Client Alert

Tougher and Broader Tax Return Preparer Standards and Penalties

October 03, 2007

Cristiane Daly and Doug Schaaf

On May 27, 2007, Congress enacted the Small Business and Work Opportunity Tax Act as part of the U.S. Troop Readiness, Veterans Care, Katrina Recovery and Iraq Accountability Appropriations Act of 2007, significantly redefining standards for tax return preparation. The Act amends section 6694(a) of the Internal Revenue Code of 1986 and increases the accuracy threshold a tax preparer must satisfy in reporting a particular item on a tax return, while broadening the definition of return to include more than income tax returns. The Act also increases the penalties for preparers who do not adhere to the new standards. It should be noted that preparer under the Code is broader than the person who signs the return, and can include (i) client employees who prepare substantial amounts of data that go into the form, and (ii) professionals who advise a taxpayer as to the position to be taken on the return. Although this Act will have considerable impact on the tax community, the changes to the law were made without much input from the Internal Revenue Service or tax preparers. As an interim matter, the IRS has provided transitional relief for all tax returns due prior to December 31, 2007.

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