tax 
return preparer failed to sign a return or claim for refund in the 
manner prescribed by regulations. Sections 6695(a), (c), (d), and (e) 
also imposed penalties of $25 if an income tax return preparer failed 
to comply with the various identification rules in sections 6107(a), 
6109(a)(4), 6107(b) and 6060.
    The House and Senate Reports to the 1976 Act, H. Rep. No. 94-658, 
94th Cong., 1st Sess. at 274 (1975) and S. Rep. No. 94-938 at 349-50, 
and the Joint Committee on Taxation's General Explanation of the Tax 
Reform Act of 1976, 94th Cong., 2d Sess. at 346 (1976), explained the 
need for the new tax return preparer penalty regime by noting the 
significant number of fraudulent returns and tax return preparers 
engaged in abusive practices. The legislative history further explained 
that, under prior law, it was often difficult for the IRS to detect any 
individual case of improper return preparation. This was because the 
IRS generally had no way of knowing whether the return was prepared by 
the taxpayer or by a tax return preparer who may have engaged in 
abusive practices involving a number of returns. Further, even when the 
IRS could trace the improper preparation of tax returns to an 
individual tax return preparer, the only sanctions available were 
criminal penalties, which were often considered inappropriate, 
cumbersome, and ineffective deterrents because of the cost and length 
of time involved in prosecuting those cases. The legislative history 
makes clear that Congress intended the tax return preparer penalties to 
aid the IRS in detecting returns that were incorrectly prepared and to 
deter tax return preparers from engaging in improper conduct. See S. 
Rep. No. 94-938, at 350-51 (1976).
    Regulations implementing certain of the amendments made by the 1976 
Act were published on December 29, 1976, as TD 7451, 41 FR 56631, and 
later amended on March 31, 1977, by TD 7473, 42 FR 17124. Additional 
regulations were published on April 1, 1977, as TD 7475, 42 FR 17452, 
and November 23, 1977, as TD 7519, 42 FR 17452 (the November 1977 final 
regulations).
    The November 1977 final regulations applied the tax return preparer 
penalty provisions to persons who did not sign the return or claim for 
refund, or make or control the entries on the return or claim for 
refund, including tax professionals who rendered advice that was 
directly related to the determination of the existence, 
characterization, or amount, of an entry on a return or claim for 
refund. By including a broad definition of tax return preparer, the 
Treasury Department and the IRS intended the regulations to increase 
advisor care and to monitor careless or deceptive members of the 
profession. The November 1977 final regulations reflected the 
considered view that excluding nonsigning tax professionals from the 
reach of section 6694 could result in a lack of accountability for 
positions taken on a return, as taxpayers could escape penalty 
liability because

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they employed tax return preparers, tax return preparers could escape 
liability because they relied on nonsigning tax professionals' 
opinions, and nonsigning tax professionals could escape liability 
because they would not be considered tax return preparers. The November 
1977 final regulations also reflected a concern with the possible 
exemption of tax attorneys and other professionals involved in 
preparing more complex returns while at the same time subjecting to 
penalties preparers of less sophisticated returns who did not rely on 
the work of others.
    The November 1977 final regulations also adopted the safe harbor 
provisions of Sec.  301.7701-15(b)(2), which excluded from the 
definition of a tax return preparer persons providing tax advice (other 
than those signing the return) if the amounts of gross income, 
deductions, or credits giving rise to the understatement were less than 
$2,000; or less than $100,000 and also less than 20 percent of the 
gross income (or, for an individual, the individual's adjusted gross 
income) shown on the return or claim for refund.

Omnibus Budget Reconciliation Act of 1989

    Sections 6694 and 6695 were amended by the Improved Penalty 
Administration and Compliance Tax Act of 1989, enacted as title G of 
the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Public Law 
101-239 (103 Stat. 2106) (December 19, 1989). The OBRA 1989 amended 
section 6694(a) to remove the prior link to negligence or intentional 
disregard of rules or regulations and instead impose a $250 penalty on 
an income tax return preparer who understated a taxpayer's tax 
liability on an income tax return or claim for refund if the 
understatement was due to a position for which there was not a 
``realistic possibility'' of being sustained on its merits, and the tax 
return preparer knew or reasonably should have known of such position. 
The revised section 6694(a) penalty did not apply, however, if the 
position was ``not frivolous'' and was adequately disclosed, or if 
there was reasonable cause for the position taken and the tax return 
preparer acted in good faith. The OBRA 1989 also amended section 
6694(b) to impose a $1,000 penalty on a tax return preparer who 
understated a taxpayer's tax liability on an income tax return or claim 
for refund if the understatement was due to the tax return preparer's 
willful attempt to understate tax liability or the tax return 
preparer's reckless or intentional disregard of rules or regulations.
    The OBRA 1989 also made uniform the tax return preparer penalties 
that apply for each failure by a tax return preparer to: (1) Furnish a 
copy of a return or claim for refund to the taxpayer under section 
6695(a); (2) sign the return or claim for refund under section 6695(b); 
(3) furnish his or her identification number under section 6695(c); or 
(4) file a correct information return under section 6695(e). The 
unified penalty amount was $50 for each failure, with a limit of 
$25,000 for the total amount of penalties that could be imposed for any 
single type of failure.
    The OBRA 1989 also consolidated the negligence, substantial 
understatement and valuation misstatement penalties applicable to 
taxpayers. These penalties were consolidated into a single accuracy-
related penalty regime under section 6662. The new accuracy-related 
penalty for a substantial understatement of income tax generally would 
not be imposed, however, if (1) there was ``substantial authority'' for 
the taxpayer's treatment of the item giving rise to the understatement, 
or (2) relevant facts affecting the tax treatment of the item were 
adequately disclosed in the return or in a statement attached to the 
return and there was a ``reasonable basis'' for the tax treatment of 
the item.
    By adopting the ``realistic possibility'' standard for tax return 
preparers, and the higher ``substantial authority'' standard for 
taxpayers with respect to undisclosed positions, OBRA 1989 created a 
disparity between the penalty treatment of tax return preparers and 
most taxpayers subject to income tax.
    Regulations were published on December 31, 1991, as TD 8382, 56 FR 
67509, which amended the regulations under section 6694 to conform the 
income tax return preparer regulations with the statutory changes made 
by OBRA 1989 and to make other changes.

