Does Giving Tax Advice Make You a 'Preparer'?

Signed by President Bush on May 25, The Small Business and Work Opportunity Tax Act of 2007 ('Small Business Act') includes new preparer penalty provisions that range up to 50% of the fee for preparing the tax return. Lawyers who give tax advice need to know that this legislation had a 'surprise' in it regarding whom the IRS considers a tax return preparer.

The new law replaces the original Code definition of 'income tax preparer' with 'tax return preparer.' A tax return preparer now includes any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or any claim for refund. In other words, this standard no longer applies solely to those who prepare income tax returns ' it also now encompasses those who prepare estate and gift tax returns, employment tax returns, excise tax returns, and exempt organization returns.

Moreover, you do not need to actually prepare or sign a tax return in order to be a tax return preparer under the law. The regulations currently state that a preparer includes any person who gives a taxpayer or other preparer sufficient information and advice so that the completion of the return or claim for refund is largely a mechanical or clerical matter, even though that person does not actually place or review the placement of information on the return or claim for refund. A person who merely gives advice on specific issues of law is a preparer if: 1) the advice is given for events which have occurred at the time the advice is rendered and is not given with respect to the consequences of contemplated actions, and 2) the advice is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund.

Safe Harbor

In order to be a preparer, however, a person must 'prepare' all or a substantial portion of a return or claim for refund. The current regulations contain a safe harbor provision which states that a schedule, entry, or other portion of the return or claim for refund is not a substantial portion if the amounts of gross income, deduction, or amounts on the basis of which credits are determined are:

• Less than $2000; or
• Less than $100,000, and also less than 20% of the gross income (or adjusted gross income if the taxpayer is an individual) as shown on the return or claim for refund.

If this safe harbor is not met, the determination of whether a schedule, entry, or other portion of a return or claim for refund is a substantial portion is made by comparing the length and complexity of, and the tax liability or refund involved in, that portion with the return or claim for refund as a whole.

Richard H. Stieglitz is a tax partner, and Michael G. Freel is a tax manager in the New York accounting firm of Anchin, Block & Anchin, LLP, which specializes in providing accounting, tax, and consulting services to law firms. Stieglitz can be reached at 212-840-3456 or [email protected].

Signed by President Bush on May 25, The Small Business and Work Opportunity Tax Act of 2007 ('Small Business Act') includes new preparer penalty provisions that range up to 50% of the fee for preparing the tax return. Lawyers who give tax advice need to know that this legislation had a 'surprise' in it regarding whom the IRS considers a tax return preparer.

The new law replaces the original Code definition of 'income tax preparer' with 'tax return preparer.' A tax return preparer now includes any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or any claim for refund. In other words, this standard no longer applies solely to those who prepare income tax returns ' it also now encompasses those who prepare estate and gift tax returns, employment tax returns, excise tax returns, and exempt organization returns.

Moreover, you do not need to actually prepare or sign a tax return in order to be a tax return preparer under the law. The regulations currently state that a preparer includes any person who gives a taxpayer or other preparer sufficient information and advice so that the completion of the return or claim for refund is largely a mechanical or clerical matter, even though that person does not actually place or review the placement of information on the return or claim for refund. A person who merely gives advice on specific issues of law is a preparer if: 1) the advice is given for events which have occurred at the time the advice is rendered and is not given with respect to the consequences of contemplated actions, and 2) the advice is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund.

Safe Harbor

In order to be a preparer, however, a person must 'prepare' all or a substantial portion of a return or claim for refund. The current regulations contain a safe harbor provision which states that a schedule, entry, or other portion of the return or claim for refund is not a substantial portion if the amounts of gross income, deduction, or amounts on the basis of which credits are determined are:

• Less than $2000; or
• Less than $100,000, and also less than 20% of the gross income (or adjusted gross income if the taxpayer is an individual) as shown on the return or claim for refund.

If this safe harbor is not met, the determination of whether a schedule, entry, or other portion of a return or claim for refund is a substantial portion is made by comparing the length and complexity of, and the tax liability or refund involved in, that portion with the return or claim for refund as a whole.

Richard H. Stieglitz is a tax partner, and Michael G. Freel is a tax manager in the New York accounting firm of Anchin, Block & Anchin, LLP, which specializes in providing accounting, tax, and consulting services to law firms. Stieglitz can be reached at 212-840-3456 or [email protected].