The AICPA Is Very Concerned That Serious Ramifications That Will Result to Taxpayers, Treasury

June 7, 2007

The Honorable Kevin M. Brown The Honorable Eric Solomon Acting Commissioner Assistant Secretary (Tax Policy) Internal Revenue Service Department of the Treasury 1111 Constitution Avenue, NW 1500 Pennsylvania Avenue, NW Room 3000 Room 3120 Washington, DC 20224 Washington, DC 20220

Dear Commissioner Brown and Assistant Secretary Solomon:

The AICPA is very concerned that serious ramifications will result to taxpayers, Treasury, the IRS, and the tax practitioner community if the provisions in the Small Business and Work Opportunity Tax Act of 2007 revising section 6694 of the Internal Revenue Code are enforced without transitional relief. In particular, there is an urgent need for transitional relief with respect to the statute’s effective date to avoid extreme inequity, uncertainty, and administrative burden.

Revised section 6694 is to be effective for returns prepared after the date of enactment (May 25, 2007). We believe the Commissioner has the authority to grant relief based on: 1) the Commissioner’s inherent authority to administer and enforce the tax laws (See G.C.M. 36137), and 2) the statutory authority to grant reasonable cause relief by waiving the penalty under both prior and current versions of section 6694. We will be providing you examples of the Commissioner’s exercise of authority in other situations.

We urge the Commissioner to exercise this authority by publishing guidance that defers the application of the changes until practitioners, taxpayers and the IRS can fully understand and implement the new, higher standards. Specifically, the Commissioner should issue guidance stating that the penalty under section 6694 will not be asserted with respect to undisclosed positions reflected on tax returns for tax years beginning prior to January 1, 2007, if those positions have a realistic possibility of success (the standard applicable prior to the statutory change).

Because of the impending June 15th filing deadline for certain fiscal year filers and the lead time needed for e-filing, we respectfully request that such relief be issued immediately.

A few examples of problems that demonstrate the need for transitional relief are set forth below. The Honorable Kevin M. Brown The Honorable Eric Solomon June 7, 2007 Page 2

1. Good Tax Administration

 Practitioner-Prepared Returns - Before and After the Effective Date Revised section 6694 is to be effective for returns prepared after the date of enactment (May 25, 2007). As a result, identical positions on practitioner- prepared returns for different taxpayers with the same tax year could be held to different standards. For example, an undisclosed position on a year 2006 practitioner-prepared return that was prepared before the effective date would be held to the realistic possibility of success standard. In contrast, that same undisclosed position on a year 2006 practitioner-prepared return that is on extension and, therefore, prepared on or after the effective date, would be held to the higher more-likely-than-not (“MLTN”) standard. As a matter of fairness, all taxpayers and practitioners should be treated equally.

 Taxpayer-Prepared vs. Practitioner-Prepared Returns The penalty standard that applies to a position on a return prepared on or after the effective date is higher for a practitioner than for a taxpayer. Undisclosed positions on taxpayer-prepared returns are subject to the substantial authority standard. Undisclosed positions on practitioner-prepared returns are subject to a higher, MLTN standard. As a matter of fairness, not only should taxpayers be treated equally, they also should not be disadvantaged by having their returns prepared by a practitioner.

 Inconsistent Enforceability Standards This inconsistent treatment also creates additional administrative burdens for Treasury and the IRS, since the enforceability standards applicable to different taxpayers with the same taxable years will vary.

 Revisions to Forms and Publications and Issuance of Additional Guidance The revisions to section 6694 necessitate revision to various forms and publications and the issuance of additional guidance. This burden is exacerbated by the need for additional guidance to address the inconsistency problems noted above. Providing transitional relief would significantly lighten the burden on Treasury and the IRS.

 Issuance of Guidance to Newly Affected Practitioners Practitioners who previously have not been subject to section 6694 standards (but are now because of the broadening of the scope of present law preparer penalties to cover the preparation of estate and gift tax, employment tax, excise tax, and exempt organization returns) need to be provided with appropriate guidance from Treasury and the IRS and given an adequate period of time in which to familiarize themselves with that guidance before they can reasonably be expected to apply these rules. This is especially so given the potential severity of the new section 6694 penalties. The Honorable Kevin M. Brown The Honorable Eric Solomon June 7, 2007 Page 3

2. Uncertainty Regarding the Application of the Effective Date/Definition of “Prepared”

Much uncertainty exists regarding the interpretation of the effective date provision; that provision states that section 6694 as amended will apply “to returns prepared after date of enactment.” Examples of just a few of the factual situations raising questions regarding the effective date are set forth below.