The Small Business and Work Opportunity Tax Act of 2007

    Section 8246 of the 2007 Act amended sections 6694 and 7701(a)(36) 
and made conforming changes to other Code provisions to make tax return 
preparer penalties applicable to a broader range of tax returns. The 
2007 Act's amendments to section 6694 also changed the standards of 
conduct that tax return preparers must meet in order to avoid 
imposition of penalties in the event that a return prepared results in 
an understatement of tax. For undisclosed positions, the 2007 Act 
replaced the ``realistic possibility'' standard with a standard 
requiring the tax return preparer to ``reasonably believe that the tax 
treatment of the position is more likely than not'' the proper 
treatment. For disclosed positions, the 2007 Act replaced the ``not-
frivolous'' standard with a standard requiring the tax return preparer 
to have a ``reasonable basis'' for the tax treatment of the position.
    The 2007 Act also increased the first-tier penalty under section 
6694(a) from $250 to the greater of $1,000 or 50 percent of the income 
derived (or to be derived) by the tax return preparer from the 
preparation of a return or claim for refund with respect to which the 
penalty was imposed. In addition, the 2007 Act increased the second-
tier penalty under section 6694(b) from $1,000 to the greater of $5,000 
or 50 percent of the income derived (or to be derived) by the tax 
return preparer. The amendments made by the 2007 Act are effective for 
tax returns prepared after the date of enactment, May 25, 2007.

Notice 2008-13

    Notice 2008-13 (2008-3 IRB 282) was released on December 31, 2007 
and provided interim guidance under the 2007 Act regarding: (1) The 
relevant categories of tax returns or claims for refund for purposes of 
applying the penalty under section 6694(a); (2) the definition of ``tax 
return preparer'' under sections 6694 and 7701(a)(36); (3) the date a 
return is deemed prepared; (4) the standards of conduct applicable to 
tax return preparers for disclosed and undisclosed positions taken on 
tax returns; and (5) the penalty compliance obligations applicable to 
tax return preparers. Additional guidance was provided in Notice 2008-
12 (2008-3 IRB 280) with respect to the implementation of the tax 
return preparer signature requirement of section 6695(b), and in Notice 
2008-11 (2008-3 IRB 279), which clarified the earlier transition relief 
provided in Notice 2007-54 (2007-27 IRB 12 (July 2, 2007)). Notice 
2008-46 (2008-18 IRB 868) was released on April 16, 2008 and added 
certain returns and documents to Exhibits 1, 2, and 3 of Notice 2008-
13.

Explanation of Provisions

    In developing these proposed regulations, the Treasury Department 
and the IRS recognize that the majority of tax return preparers serve 
the interests of their clients and the tax system by preparing complete 
and accurate returns. Tax return preparers are critical to ensuring 
compliance with the Federal tax laws and are an important component in 
the IRS's administration of those laws. The proposed regulations intend 
to balance the interests of the IRS in curtailing the activities of 
noncompliant tax return

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preparers against the burden imposed on all tax return preparers in 
complying with the requirements imposed by the 2007 Act and these 
proposed regulations.
    The Treasury Department and the IRS also recognize that the 
government has a number of tools to monitor and sanction tax return 
preparers, and will continue to coordinate the application of penalties 
under sections 6694, 6695, 6695A, 6700, 6701, 6702, and Circular 230, 
as well as other applicable penalties and criminal sanctions.
    The IRS will assess penalties under section 6694 in appropriate 
cases. In keeping with a balanced enforcement program for tax return 
preparers, the IRS intends to modify its internal guidance so that a 
referral by revenue agents to the IRS Office of Professional 
Responsibility (OPR) will not be per se mandatory when the IRS assesses 
a tax return preparer penalty under section 6694(a) against a tax 
return preparer who is also a practitioner within the meaning of 
Circular 230. This change is consistent with the general administrative 
recommendations made in the legislative history of the amendments made 
by OBRA 1989 to the section 6694 penalty. See H.R. Conf. Rep. 101-386, 
101st Cong., 1st Sess. at 662 (1989). In matters involving non-willful 
conduct, the IRS will generally look for a pattern of failing to meet 
the required penalty standards under section 6694(a) before making a 
referral to OPR, although any egregious conduct subjecting a tax return 
preparer to penalty may also form a basis for a referral to OPR.

