News Flash: The Senate has now approved, 51-46, the almost $5 billion in business tax breaks purportedly 'required' to finance the minimum wage increase, as part of the H.R. 1591 supplemental spending package expected to be vetoed by Bush because it includes an Iraq withdrawal timetable. The House already approved the conference report ( Download hr1591.conf report.tx70794.pdf ) yesterday with a 218-208 vote.
One of the revenue raisers in the bill is Section 7546. That provision increases the tax return preparer understatement penalty (from $250 to the greater of $1000 or 50% of the preparer income) and standards. Under the bill's new standards, tax return preparers would be penalized for understatements due to "unreasonable positions" defined as positions that, if not disclosed, are not backed by a reasonable belief that the position is more likely than not to be sustained on the merits (what I have called the "MLTN" standard). A "reasonable basis" standard would apply to disclosed positions. This would replace the current tax return preparer statutory standard of "realistic possibility of success" for nondisclosed positions and the regulatory provision that permits non-signing tax return preparers to recommend disclosed positions that are merely nonfrivolous, so long as the preparer advises the taxpayer that the position lacks substantial authority and that adequate disclosure could avoid a penalty. There will still be an affirmative "reasonable cause/good faith" defense.
This is a move in the right direction, though incomplete. I have written about the problems that lead to the prevailing tax minimization norm which in turn encourages to a race to the bottom in terms of aggressive tax reporting, as follows:
"The combination of limited enforcement resources, few audits in less time under weaker investigatory circumstances, and an ethical rule that supports advisors' alerting clients to audit lottery practicalities forces the conclusion that even enhanced disclosure requirements and stiffer penalties may not be sufficient to overcome an aggressive taxpayer's audit lottery advantage. ...[T]hese problems are exacerbated by standards that govern taxpayers' return positions and tax advisors' planning advice and evidentiary privileges that affirmatively limit disclosure." Tax Advice Before the Return, 25 Va. Tax Rev. 583, 612 (2006).
I argued that it is inappropriate for tax advisers (and specifically, tax return preparers) to have lower reporting standards than taxpayers, and urged that Congress create a consistent more-likely-than-not standard applicable to both taxpayers and tax advisers. The tax bill passed by the House and Senate would bring the disclosed position standard for tax return preparers into conformity with that required by taxpayers for non-shelter transactions under section 6662(d)(1)(B)(ii) (reduction in penalty where reasonable basis for disclosed positions). However, a lack of congruity between taxpayer and tax return preparers would remain, since taxpayers are required to have substantial authority for non-disclosed positions taken, under section 6662(d)(1)(B)(i) (which is often interpreted to require something less than a MLTN standard requires), and are only required to satisfy both the substantial authority and the MLTN standard if they claim the reasonable cause affirmative defense for a reportable transaction under section 6664(d).
So the penalty enhancement in the tax bill revenue raiser should increase compliance, at least somewhat. Similarly, raising the statutory reporting standards for tax return preparers should discourage overly aggressive advice on behalf of their clients. It would be best, however, to set a single, consistent standard for taxpayers and tax advisers/return preparers at the "more likely than not" level for all purposes.
News Flash2: Taxes remain a relatively small portion of US economic output, compared to other countries. Overall, taxes take about 25.8% of GDP in the US, ranking us very near the bottom of OECD countries, with only Korea and Mexico coming in with lower taxes. Corporate taxes amount to only about 4% of GDP, and again we are at the bottom, with just Iceland and Germany below us. See Citizen's for Tax Justice (or Tax Prof for its excerpt showing the overall taxes chart).
Revised and extended: 4/26/07 5pm
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