 Practitioner prepares a return prior to the effective date, but is unable to complete it because he or she is waiting for a Schedule K-1. The Schedule is received after the effective date. Does Practitioner have to re-review the return and apply the MLTN standard to all positions taken on the return?

 Practitioner completes the federal return prior to the effective date, but does not transmit it to the client before that date because the state returns have not yet been completed. Will the federal return be regarded as having been prepared prior to the effective date? Does it matter whether the federal return is signed by Practitioner prior to the effective date?

 Prior to the effective date, Practitioner gives tax advice on a transaction and, relying on that advice, the taxpayer enters into the transaction. After the transaction is closed, but before the effective date, Practitioner provides written tax advice on the transaction. After the effective date, Practitioner prepares taxpayer’s return. Does the higher standard apply with respect to the initial advice and the written tax advice related to the transaction?

 Prior to the effective date, Practitioner gives tax advice on a transaction. Relying on that advice, the taxpayer proceeds with the transaction but the transaction is not closed until after the effective date. Practitioner prepares written tax advice and prepares the tax return after the effective date. Does the higher standard apply with respect to the advice and return positions related to the transaction?

 Prior to the effective date, Practitioner gives advice on a position that constitutes a “substantial portion” of the taxpayer’s return. After the effective date, a different Practitioner prepares the return which takes this position. Does the higher standard apply to the first Practitioner, regarding the advice that was given prior to the effective date, but that was reflected on a tax return signed by a different preparer after the effective date? Does the higher standard apply to the second Practitioner, regarding the position taken on the tax return? The Honorable Kevin M. Brown The Honorable Eric Solomon June 7, 2007 Page 4

3. Disclosures

 Excess Disclosures To protect themselves from possible section 6694 penalties, it is likely that practitioners will recommend that taxpayers include numerous disclosures in their returns. As a result, the number of disclosures received by the IRS could be so excessive and unmanageable as to defeat the purpose of the disclosure system. To avoid such a situation, Treasury and the IRS should be given sufficient time to develop guidance regarding appropriate types of disclosures.

 Burden on E-File Program Currently, the e-file system is not structured to accept a large number of disclosures. As a result, excessive disclosures could diminish the effectiveness of the e-file system.

 Uncertainty Regarding CIC (Formerly CEP) Cases Without additional guidance, uncertainty exists regarding the submission of disclosures for CIC (Coordinated Industry Case) cases. Do the rules in Rev. Proc. 94-69, regarding the submission of disclosures after notification in Exam, still apply?

Transitional guidance with respect to when disclosures are needed and what comprises adequate disclosure could alleviate the likely strain on the system that would otherwise result due to the submission of excessive disclosures.

* * * * * * * * * *

The revisions to section 6694 constitute major changes to practice standards and penalties that have been in place for many years. These changes and their ramifications need to be thoroughly considered and the related administrative guidance and processes need to be developed before penalties are imposed. As noted above, we believe that current enforcement of section 6694 as amended would result in such extreme inequity, uncertainty, and administrative burden that the IRS should exercise its inherent authority to provide transitional relief by not asserting penalties, or by waiving penalties on reasonable cause grounds during an appropriate transitional period. We urge you to provide immediate transitional relief with respect to the enforcement of section 6694, as amended. Practitioners are filing 2006 extended returns everyday, but the immediacy of this action is particularly crucial because of the approaching June 15, 2007 due date for many returns. The Honorable Kevin M. Brown The Honorable Eric Solomon June 7, 2007 Page 5

This letter is meant to highlight some of the problems posed by the revisions to section 6694. We will follow up with a more extensive discussion at a later date. In the meantime, if you have any questions about this matter, please feel free to contact me at (212) 773-2858 or [email protected]; Thomas P. Ochsenschlager, AICPA Vice President - Taxes at (202) 434-9209 or [email protected]; or Edward S. Karl, AICPA Director at (202) 434-9228, or [email protected].

Sincerely,

Jeffrey R. Hoops Chair, Tax Executive Committee cc: Donald L. Korb Deborah A. Butler Michael J. Desmond Anita C. Soucy