Proposed Changes

    The following is a summary of the proposed changes to the existing 
regulations affecting tax return preparers. The changes included in 
these proposed regulations are discussed in order of the Code sections 
to which they relate. When appropriate, cross-references to 
definitional sections are included. Significantly, the definition of 
tax return preparer, which maintains the concepts in the existing 
regulations of signing and nonsigning tax return preparers, is located 
at the end of these proposed regulations in Sec.  301.7701-15, and that 
section is cross-referenced in the relevant sections of the regulations 
under sections 6694 and 6695.

Furnishing of Copy of the Tax Return

    Section 1.6107-1(a), which requires signing tax return preparers to 
furnish the taxpayer a copy of the prepared return, is proposed to be 
amended to provide that for electronically filed Forms 1040EZ, ``Income 
Tax Return for Single Filers and Joint Filers With No Dependents,'' and 
Forms 1040A, ``U.S. Individual Income Tax Return,'' filed for the 2009, 
2010 and 2011 taxable years, the return information may be provided on 
a replica of a Form 1040, ``U.S. Individual Income Tax Return,'' that 
provides all of the return information. For other electronically filed 
returns, the information may be provided on a replica of an official 
form that provides all of the information. This amendment addresses the 
IRS' transitional issues in implementing the Modernized e-File platform 
for the Form 1040 series of returns.

Date Return Is Prepared

    Proposed Sec.  1.6694-1(a)(2) defines the date a return or claim 
for refund is prepared as the date it is signed by the tax return 
preparer, and also provides that if the tax return preparer fails to 
sign the return when otherwise required to do so, the date the return 
is deemed prepared is the date the return is filed. In the case of a 
nonsigning tax return preparer, the relevant date is the date the 
person provides the advice on the position that results in the 
understatement. This date will be determined based on all the facts and 
circumstances.

Defining the Preparer Within a Firm

    Current Sec.  1.6694-1(b)(1) provides a ``one preparer per firm'' 
rule. Specifically, if a signing tax return preparer is associated with 
a firm, that individual, and no other individual in the firm, is 
treated as a tax return preparer with respect to the return or claim 
for purposes of section 6694. Under the current regulations, if two or 
more individuals associated with a firm are tax return preparers with 
respect to a return or claim for refund, and none of them is the 
signing tax return preparer, only one of the individuals is a 
nonsigning tax return preparer with respect to that return or claim for 
purposes of section 6694. In such a case, ordinarily, the individual 
who is a tax return preparer for purposes of section 6694 is the 
individual with overall supervisory responsibility for the advice given 
by the firm with respect to the return or claim. The ``one preparer per 
firm'' rule and the corollary rule included in Sec.  1.6694-2(d)(5) of 
the current regulations precluding a tax return preparer from relying 
on the advice of an individual associated with the tax return 
preparer's same firm for purposes of penalty protection were intended 
to eliminate the administrative difficulty of attempting to apply the 
section 6694 penalty on an intra-firm basis.
    The Treasury Department and the IRS believe that the amendments to 
section 6694 made by the 2007 Act, together with the evolution in 
existing business practices and the increased complexity of the Federal 
tax law that has created an increased need for specialization, require 
reconsideration of the ``one preparer per firm'' rule. Specifically, 
the Treasury Department and the IRS believe this evolution requires the 
adoption of a framework that centers on the return or claim for refund 
on a position-by-position basis, with the focus of any penalty on the 
position(s) giving rise to the understatement on the return or claim 
for refund and any responsible parties with respect to such 
position(s). Thus the Treasury Department and the IRS believe that the 
``one preparer per firm'' rule is no longer appropriate and have 
proposed to adopt a framework defining a preparer-per-position within a 
firm.
    Under both the current and the proposed regulations, an individual 
is a tax return preparer subject to section 6694 if the individual is 
primarily responsible for the position on the return or claim for 
refund giving rise to the understatement.
    Under proposed Sec.  6694-1(b)(1), only one person within a firm 
will be considered primarily responsible for each position giving rise 
to an understatement and, accordingly, be subject to the penalty. In 
the course of identifying the individual who is primarily responsible 
for the position, the IRS may advise multiple individuals within the 
firm that it may be concluded that they are the individual within the 
firm who is primarily responsible. In some circumstances, there may be 
more than one tax return preparer who is primarily responsible for the 
position(s) giving rise to an understatement if multiple tax return 
preparers are employed by, or associated with, different firms.
    Proposed Sec.  1.6694-1(b)(2) provides that the individual who 
signs the return or claim for refund as the tax return preparer will 
generally be considered the person that is primarily responsible for 
all of the positions on the return or claim for refund giving rise to 
an understatement. The ``one preparer per firm'' rule, however, is 
revised by these proposed regulations if it is concluded based upon 
information received from the signing tax return preparer (or other 
relevant information from a source other than the signing tax return 
preparer) that another person within the signing tax return preparer's 
same firm was primarily responsible for the position(s)

