Disclosure backlash

[Zee]

I'm wondering...what percentage of your clients may require a disclosure statement? And, how you think client's will react to this need when the situation arises? For those of us that are conservative, will this result in a loss of clients?

[JoshinNC]

What exactly are you talking about?

I'm wondering...what percentage of your clients may require a disclosure statement? And, how you think client's will react to this need when the situation arises? For those of us that are conservative, will this result in a loss of clients?

Did I miss something somewhere?

[Zee]

Huh? I'm talking about the requirement to file a disclosure when the law isn't exactly clear on how to treat an item on a return, and the potential preparer penalty if the position taken doesn't meet the "more likely to be correct" guidelines.

It would seem that once it is communicated to a client that this disclosure will be necessary on an particular return item, they will see this as a "red flag" increasing their chances of audit. IMHO, a "conservative" preparer would see the need for such disclosure more often than an "aggressive" preparer. This might result in the loss of clients to the more "aggressive" preparer willing to take a chance on an item without submitting a disclosure.

So, my question is; "do you have many clients that might end up in this situation (requiring a disclosure)"? If so, will they stay with you or might they seek another preparer willing to prepare and sign the tax return without attaching the disclosure?

I hope this makes my question clearer.

[solomon]

From Proposed Reg. 138637-07

"Under §10.34(a) of these proposed regulations, a practitioner may not sign a tax
return as a preparer unless the practitioner has a reasonable belief that the tax
treatment of each position on the return would more likely than not be sustained on its
merits, or there is a reasonable basis for each position and each position is adequately
disclosed to the Internal Revenue Service. A practitioner may not advise a client to take
a position on a tax return, or prepare the portion of a tax return on which a position is
taken, unless (1) the practitioner has a reasonable belief that the position satisfies the
more likely than not standard; or (2) the position has a reasonable basis and is
adequately disclosed to the Internal Revenue Service."

Note: Disclosure is required under a reasonable basis - not under more likely than not.


"A practitioner may not advise a client to take
a position on a tax return, or prepare the portion of a tax return on which a position is
taken, unless--

(1) The practitioner has a reasonable belief that the position satisfies the more
likely than not standard; or

(2) The position has a reasonable basis and is adequately disclosed to the
Internal Revenue Service.
* * * * *
(e) Definitions. For purposes of this section--

(1) More likely than not. A practitioner is considered to have a reasonable belief
that the tax treatment of a position is more likely than not the proper tax treatment if the
practitioner analyzes the pertinent facts and authorities, and based on that analysis
reasonably concludes, in good faith, that there is a greater than fifty-percent likelihood
that the tax treatment will be upheld if the IRS challenges it. The authorities described
in 26 CFR 1.6662-4(d)(3)(iii), or any successor provision, of the substantial
understatement penalty regulations may be taken into account for purposes of this
analysis.

(2) Reasonable basis. A position is considered to have a reasonable basis if it is
reasonably based on one or more of the authorities described in 26 CFR 1.6662-
4(d)(3)(iii), or any successor provision, of the substantial understatement penalty
regulations. Reasonable basis is a relatively high standard of tax reporting, that is,
significantly higher than not frivolous or not patently improper. The reasonable basis
standard is not satisfied by a return position that is merely arguable or that is merely a
colorable claim. The possibility that a tax return will not be audited, that an issue will not
be raised on audit, or that an issue will be settled may not be taken into account."

[KJ Judd]

Form 8275 - Disclosure statement

I've printed out the Form 8275, Disclosure Statement, but haven't read the instructions. I've heard a lot about the new rules but have been unable to find any practical guidance.

For example, I have a couple clients that have been in business 3 or more years and are still showing losses. I truly believe they are businesses not hobbies under the all facts & circumstances test. Am I required to disclose & what is a sample disclosure? Do I have to plead my case in the attachment?

What about a parent loaning money (with written promissory note) to child for new business where the business is in a loss situation and child needs the note for basis to deduct the loss?

Has anyone seen guidance on this?

I also am wondering what my clients' reaction will be on this. I can't believe the low cost, more aggressive preparers are going to disclose. Although I've heard some of the larger firms are planning to disclose everything & flood the IRS system. What is everyone planning on doing?

