Chairman Charles B. Rangel

Ranking Member Jim McCrery
House Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20515

Chairman Max Baucus
Ranking Member Charles Grassley
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510

Re: Reporting Standards for Tax Return Preparers

Dear Chairmen and Ranking Members;

As president of the National Association of Enrolled Agentsi (NAEA), I write with respect to §8246 of the Small Business Work Opportunity Act of 2007 (the Act), PL 110-28. Newly-created reporting standards for tax return preparers in this section are troublesome to enrolled agents (EAs) and quite probably will cause a number of unintended and undesirable consequences.

Section 8246 of the Act:

  1. Broadens the scope of current tax return preparer penalties (to include exempt organization, estate and gift tax, employment tax, and excise tax return preparers) and
  2. Raises the standard to avoid return preparer penalty assessments for understatement of tax for “non-disclosed positions” from the “realistic possibility of success” standard to the “more likely than not” (MLTN) standard.1

This change, which on its surface may seem innocuous, is far from that. Allow me to outline some of the consequences of §8246 and to provide a few concrete illustrations.

The change in standards creates a disconnect between the “substantial authority” standard for self-preparing taxpayers and the new, higher MLTN standard for tax professionals. We are led to wonder whether this legislation, in essence, requires the taxpayer to give up the right of non-disclosed positions when seeking tax preparation from a tax professional. If so, this sets up a scenario in which the interest of an enrolled agent (or any other paid preparer) could easily diverge from the interest of the taxpayer. The tax professional may in fact have a conflict of interest with the taxpayer solely due to the dichotomy between standards for disclosure.

Given the split between interests, a further question becomes relevant. Because a taxpayer has a lower disclosure hurdle, he could retain an EA to provide consulting services. At what point does an EA providing advice become a non-signing preparer? Further, if an EA becomes a non-signing preparer, what are the consequences?

While we do not take issue with contentions that there are circumstances in which either the lack of guidance or special circumstances make it nearly impossible to determine whether the MLTN standard has been met, an even more pressing concern is one that is extremely practical. When the dust settles, practitioners and preparers will in all likelihood, out of a sense of extreme caution (particularly for Circular 230 practitioners who fear losing their licenses), overreact and thus over-disclose non tax-avoidance items. For example, when preparing a Schedule C return for a small business owner, many, if not most, practitioners have not managed the business’ bookkeeping. What if the taxpayer does not produce mileage logs? The paid preparer will submit a Form 8275-R (Regulation Disclosure Statement, enclosed). What if she does not produce receipts for entertainment expenses? The paid preparer will submit a Form 8275-R. IRS will be swimming in Forms 8275-R. This state of affairs neither enhances tax administration nor lowers taxpayer burden.

This discussion begs the question of what Congress was trying to accomplish with §8246, which as you know did not receive a hearing from either of the tax-writing committees. Was its goal simply to raise revenue? Was it to address the tax gap? Was it to put all paid preparers under higher standards?

While we don’t know Congress’ goal with §8246, we do know that this provision continues a recent trend in increasing, sometimes radically, the penalty regime. Is it reasonable to increase penalty amounts by as much as 500%? At first blush, our answer is no. Our concern is not that such steep penalties could become a powerful tool for IRS to penalize preparers acting egregiously. Disciplining bad preparers is good news for taxpayers and good news for our industry. We are concerned, however, that there is great potential for misuse or abuse of the penalty. While the IRS has been selective in assessing preparer penalties in the past, we know from experience that on occasion IRS cuts off heads and later offers to discuss whether they can be reattached.

As with many tax-policy issues, we seem to have come full circle. In the 1989 coordination and revision of penalties, the presumptive negligence penalty (a five percent penalty on any assessment, small or large) was replaced with a twenty percent accuracy-related penalty, which was selectively assessed. Key among the reasons for this move was a desire to compel a conversation between IRS and the tax preparer. Arguably, the combination of the steep penalties and MLTN standards in §8246 of the Act creates yet another presumptive negligence penalty.

The MLTN standard is the standard used by the Tax Court in almost all its cases. Has the tax professional, de facto, become an auditor and judge at the same time a tax return is prepared? NAEA realizes that the MLTN standard has been in effect for tax shelter investments for several years and we are not troubled by the MLTN standard in this domain. We are concerned, however, about the imposition of this standard for all tax return items.

We believe the solution to the undesirable and unintended consequences of §8246 of the Act is to equalize the standard for non-tax avoidance items. Both self-preparers and paid preparers should be subject to the substantial authority standard.

We would be pleased to discuss this matter with you or members of your respective staffs. Should you seek further clarification or explanation of our positions, please contact NAEA’s Senior Director, Government Relations, Robert Kerr, at (202) 822-6232 or


Diana Thompson, EA

Enclosure (as stated)


Thomas Barthold, Acting Chief of Staff, Joint Committee on Taxation
Kevin Brown, Acting Commissioner, IRS
Michael Chessman, Director, Office of Professional Responsibility, IRS
Nina Olson, National Taxpayer Advocate, IRS
Eric Solomon, Assistant Secretary (Tax Policy), Department of Treasury

iThe National Association of Enrolled Agents (NAEA) is the professional society representing enrolled agents (EAs), which number some 46,000 nationwide. Its 10,000+ members are licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS), including examination, collection, and appeals functions.

While the enrolled agent license was created in 1884 and has a long and storied past, today’s EAs are the only tax professionals tested by IRS on their knowledge of tax law and regulations. They provide tax preparation, representation, tax planning, and other financial services to millions of individual and business taxpayers. EAs adhere to a code of ethics and professional conduct and are required by IRS to take continuing professional education. Like attorneys and certified public accountants, enrolled agents are governed by Treasury Circular 230 in their practice before IRS.

Since its founding in 1972, NAEA has been the enrolled agents’ primary advocate before Congress and IRS. NAEA has affiliates and chapters in 42 states. For additional information about NAEA, please go to our website at


August 6, 2007

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