In recent months, the IRS has set up a conflict of interest between tax return preparers and their taxpayer clients. They have done this by requiring that for a return preparer to avoid a penalty on an erroneous tax position without specifically highlighting/disclosing the tax position, the preparer generally has to have a more likely than not belief that the reported position was correct. However, a taxpayer would be penalized for the same error only if there was no substantial authority for the position - this requires less belief in the correctness of the position than the more likely than not standard. This puts preparers in the uncomfortable position that if they have a taxpayer who wants to report a position based on substantial authority (and thus the taxpayer is not at risk for penalties if wrong), but there is not enough authority that the preparer has a more likely than not belief in the correct position, they are at risk of a penalty when their client is not. The effect is that the preparer either refuses to adopt the position, or must attempt to persuade the taxpayer to disclose the issue even though the taxpayer is justified in reporting the position.
Many members of Congress disapprove of these higher standards being imposed on preparers. A recent tax bill, H.R. 5719, the “Taxpayer Assistance and Simplification Act of 2008,” seeks to reduce the preparer standard to match the substantial authority standard for taxpayers in most situations. This bill is presently being debated in Congress. Whether it will be enacted into law is uncertain, since there are other provisions of the bill that President Bush does not favor, and he has threatened to veto the bill (these provisions relate to the termination of the IRS' authority to hire private debt collectors).
If relief comes, it will be too late for the April 15 deadline for 2007 individual income tax returns, but, depending on effective date provisions, may still come in time to exist in regard to the preparation of returns that are on extension and to perhaps avoid penalties on returns that have already been filed.