[Zee]

"Under §10.34(a) of these proposed regulations, a practitioner may not sign a tax
return as a preparer unless the practitioner has a reasonable belief that the tax
treatment of each position on the return would more likely than not be sustained on its
merits, or there is a reasonable basis for each position and each position is adequately
disclosed to the Internal Revenue Service. A practitioner may not advise a client to take
a position on a tax return, or prepare the portion of a tax return on which a position is
taken, unless (1) the practitioner has a reasonable belief that the position satisfies the
more likely than not standard; or (2) the position has a reasonable basis and is
adequately disclosed to the Internal Revenue Service."

Note: Disclosure is required under a reasonable basis - not under more likely than not.


"A practitioner may not advise a client to take
a position on a tax return, or prepare the portion of a tax return on which a position is
taken, unless--

(1) The practitioner has a reasonable belief that the position satisfies the more
likely than not standard; or

(2) The position has a reasonable basis and is adequately disclosed to the
Internal Revenue Service.
* * * * *
(e) Definitions. For purposes of this section--

(1) More likely than not. A practitioner is considered to have a reasonable belief
that the tax treatment of a position is more likely than not the proper tax treatment if the
practitioner analyzes the pertinent facts and authorities, and based on that analysis
reasonably concludes, in good faith, that there is a greater than fifty-percent likelihood
that the tax treatment will be upheld if the IRS challenges it. The authorities described
in 26 CFR 1.6662-4(d)(3)(iii), or any successor provision, of the substantial
understatement penalty regulations may be taken into account for purposes of this
analysis.

(2) Reasonable basis. A position is considered to have a reasonable basis if it is
reasonably based on one or more of the authorities described in 26 CFR 1.6662-
4(d)(3)(iii), or any successor provision, of the substantial understatement penalty
regulations. Reasonable basis is a relatively high standard of tax reporting, that is,
significantly higher than not frivolous or not patently improper. The reasonable basis
standard is not satisfied by a return position that is merely arguable or that is merely a
colorable claim. The possibility that a tax return will not be audited, that an issue will not
be raised on audit, or that an issue will be settled may not be taken into account."

Now, I'm confused.

The 12/14/07 Kiplinger Tax letter I received today indicated "If a preparer doesn't believe that a position he or she takes on a return is more likely than not be be correct, he or she must disclose it to the IRS."

I also read the following on an Intuit webpage;

"Under prior law, an income tax return preparer could avoid a first-tier penalty for a tax understatement due to a return position if there was a "realistic possibility" of the position being sustained on its merits. If the position was disclosed on the return, no penalty applied unless the position was frivolous.

Under the new rules, a penalty for a return position can be avoided only if there is a reasonable belief that the position will "more likely than not" be sustained on its merits. If the position is disclosed on the return, no penalty applies unless there is no "reasonable basis" for the position."

As such, it would seem to me a disclosure statement might be required in both situations. But, it isn't very clear.

[erchess]

I don't believe

that any of the clients I served in the last two years would have wanted me to do anything that was not more likely than not to be upheld if challenged. In fact, most were under the misapprehension that if I were sufficiently conservative I could avoid any possibility of an audit and this was what they wanted. I think that if I had offered to do one of these explanations the clients I have would not run to a more aggressive person who would do the same thing without disclosure. Instead they would tell me to take some other course of action that was more likely than not to be upheld. The fact that it doubled what they had to pay would not phase them.

If I were to get a client who wanted me to go out on a limb where I felt that I needed to do an extra disclosure, I would also require them to sign the high risk rider to my engagement letter. The rider simply states that I have taken a very assertive position on the return and therefore examination of the return is likely and changes could very well result from the examination.

[solomon]

Hr 4318

Note that this Bill would vacate the "more likely than not" standard and substitute "substantial authority."

http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.4318:

[JoshinNC]

I hope I don't seem to dumb

Huh? I'm talking about the requirement to file a disclosure when the law isn't exactly clear on how to treat an item on a return, and the potential preparer penalty if the position taken doesn't meet the "more likely to be correct" guidelines.

It would seem that once it is communicated to a client that this disclosure will be necessary on an particular return item, they will see this as a "red flag" increasing their chances of audit. IMHO, a "conservative" preparer would see the need for such disclosure more often than an "aggressive" preparer. This might result in the loss of clients to the more "aggressive" preparer willing to take a chance on an item without submitting a disclosure.

So, my question is; "do you have many clients that might end up in this situation (requiring a disclosure)"? If so, will they stay with you or might they seek another preparer willing to prepare and sign the tax return without attaching the disclosure?

I hope this makes my question clearer.

but I knew nothing about this. I guess I've got some studying to do over the holiday break.