[[Page 34564]]

giving rise to the understatement. In this situation, the ``one 
preparer per firm'' rule in the current regulations could unduly limit 
the IRS to assessing the penalty against a person who may have overall 
responsibility in terms of signing the return, but who may lack 
detailed knowledge of, or responsibility for, a problematic return 
position, and who reasonably relied on another professional at the same 
firm with greater knowledge of, and responsibility for, the accuracy of 
a position giving rise to the understatement.
    The Treasury Department and the IRS believe that amending the 
regulations to better target the person or persons responsible for the 
position(s) giving rise to the understatement will further compliance 
and result in more equitable administration of the tax return preparer 
penalty regime.
    Proposed Sec.  1.6694-1(b)(3) establishes a similar rule for 
situations when there are one or more nonsigning tax return preparers 
at the same firm. If there are one or more nonsigning tax return 
preparers at the firm and no signing tax return preparer within the 
firm, the individual within the firm with overall supervisory 
responsibility for the position(s) giving rise to the understatement is 
the tax return preparer who is primarily responsible for the position 
for purposes of section 6694. Additionally, if after the application of 
proposed Sec.  1.6694-1(b)(2) it is concluded that the signer is not 
primarily responsible for the position or the IRS cannot conclude which 
individual (as between the signing tax return preparer and other 
persons within the firm) is primarily responsible for the position, the 
individual nonsigning tax return preparer within the firm with overall 
supervisory responsibility for the position(s) is the tax return 
preparer who is primarily responsible for the position(s) giving rise 
to the understatement.
    This rule in proposed Sec.  1.6694-1(b)(3) is intended to address 
the potential for uncertainty regarding the identification of the 
primarily responsible tax return preparer prior to the time of the 
expiration of the period of limitations on making an assessment under 
section 6694(a). The proposed rule is distinguished from the current 
``one preparer per firm'' rule in the current regulations because under 
the proposed rule the IRS may assess the penalty against either the 
signing tax return preparer or the nonsigning tax return preparer with 
overall supervisory responsibility for the position(s) giving rise to 
an understatement depending on the facts and circumstances. 
Specifically, when the facts indicate that the signing tax return 
preparer is the primarily responsible tax return preparer under 
proposed Sec.  1.6694-1(b)(1) and (b)(2), the IRS may assess the 
section 6694 penalty against that individual when appropriate under the 
statute and regulations. In situations when the facts indicate that the 
nonsigning tax return preparer with overall supervisory responsibility 
is the primarily responsible tax return preparer under proposed Sec.  
1.6694-1(b)(1) and (b)(3), the IRS may assess the section 6694 penalty 
against that individual when appropriate. In situations when it is 
unclear which individual, as between the signer and other nonsigning 
tax return preparers at the firm, the IRS may assess the section 6694 
penalty against the nonsigning tax return preparer with overall 
supervisory responsibility with respect to the position giving rise to 
the understatement when appropriate. The Treasury Department and the 
IRS specifically request comments regarding the approach taken in these 
proposed regulations and any recommendations to improve this rule.
    As described in this preamble, conforming rules are included in 
Sec.  1.6694-1(f) of the proposed regulations regarding computation of 
the ``income derived (or to be derived)'' from the firm and the 
individual(s) associated with the firm, in order to ensure that the 
same income is not counted twice in determining the amount of income 
subject to the section 6694 penalty.

Reliance on Information Provided

    Section 1.6694-1(e) of the current regulations allows a tax return 
preparer generally to rely in good faith without verification upon 
information furnished by the taxpayer. Proposed Sec.  1.6694-1(e) 
allows similar reliance, but provides that a tax return preparer may 
not rely on information provided by taxpayers with respect to legal 
conclusions on Federal tax issues.
    The proposed regulations expand on the current regulations to 
provide that a tax return preparer may rely in good faith and without 
verification on information furnished by another advisor, another tax 
return preparer, or other party (even when the advisor or tax return 
preparer is within the tax return preparer's same firm). Similarly, a 
tax return preparer may rely in good faith without verification upon a 
tax return that has been previously prepared by a taxpayer or another 
tax return preparer and filed with the IRS. The tax return preparer, 
however, may not ignore the implications of information furnished to 
the tax return preparer or actually known by the tax return preparer, 
and must make reasonable inquiries if the information as furnished 
appears to be incorrect or incomplete. The Treasury Department and the 
IRS believe that this expansion of the current rules regarding reliance 
is necessary given the heightened standards imposed on tax return 
preparers by the 2007 Act and the increased complexity of the tax law, 
which often requires signing and nonsigning tax return preparers to 
rely on the work of others in ensuring compliance.

Income Derived Determination in Computing Penalty Amount

    Proposed Sec.  1.6694-1(f) defines ``income derived (or to be 
derived)'' with respect to a return or claim for refund as all 
compensation the tax return preparer receives or expects to receive 
with respect to the engagement of preparing the return or claim for 
refund or providing tax advice (including research and consultation) 
with respect to the position(s) taken on the return or claim for refund 
that gave rise to the understatement. In the situation of a tax return 
preparer who is not compensated directly by the taxpayer, but rather by 
a firm that employs the tax return preparer or with whom the tax return 
preparer is associated, income derived (or to be derived) means all 
compensation the tax return preparer receives from the firm that can be 
reasonably allocated to the engagement of preparing the return or claim 
for refund or providing tax advice (including research and 
consultation) with respect to the position(s) taken on the return or 
claim for refund that gave rise to the understatement. In the situation 
where a firm that employs the individual tax return preparer (or the 
firm with which the individual tax return preparer is associated) is 
subject to a penalty under section 6694(a) or (b), income derived (or 
to be derived) means all compensation the firm receives or expects to 
receive with respect to the engagement of preparing the return or claim 
for refund or providing tax advice (including research and 
consultation) with respect to the position(s) taken on the return or 
claim for refund that gave rise to the understatement.
    If the tax return preparer or the tax return preparer's firm has 
multiple engagements related to the same return or claim for refund, 
only those engagements relating to the position(s) taken on the return 
or claim for refund that gave rise to the understatement are considered 
for purposes of computing the income derived (or to be derived). In the 
situation of a tax return preparer

