The Honorable Charles B. Rangel

The Honorable Max Baucus

The Honorable Charles E. Grassley

The Honorable Jim McCrery

July 10, 2007

Page 3 of 3

July 10, 2007

The Honorable Charles B. Rangel The Honorable Max Baucus

Chairman Chairman

House Committee on Ways and Means Senate Finance Committee

1102 Longworth House Office Building 219 Dirksen Senate Office Building

Washington, DC 20515 Washington, DC 20510

The Honorable Jim McCrery The Honorable Charles E. Grassley

Ranking Member Ranking Member

House Committee on Ways and Means Senate Finance Committee

1106 Longworth House Office Building 219 Dirksen Senate Office Building

Washington, DC 20515 Washington, DC 20510

Re: Tax Return Reporting Standards for Preparers

Dear Chairmen and Ranking Members:

The American Institute of Certified Public Accountants (“AICPA”) requests a correction to problems created by the May 25, 2007 enactment of a tax provision found in section 8246 of the U.S. Troop Readiness, Veteran’s Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007 (“the Act”).

Specifically, among other changes, section 8246 of the Act increased the tax return reporting standards applicable to tax return preparers under section 6694 of the Internal Revenue Code for undisclosed, non-tax avoidance items, from the “realistic possibility of success” standard to the “more likely than not” standard. As under prior law, if that reporting standard cannot be satisfied and the preparer wants protection from the possible imposition of an understatement penalty, a disclosure of the item on the return is necessary.

Section 8246 of the Act is a major change in tax policy, but it was not the subject of a hearing. Thus, the full consequences of this provision were not studied by Congress. Also, this change was not based on a recommendation from the Treasury Department. In its “Blue Book” of recommended legislation, issued in February 2007, Treasury did address the section 6694 penalty, but only recommended an increase in the dollar amount of the penalty. Treasury did not recommend a change in the preparer standards. Even the IRS Chief Counsel commented about the sudden and unexpected change to section 6694, noting that the IRS had been “blindsided” by the provision in the Act.

The section 6694 understatement penalty was added to the Internal Revenue Code in 1989, as part of an overhaul of the entire penalty regime. At that time, in contrast to the lack of consideration given to making the recent change to the section 6694 reporting standards, there were two years of congressional hearings and study, several extensive reports by an IRS task force created to study the penalty regime, and meetings and input from various professional organizations. Reporting standards and their implications to the tax system and tax policy are too important to be given no consideration prior to a change.

The change in standards resulting from this legislation impacts several fundamental policies related to the representation of taxpayers and causes serious problems, not only for tax return preparers, but also for taxpayers and the government.

·  First, because the change raises the tax return reporting standard for preparers above the standard for taxpayers (“substantial authority”), it creates the potential for conflicts of interest between preparers and their clients; as a result, it affects the nature of the representation of taxpayers and a taxpayer’s right to representation.

·  Second, applying the “more likely than not” standard to a tax return preparer results in a fundamental change in the role of the preparer, from that of an advocate to that of an advisor

·  Third, it will be extremely difficult, if not impossible, to determine the probable correctness of the treatment of some routine items with the degree of certainty required for the higher “more likely than not” standard because: (1) there sometimes is little guidance for the tax treatment of an item at the time the item must be reported on a return; and (2) the proper treatment of an item frequently depends on an analysis of unique or unusual facts and circumstances that were not contemplated in published guidance.

·  Fourth, a disclosure made under a system with a “more likely than not” standard could be viewed as a concession on the merits.

·  Fifth, the potential penalties on a preparer for failure to satisfy that high standard are so severe that preparers will feel compelled to protect themselves by urging their clients to include disclosures for virtually every item for which there is even the slightest uncertainty regarding the proper treatment. (Fines under section 6694 and Circular 230 could be imposed on the preparer, possibly totaling up to 150% of fees derived from the return. In addition, the preparer could be subject to disciplinary action by the IRS Office of Professional Responsibility.) These excessive disclosures for routine tax return positions will overburden tax administration, thereby defeating the purpose of the disclosure system and also undermining the electronic filing initiative, which currently is not capable of processing a large number of disclosures in a return.

To avoid this disruption to our tax system, the AICPA recommends that the section 6694 tax return preparer standards be equalized with the taxpayer standards. For tax shelter (“tax avoidance”) items the “more likely than not” standard should continue to apply. For non-tax shelter (“non-tax avoidance”) items, the “substantial authority” standard should apply. The rationale for these recommendations is set forth in the enclosed comments.

The AICPA is the national, professional association of CPAs, with approximately 330,000 members, including CPAs in business and industry, public practice, government, and education; student affiliates; and international associates. Our members advise clients on federal, state, and international tax matters and prepare income and other tax returns for millions of taxpayers. They provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America’s largest businesses. It is from this broad perspective that we offer our thoughts today.

We would be pleased to discuss this matter with you or others at any time. If you have any questions about this matter, please feel free to contact me at (212) 773-2858 or ; Thomas P. Ochsenschlager, AICPA Vice President - Taxes at (202) 434-9209 or ; or Edward S. Karl, AICPA Director at (202) 434-9228, or .

Sincerely,

Jeffrey R. Hoops

Chair, Tax Executive Committee

cc: Janice Mays, Chief Counsel, House Committee on Ways and Mean

John L. Buckley, Chief Tax Counsel, House Committee on Ways and Means

Jon Traub, Minority Chief Counsel, House Committee on Ways and Means

Russ Sullivan, Majority Staff Director, Senate Finance Committee

Patrick Heck, Chief Counsel, Senate Finance Committee

Mark Prater, Minority Chief Counsel, Senate Finance Committee

Thomas Barthold, Acting Chief of Staff, Joint Committee on Taxation

Eric Solomon, Assistant Secretary (Tax Policy), Treasury