The small biz tax law enacted last year—the Small Business and Work Opportunity Tax Act of 2007—imposed tougher standards on professional tax return preparers. It also increased the penalties that paid preparers face for tax understatements.The new rules generally apply to tax returns due after Dec. 31, 2007.
So what does this have to do with you? Plenty. Your tax pro may not be willing to go out on a limb in support of a tenuous position.
Strategy: Make sure you and your tax pro are on the same page. In some cases, you may agree to adopt a more conservative stance on your return. Other times, if you have the courage of your convictions, you might switch to a different preparer or go it alone.
The new small business law includes the following changes for professional tax-return preparers:
- The rules for income tax return preparers also extend to preparers of other returns, including estate and gift tax, employment tax, excise tax and tax-exempt organization returns.
- Under the first-tier penalty for less-serious transgressions,a preparer may be liable for a tax understatement due to an undisclosed position he or she knows, or should have known about, if a reasonable belief exists that it’s more likely than not that the tax treatment would not be sustained on the merits. This “reasonableness” test replaces the standard based on a “realistic possibility.” For disclosed positions, the reasonableness test applies instead of one based on nonfrivolity. Also, the first-tier penalty increases to the greater of $1,000 (up from $250) or 50% of the income for preparing the return.
- The more serious second-tier penalty for a tax understatement due to “willful or reckless conduct” is increased to the greater of $5,000 or 50% of return preparation.
Tip: It can’t hurt to obtain a second opinion if you’re unsure about a particular tax position. But only consult with reputable professionals.