[[Page 34565]]

who is not compensated directly by the taxpayer, but rather by a firm 
that employs the tax return preparer or with whom the tax return 
preparer is associated, income derived (or to be derived) means all 
compensation the tax return preparer receives from the firm that can be 
reasonably allocated to the relevant firm engagements.
    The proposed regulations also provide that only compensation for 
time spent on tax advice that is given with respect to events that have 
occurred at the time the advice is rendered and that relates to the 
position(s) giving rise to the understatement will be taken into 
account for purposes of calculating the section 6694 penalty. This rule 
is intended to be consistent with the definition of tax return preparer 
in Sec.  301.7701-15(b)(2)(i).
    The proposed regulations provide that it may be concluded, based 
upon information received from the tax return preparer, that an 
appropriate allocation of compensation attributable to the position(s) 
giving rise to the understatement on the return or claim for refund is 
less than the total amount of compensation associated with the 
engagement. For example, it may be concluded that the number of hours 
of the engagement spent on the position(s) giving rise to the 
understatement may be less than the total hours associated with the 
engagement. If this is concluded, the amount of the penalty will be 
calculated based upon the compensation attributable to the position(s) 
giving rise to the understatement. Otherwise, the total amount of 
compensation from the engagement will be the amount of income derived 
for purposes of calculating the penalty under section 6694.
    The proposed regulations also clarify that the amount of penalties 
assessed against the individual and the firm shall not exceed 50 
percent of the income derived (or to be derived) by the firm from the 
relevant engagement(s) relating to the position(s) giving rise to an 
understatement. The portion of the total amount of penalty assessed 
against the individual tax return preparer shall not exceed 50 percent 
of the individual's compensation attributable to the engagement that 
relates to the position(s) giving rise to an understatement. In other 
words, the same income will not be taken into consideration more than 
once in calculating the penalty against an individual tax return 
preparer and the individual tax return preparer's firm. The Treasury 
Department and the IRS also anticipate that Circular 230 will be 
revised to state that the IRS generally will not stack the section 6694 
penalty and monetary penalties under 31 U.S.C. section 330 with respect 
to the same conduct.

Firm Liability

    Proposed Sec. Sec.  1.6694-2(a)(2) and 1.6694-3(a)(2) are the same 
as Sec. Sec.  1.6694-2(a)(2) and 1.6694-3(a)(2) of the current 
regulations regarding when a firm is liable for the section 6694(a) or 
(b) penalty with one exception. Proposed Sec. Sec.  1.6694-2(a)(2)(iii) 
and 1.6694-3(a)(2)(iii) provide that a firm is also subject to the 
penalty when the firm's review procedures were disregarded by the firm 
through willfulness, recklessness, or gross indifference (including 
ignoring facts that would lead a person of reasonable prudence and 
competence to investigate or ascertain) in the formulation of the 
advice, or the preparation of the return or claim for refund, that 
included the position for which the penalty is imposed.

Reasonable Belief of More Likely Than Not

    Proposed Sec.  1.6694-2(b)(1) provides that the ``reasonable belief 
that the position would more likely than not be sustained on its 
merits'' standard will be satisfied if the tax return preparer analyzes 
the pertinent facts and authorities and, in reliance upon that 
analysis, reasonably concludes in good faith that the position has a 
greater than 50 percent likelihood of being sustained on its merits. 
Whether a tax return preparer meets this standard will be determined 
based upon all facts and circumstances, including the tax return 
preparer's due diligence. In determining the level of diligence in a 
particular case, the IRS will take into account the tax return 
preparer's experience with the area of tax law and familiarity with the 
taxpayer's affairs, as well as the complexity of the issues and facts 
in the case. The proposed regulations also provide that a tax return 
preparer may meet the ``reasonable belief that the position would more 
likely than not be sustained on its merits'' standard if a position is 
supported by a well-reasoned construction of the applicable statutory 
provision despite the absence of other types of authority, or if the 
tax return preparer relies on information or advice furnished by a 
taxpayer, advisor, another tax return preparer, or other party (even 
when the advisor or tax return preparer is within the tax return 
preparer's same firm), as provided in proposed Sec.  1.6694-1(e).
    Proposed Sec.  1.6694-2(b)(2) provides that a tax return preparer 
may not rely on unreasonable assumptions, while proposed Sec.  1.6694-
2(b)(3) states that the authorities contained in Sec.  1.6662-
4(d)(3)(iii) (or any successor provision) are to be considered in 
determining whether a position satisfies the ``more likely than not'' 
standard. Proposed Sec.  1.6694-2(b)(4) also provides examples that 
illustrate positions meeting the ``reasonable belief that the position 
would more likely than not be sustained on its merits'' standard.

Reasonable Basis

    Proposed Sec. Sec.  1.6694-2(c)(1) and (2) establish that the 
``reasonable basis'' standard that must be met for disclosed positions 
is the same standard as defined in Sec.  1.6662-3(b)(3) (or any 
successor provision). The proposed regulations also provide that, to 
meet the ``reasonable basis'' standard, a tax return preparer may rely 
in good faith, without verification, upon information furnished by a 
taxpayer, advisor, another tax return preparer, or other party (even 
when the advisor or tax return preparer is within the tax return 
preparer's same firm), as provided in proposed Sec.  1.6694-1(e).

