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February 17, 2008

Guidance on Tax Return Preparer Penalty - Tax Penalties

In Revenue Procedure 2008-14, the Internal Revenue Service ("IRS") recently provided guidance regarding circumstances under which a disclosure on a return is adequate for purposes of tax return preparers avoiding the §6694(a) penalty for understatement due to unrealistic positions taken on a return. Generally, to be considered adequate, the disclosure must be made on an income tax return. The taxpayer must furnish all the required information in accord with applicable forms and instructions, and money amounts entered must be verifiable. The amounts are verifiable if, on audit, the taxpayer can show origin of the numbers, even if ultimately rejected by the IRS, and can show good faith in applying the numbers to the return.

As background, §6694(a) imposes a penalty on a tax return preparer for filing a return or claim for refund that results in an understatement of liability due to a position of which the preparer knew or should have known, if the preparer did not have a reasonable belief that the position would more likely than not be sustained on the merits and the position was not disclosed in accordance with §6662(d)(2)(B)(ii). The penalty is equal to the greater of $1,000 or 50% of the income derived (or to be derived) by the preparer with respect to the return or claim.

This revenue procedure applies to any income tax return filed on a 2007 tax form for a taxable year beginning in 2007, and to any income tax return filed on a 2007 tax form in 2008 for a short taxable year beginning in 2008.

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February 17, 2008

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