[Zee]

but I knew nothing about this. I guess I've got some studying to do over the holiday break.

Josh, your not dumb. it's hard to keep up with the constant changes. I'm sorry if my answer seemed abrasive.

The new rules are quite onerous. Essentially, they prohibit a preparer from signing a return in many of those simple situations where preparer's have let the client assume the risk of audit in the past. Lack of receipts for cash contributions is a good example, mileage logs is another.

I'm wondering what those here will do? If your client says, "I donated $500 to the collection plate", but don't have a receipt since it was cash."
Most will probably explain the new rule and explain it can no longer be deducted. If the client insists they made the contribution, want the deduction and are willing to risk an audit of that item do we now refuse to prepare the return? The new high penalties and disclosure rules sure seem so.

[JoshinNC]

No offense taken.

Josh, your not dumb. it's hard to keep up with the constant changes. I'm sorry if my answer seemed abrasive.

The new rules are quite onerous. Essentially, they prohibit a preparer from signing a return in many of those simple situations where preparer's have let the client assume the risk of audit in the past. Lack of receipts for cash contributions is a good example, mileage logs is another.

I'm wondering what those here will do? If your client says, "I donated $500 to the collection plate", but don't have a receipt since it was cash."
Most will probably explain the new rule and explain it can no longer be deducted. If the client insists they made the contribution, want the deduction and are willing to risk an audit of that item do we now refuse to prepare the return? The new high penalties and disclosure rules sure seem so.

I had actually thought about that specific situation just the other day while leaving my local big box store. If you drop a C-note in the bell ringer's tub and don't get a receipt you don't get a deduction. I would simply tell the client it's not deductible and move on. If they were adamant about taking the deduction they would need to find a new preparer. I'm not taking that liability.

[DonPriebe]

Trivial quibble ...

The new rules are quite onerous. Essentially, they prohibit a preparer from signing a return in many of those simple situations where preparer's have let the client assume the risk of audit in the past. Lack of receipts for cash contributions is a good example, mileage logs is another.

I'll argue that the lack of mileage logs is adequately disclosed by checking the "Is the evidence written" box NO.

Agree that if the client says he has no records of charitable contributions, then no deduction is allowed.

[Nashville]

Answer to Zee's Question...

...in my case is ZERO. Form 8275 is sometimes affectionately known as the "Please Audit Me" form.

If I am so prodigiously concerned about a client's position on a particular line item that I have to issue a Form 8275, then I shouldn't be taking his position to begin with.

If, during a conversation with a client who is pressing to take a questionable deduction, I tell him:

Nashv: "O.K. I'll take your office-in-home deduction even though it is nothing more than a computer in the bedroom of your youngest son."
Client: "That seems reasonable to me."
Nashv: "But if I deduct this, I'll have to file a Form 8275."
Client: "What's an 8275?"
Nashv: "It's a special form that tells the IRS we are taking a questionable position on your home office."
Client: "That's ridiculous. Why would we want to tell them that so they can have a reason to audit me?"
Nashv: "I agree, but that's what I'll be forced to do if we deduct your OIH."
Client: "Just forget it. I don't want you to file a Form whatever-it-is..."
Nashv: "I didn't think so. No deduction for OIH."
Client: "My second cousin's son-in-law is a tax man. He says I can deduct it. I think I'll go to him."

RESULT: The need for the 8275 evaporates, and yes, Zee, I will lose customers if I file one. I will also lose customers if I fail to take deductions they want me to take.

[KJ Judd]

The new "greater than 50% probablity" standard doesn't seem so tough at first glance. However in an update seminar the presenter wondered if the IRS audits you & wins, will the IRS turn around & say you didn't have a greater than 50% probability of success since the odds were in your favor & the IRS won.

And how do you judge if it's 49% or 51% chance of success? So in actuality your threshhold is higher. I agree my clients don't want me to do something that's not "more likely that not" sustainable. However, there are gray areas out there & we don't always agree with the IRS's reasoning. So now we're almost forced to be even more conservative because of the potential threat of penalty out there.

I don't know what your fee structure is however a penalty of the greater of $1000 or 50% of tax prep fee, this is a nasty penalty. In my fee structure the $1000 minimum penalty is several times my tax prep fee.

[solomon]

The IRS has accomplished the goal - intimidation of tax preparers - which probably will make the majority of us follow the rules - might take a bit more research at times. This does not bother me. What bothers me is the free ride the self-prepared will probably still have.