Adequate Disclosure

    Section 1.6694-2(c)(3) builds on the current regulations and the 
interim guidance provided in Notice 2008-13 and provides the rules for 
disclosure of a position for which there is a ``reasonable basis'' but 
for which the tax return preparer does not have a ``reasonable belief 
that the position would more likely than not be sustained on its 
merits.''
    For a signing tax return preparer within the meaning of Sec.  
301.7701-15(b)(1), the proposed regulations provide that a position may 
be disclosed in one of five ways. First, the position may be disclosed 
on a properly completed and filed Form 8275, Disclosure Statement, or 
Form 8275-R, Regulation Disclosure Statement, as appropriate, or on the 
tax return in accordance with the annual revenue procedure. See Revenue 
Procedure 2008-14 (2008-7 IRB 435 (February 19, 2008)). Second, for 
income tax returns, if the position does not meet the ``substantial 
authority'' standard described in Sec.  1.6662-4(d), disclosure of the 
position is adequate if the tax return preparer provides the taxpayer 
with a prepared tax return that includes the appropriate disclosure. 
Third, for income tax returns, if the position meets the ``substantial 
authority'' standard, disclosure of the position is adequate if the tax 
return preparer advises the taxpayer of all of the penalty standards 
applicable to the taxpayer under section 6662. Fourth, for income tax 
returns, if the position may be described as a tax

[[Page 34566]]

shelter under section 6662(d)(2)(C) or a reportable transaction to 
which section 6662A applies, disclosure of the position is adequate if 
the tax return preparer advises the taxpayer that there needs to be at 
a minimum ``substantial authority'' for the position, that the taxpayer 
must possess a ``reasonable belief that the tax treatment was more 
likely than not'' the proper treatment, and that disclosure will not 
protect the taxpayer from assessment of an accuracy-related penalty. 
Fifth, for tax returns or claims for refund that are subject to 
penalties other than the accuracy-related penalty for substantial 
understatements under sections 6662(b)(2) and (d), the tax return 
preparer advises the taxpayer of the penalty standards applicable to 
the taxpayer under section 6662. This fifth rule is intended to address 
the situation when the penalty standard applicable to the taxpayer is 
based on compliance with requirements other than disclosure on the 
return (for example, section 6662(e)). In order to establish that the 
tax return preparer's disclosure obligation was satisfied, the tax 
return preparer must document contemporaneously in the tax return 
preparer's files that the information or advice required by the 
proposed regulations was provided.
    In the case of a nonsigning tax return preparer within the meaning 
of Sec.  301.7701-15(b)(2), the position may be disclosed in one of 
three ways. First, the position may be disclosed on a properly 
completed and filed Form 8275, ``Disclosure Statement,'' or Form 8275-
R, ``Regulation Disclosure Statement,'' as appropriate, or on the tax 
return in accordance with the annual revenue procedure. Second, a 
nonsigning tax return preparer may meet the disclosure standards if the 
nonsigning tax return preparer advises the taxpayer of all 
opportunities to avoid penalties under section 6662 that could apply to 
the position and advises the taxpayer of the standards for disclosure 
to the extent applicable. Third, disclosure of a position is adequate 
if a nonsigning tax return preparer advises another tax return preparer 
that disclosure under section 6694(a) may be required. The nonsigning 
tax return preparer must document contemporaneously in the tax return 
preparer's files that this advice required by the proposed regulations 
was provided.
    In order to satisfy the disclosure standards when the position is 
not disclosed on or with the return, each return position for which 
there is a ``reasonable basis'' but for which the tax return preparer 
does not have a ``reasonable belief that the position would more likely 
than not be sustained on the merits'' must be addressed by the tax 
return preparer. Thus, the advice to the taxpayer with respect to each 
position must be particular to the taxpayer and tailored to the 
taxpayer's facts and circumstances. No form of a general boilerplate 
disclaimer will satisfy these standards. Proposed Sec.  1.6694-2(c)(iv) 
provides that disclosure in the case of items attributable to a pass-
through entity is adequate if made at the entity level in accordance 
with the rules in Sec.  1.6662-4(f)(5). For example, a tax return 
preparer of a partnership tax return need only advise the partnership 
in order to satisfy any of the above disclosure rules and does not need 
to advise each individual partner in the partnership of the applicable 
penalties.

Reasonable Cause

    Proposed Sec.  1.6694-2(d) maintains the rules in the current 
regulations regarding reasonable cause and good faith, except that 
Sec.  1.6694-2(d) is proposed to be revised to provide that whether a 
position is supported by a generally accepted administrative or 
industry practice is an additional factor to consider in determining 
whether the tax return preparer acted with reasonable cause and good 
faith. This provision is intended to address situations in the absence 
of published guidance when administrative or industry practice has 
developed that would not reasonably be subject to challenge by the IRS.
    The reasonable cause factor regarding reliance on advice of another 
tax return preparer is also expanded to allow a tax return preparer to 
reasonably rely on information or advice furnished by a taxpayer, 
advisor, another tax return preparer, or other party (even when the 
advisor or tax return preparer is within the tax return preparer's same 
firm), as provided in proposed Sec.  1.6694-1(e).

Electronically Signed Returns

    Proposed Sec.  1.6695-1(b)(2) provides that, in the case of an 
electronically signed tax return, a tax return preparer need not sign 
the return prior to presenting a completed copy of the return to the 
taxpayer. The tax return preparer, however, must furnish all of the 
information to the taxpayer contemporaneously with furnishing the Form 
8879, IRS e-file Signature Authorization, or similar IRS e-file 
signature form. The information may be furnished on a replica of an 
official form that provides all of the information.

