Daily Tax Update - June 16, 2008

IRS ISSUES PROPOSED REGULATIONS ON RETURN PREPARER PENALTY PROVISIONS: Today, the Treasury Department and the IRS issued proposed regulations implementing amendments to the tax return preparer penalties under sections 6694 and 6695, as well as related provisions under sections 6060, 6107, 6109, 6696, and 7701(a)(36), reflecting amendments to the Internal Revenue Code made by section 8246 of the Small Business and Work Opportunity Act of 2007. In the preamble to the proposed regulations, Treasury and IRS stated that (1) they "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," and (2) they intend to finalize the proposed regulations by no later than December 31, 2008. 

The proposed regulations state that "the Treasury 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 proposed section 1.6694-1(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 a penalty."

The proposed regulations also:

  • Broaden the scope of "income tax return preparers" to include preparers of estate, gift, and generation-skipping transfer tax returns, employment tax returns, excise tax returns and returns of exempt organizations;
  • Revise current regulations to amend the standards of conduct that must be met to avoid imposition of tax return preparer penalty under section 6694;
  • Change the computation of the section 6694 tax return preparer penalty;
  • Amend current regulations under the penalty provisions of section 6695;
  • Provide 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;"
  • Add to section 7701 regulations definitions of "signing tax return preparer" and "nonsigning tax return preparer" included in the existing section 6694 regulations;
  • Provide that "time spent on advice for events that have occurred that represents less than five percent of the aggregate time incurred by such individual with respect to the position(s) giving rise to the understatement" is excluded in determining whether an individual is a nonsigning tax return preparer; and
  • Increase the current de minimis amount in determining a substantial portion of a return or claim for refund for nonsigning tax return preparers (Treasury and the IRS noted that they are considering whether other de minimis rules applicable to nonsigning tax return preparers are warranted);

In addition, the proposed regulations provide guidance on

  • computation of "income derived (or to be derived)" from the firm, in order to ensure income is not double counted in determining the amount of income subject to the section 6694 penalty; and
  • standards for tax return preparers to state that there is "reasonable belief that the position would more likely than not be sustained on its merits."

Consistent with the interim guidance set forth in Notice 2008-13, the proposed regulations revise "the definitions of 'return' and 'claim for refund' to include only preparers of returns and claims for refund that are specifically identified in guidance." Treasury Department and the IRS stated that they will publish such guidance simultaneously with the publication of the final regulations and likely will maintain the three-tiered approach used in the exhibits found in Notice 2008-13.

IRS PROVIDES GUIDANCE ON QUALIFYING AS “OUTSIDE DIRECTOR”: Today, the IRS issued Revenue Ruling 2008-32, which illustrates the definition of “outside director” for section 162(m) purposes in circumstances when a corporate director is asked to service as interim CEO of the company. The IRS stated generally that the determination of whether an individual is or was a corporate officer (and therefore not qualified to be an outside director for purposes of section 162(m)) is based on facts and circumstances,  including without limitation the source of the individual’s authority, the term for which the individual is elected or appointed, and the nature and extent of the individual’s duties. In the facts presented in the ruling, the individual director who served as interim CEO was clearly  a corporate officer. He did not merely have the title of interim CEO; he had the full authority of  the CEO position. He was in regular and continued service (and not appointed for a special or single transaction). Thus, he was not an “outside director”. The Ruling does not provide any additional insight into the circumstances under which an interim officer would not be an outside director. 

WAYS AND MEANS COMMITTEE TO MARK UP AMT PATCH BILL THIS WEEK:  On June 18, the House Ways and Means Committee will hold a markup of a bill to patch the alternative minimum tax for 2008.  Chairman Rangel said that he would use changing the tax treatment of carried interest as an offset and he was also considering an offset related to oil and gas. 

  • Later today, the Senate will again try to invoke cloture on the House-passed extenders bill (H.R. 6049).

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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