Due Diligence for Earned Income Credit

    Proposed Sec.  1.6695-2(b)(3) establishes a reasonableness standard 
for signing tax return preparers' due diligence requirements with 
respect to determining eligibility for the earned income credit and 
adds examples.

Claims for Refund or Credit by Tax Return Preparers or Appraisers

    Proposed Sec.  1.6696-1, discussing the procedures for filing 
claims for credit or refund for penalties assessed against tax return 
preparers under sections 6694 or 6695, is revised to also cover the new 
appraiser penalty under section 6695A. Section 6695A was enacted by 
section 1219 of the Pension Protection Act of 2006 (Pub. L. 109-280 
(120 Stat. 780, 1084-86) (August 17, 2006)), as amended by the Tax 
Technical Corrections Act of 2007 (Public Law 110-172 (121 Stat. 2473, 
2474) December 29, 2007)). A separate regulation project will provide 
guidance under section 6695A.

Definition of Tax Return Preparer

    Proposed Sec. Sec.  301.7701-15(b)(1) and (2) add to the section 
7701 regulations the definitions of ``signing tax return preparer'' and 
``nonsigning tax return preparer'' that are included in Sec.  1.6694-1 
of the current regulations. Proposed Sec.  301.7701-15(b)(1) provides 
that a signing tax return preparer is any tax return preparer who signs 
or who is required to sign a return or claim for refund as a tax return 
preparer pursuant to Sec.  1.6695-1(b).
    Proposed Sec.  301.7701-15(b)(2) provides that a nonsigning tax 
return preparer is any tax return preparer who is not a signing tax 
return preparer but who prepares all or a substantial portion of a 
return or claim for refund within the meaning of Sec.  301.7701-
15(b)(3) with respect to events that have occurred at the time the 
advice is rendered. In determining whether an individual is a 
nonsigning tax return preparer, the proposed regulations provide that 
any time spent on advice that is given with respect to events that have 
occurred, which is less than 5 percent of the aggregate time incurred 
by the person with respect to the position(s) giving rise to the 
understatement will not be taken into account in determining whether an 
individual is a nonsigning tax return preparer. The Treasury Department 
and the IRS believe that this less than 5 percent test will encourage 
tax professionals who principally rendered advice regarding events that 
had not yet occurred to provide follow-up advice requested by a 
taxpayer without the concern that, by providing

[[Page 34567]]

such advice to a taxpayer, the advisor would become a tax return 
preparer under proposed Sec.  301.7701-15(b)(2) and (3).
    Consistent with the current regulations and the legislative history 
of the 1976 Act, proposed Sec.  301.7701-15(b)(3)(i) clarifies that 
whether a schedule, entry, or other portion of a return or claim for 
refund is a substantial portion is determined based upon all facts and 
circumstances, and a single tax entry may constitute a substantial 
portion of the tax required to be shown on a return. The proposed 
regulations include additional factors to consider in determining 
whether a schedule, entry, or other portion of a return or claim for 
refund is a substantial portion, such as the size and complexity of the 
item relative to the taxpayer's gross income and the size of the 
understatement attributable to the item compared to the taxpayer's 
reported tax liability.
    Proposed Sec.  301.7701-15(b)(3)(ii) increases the de minimis 
exception in determining a substantial portion of a return or claim for 
refund for nonsigning tax return preparers. Under the proposed 
regulations, the de minimis exception applies if the item giving rise 
to the understatement is (i) less than $10,000, or (ii) less than 
$400,000 if the item is also less than 20 percent of the taxpayer's 
gross income (or, for an individual, the individual's adjusted gross 
income). This de minimis rule does not apply for signing tax return 
preparers within the meaning of Sec.  301.7701-15(b)(1). This change to 
the regulations updates the current de minimis amounts to reflect the 
passage of time since those amounts were set in 1977. The Treasury 
Department and the IRS are considering whether other de minimis rules 
applicable to nonsigning tax return preparers of non-income tax returns 
are warranted.
    Consistent with the interim guidance set forth in Notice 2008-13, 
Sec.  301.7701-15(b)(4) is proposed to be amended by revising the 
definitions of ``return'' and ``claim for refund'' to only include 
preparers of returns and claims for refund that are specifically 
identified in published guidance in the Internal Revenue Bulletin. The 
Treasury Department and the IRS will publish this guidance 
simultaneously with the publication of final regulations and will 
likely maintain the three tiered approach used in the exhibits to 
Notice 2008-13, subject to any appropriate modifications. Under the 
substantial portion rule in section 7701(a)(36)(A), preparation of a 
broad range of information returns, schedules, and other documents can 
subject a person to the section 6694 penalties even though the 
documents may not themselves give rise to an understatement. 
Accordingly, the Treasury Department and the IRS believe that including 
a list of returns or other documents, the preparation of which may 
subject a tax return preparer to penalties, will further compliance by 
not unduly increasing the burden on persons preparing information 
returns and other documents.

Cross-References

    Conforming changes are made in Sec. Sec.  1.6060-1, 1.6107-1, 
1.6109-2, 1.6694-0, 1.6694-1, 1.6694-4, 1.6695-1, 1.6695-2, 1.6696-1, 
and 301.7701-15 to replace references to income tax return preparers 
with references to tax return preparers, consistent with the provisions 
of the 2007 Act. Conforming cross references are also made to Part 20, 
Estate Tax; Estates of Decedents Dying After August 16, 1954; Part 25, 
Gift Tax; Gifts Made After December 31, 1954; Part 26, Generation-
Skipping Transfer Tax Under the Tax Reform Act of 1986; Part 31, 
Employment Taxes and Collection of Income Tax at Source; Part 40, 
Procedural Excise Tax; Part 41, Highway Use Tax; Part 44, Wagering Tax; 
Part 53, Foundation and Similar Excise Taxes; Part 54, Pension Excise 
Taxes; Part 55, Excise Tax on Real Estate Investment Trusts and 
Regulated Investment Company Taxes; Part 56, Public Charity Excise 
Taxes; Part 156, Excise Tax on Greenmail; and Part 157, Excise Tax on 
Structured Settlement Factoring Transactions; to conform these parts 
with the provisions in Parts 1 and 301, consistent with the provisions 
of the 2007 Act.

Availability of IRS Documents

    The IRS notices referred to in this preamble are published in the 
Internal Revenue Bulletin and are available at https://www.irs.gov.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations.
    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), requires the agency to ``prepare 
and make available for public comment an initial regulatory flexibility 
analysis'' that will ``describe the impact of the proposed rule on 
small entities.'' (5 U.S.C. 603(a)). Section 605 of the RFA provides an 
exception to this requirement if the agency certifies that the proposed 
rulemaking will not have a significant economic impact on a substantial 
number of small entities.
    The proposed rules affect tax return preparers. The IRS estimates 
there are 38,566 tax return preparation firms and 260,338 self-employed 
tax return preparers that qualify as small entities. Therefore, the IRS 
has determined that these proposed rules will have an impact on a 
substantial number of small entities.
    The IRS has determined, however, that the impact on entities 
affected by the proposed rule will not be significant. The statute and 
proposed regulations would require entities that employ tax return 
preparers to retain a record of the name, taxpayer identification 
number and principal place of work of each tax return preparer 
employed. The IRS estimates that this would not require purchase of 
additional software and would take five minutes per tax return preparer 
employed. The statute and proposed regulations would also require tax 
return preparers to retain a complete copy of a return (or claim for 
refund) or a list of the name, taxpayer identification number and 
taxable year for each return (or claim for refund) and the name of the 
tax return preparer required to sign the return or claim for refund. 
Many tax return preparers have copying machines or scanners and already 
make copies of the returns prepared, and the IRS estimates this would 
not require the purchase of additional equipment. The IRS estimates 
that it would take an average of five minutes to make copies or prepare 
a record of the returns prepared. Accordingly, the burden on employers 
of tax return preparers to make a record of the name, taxpayer 
identification number, and principal place of work of each employed tax 
return preparer, and a copy of each return or claim for refund 
prepared, or a record, is insignificant.
    The proposed regulations also allow the tax return preparer to 
generally avoid imposition of the tax return preparer penalties under 
section 6694 in cases when a tax return position meets the 
``substantial authority'' standard but not the ``reasonable belief that 
the position would more likely than not be sustained on its merits'' 
standard if the tax return preparer advises the taxpayer of the penalty 
standards applicable to the taxpayer, and contemporaneously documents 
in the tax return preparer's files that this information or advice was 
provided. Often, tax return preparers will choose not to advise the 
taxpayer of the applicable penalty standards and will instead disclose 
the position on a

[[Page 34568]]

properly completed and filed Form 8275, ``Disclosure Statement,'' or 
Form 8275-R, ``Regulation Disclosure Statement,'' as appropriate, or on 
the tax return in accordance with the annual revenue procedure. In 
those instances when the tax return preparer elects to advise the 
taxpayer of the penalty standards, the IRS estimates that it would take 
an average of 15 minutes to document this advice. Accordingly, the 
burden on those who choose this option is insignificant.
    Although the proposed regulations also conform the standards of 
conduct and tax return preparer penalties to the provisions of the 2007 
Act, tax return preparers already enroll in educational seminars or 
training programs to keep up to date with the latest changes to the 
Code, and the provisions of the 2007 Act and the proposed regulations 
will generally be part of that training.
    Moreover, these proposed regulations are required to comply with 
the provisions of section 8246 of the 2007 Act and flow directly from 
amendments to the Code contained in the 2007 Act.
    Based on these facts, the IRS hereby certifies that the collection 
of information contained in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a Regulatory Flexibility Analysis is not required.
    Pursuant to section 7805(f) of the Code, these regulations have 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed regulations and how they can be made easier to 
understand. Comments are requested on the examples in the proposed 
regulations, and commentators are specifically invited to suggest 
changes to these examples or to suggest new examples that they believe 
would better illustrate the principles that should be included in the 
final regulations. The IRS and the Treasury Department also request 
comments on the accuracy of the certification that the regulations in 
this document will not have a significant economic impact on a 
substantial number of small entities. All comments will be available 
for public inspection and copying.
    A public hearing has been scheduled for Monday, August 18, 2008, at 
10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by August 18, 2008 and an outline of the topics to 
be discussed and the time to be devoted to each topic (a signed 
original and eight (8) copies) by Monday, August 4, 2008. A period of 
10 minutes will be allotted to each person for making comments. An 
agenda showing the scheduling of the speakers will be prepared after 
the deadline for receiving outlines has passed. Copies of the agenda 
will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are Matthew S. 
Cooper and Michael E. Hara, Office of the Associate Chief