President Bush signed into law the Revenue Reconciliation Act of 1989 on December 19, 1989. Incorporated therein was penalty reform legislation entitled "Improved Penalty Administration and Compliance Tax Act" (IMPACT). The new penalty provisions accomplish two important goals for CPAs. First, they simplify and integrate the penalty system. Second, they establish a new standard of acceptable conduct by tax practitioners. The end result is a complete revision to the entire tax penalty system.

In 1954, tax penalties were simple and few: the IRC included 13 penalty categories. This grew to 25 in 1967 and to 150 in 1987. In 1978, the IRS imposed 15.4 million penalties amounting to $1.3 billion. In 1987, the IRS imposed 27 million penalties amounting to $14 billion.

By 1987, the tax penalty system was coming under severe attack from many quarters, including tax practitioners, Congress, taxpayers and the IRS itself Among the specific concerns were:

* implications of the possible use of the penalty system as a revenue source; n Complexity of the penalty system;

* inadequate matching of a penalty's severity with that of the infraction; and

* Bunching of multiple penalties for a single infraction.

These concerns led to formal studies of the penalty system by the AICPA, the American Bar Association (ABA), the IRS, and others.

In November 1987, the Commissioner of Internal Revenue established a task force to study penalties. In February 1989, the task force issued its "Report on Civil Tax Penalties by Executive Task Force-Commissioners Penalty, Study." The task force recommended sweeping changes in the civil tax penalty provisions of the IRC based on the view that civil tax penalties should exist to encourage voluntary compliance and not for other purposes, such as raising revenue.

IRS TASK FORCE FINDINGS

The IRS Penalty Task Force found that penalties encourage voluntary compliance through three processes:

* They help taxpayers understand that compliant conduct is "right" and that non-compliant conduct is wrong;"

* They deter noncompliance by imposing costs; and

* They establish the fairness of the tax system by giving non- compliant taxpayers their just desserts.

The task force rejected the idea that raising revenues, punishment of offenders, and reimbursing the government for the cost of enforcement programs can be independent purposes for penalties.

The four penalty, categories are:

1. Filing returns, including information returns;

2. Payment of tax;

3. Accuracy of information, including preparer penalties; and

4. Employee plans and exempt organization penalties.

Four criteria were established for evaluating penalties in each of the four categories:

* Fairness-encompasses equity, i.e., whether similarly situated taxpayers are treated similarly; and proportionality, i.e., whether the penalty in a particular situation is proportional to the seriousness of the departure of the standard of behavior established.

* Effectiveness-includes adequate severity, i.e., the aggregate cost imposed on an instance of noncompliance should reflect the benefit to the taxpayer from the noncompliance, and encourages remedial action, whereby the method of computing

* penalty should encourage the non-compliant taxpayer to take early corrective action.

* Comprehensibility-penalties must be understandable and understood, as must the standards of conduct supported by the penalties.

* Administratibility-includes a) the role of administrative discretion (a penalty should be keyed to the development of clear and appropriate standard of behavior with a set of criteria that should be taken into account in determining whether and to what extent that standard has been violated); b) neutralization of severe sanctions (increasing a penalty's severity will, to a point, arguably achieve and increase deterrent affect, but sociological evidence suggests that, when the severity of the penalty exceeds that which is perceived as fair, such severe sanctions are difficult to impose); and c) dealing with limited resources (an administrable penalty system must achieve certainty within the limits of available resources and administrative capabilities).

CHAIRMAN PICKLE'S TASK FORCE

In February 1989, J.J. Pickle, Chairman of the Subcommittee on Oversight of the House Ways and Means Committee, held hearings on penalty reform. IRS Commissioner Gibbs presented his Task Force Report. Other witnesses included former IRS Commissioners, representatives of the AICPA and ABA and the Chief judge of the Tax Court.

While it was clear that the hearing participants had important differences, it was also clear that their goals were the same: to establish a penalty system that was effective but fair. To help work out the differences, Chairman Pickle formed a special working group, which became known as the Pickle Task Force. The Pickle Task Force included representatives of: the Oversight Subcommittee, IRS, AICPA, ABA, Tax Court, Small Business Administration and other interested parties from both the public and private sectors. The collegiality of the give and take sessions provided a model for developing quality tax legislation that many would like to see repeated. The resulting legislative proposal embodied the consensus of that group.

IMPACT was introduced as a bill on July 1, 1989. Subsequently, it was incorporated into the Revenue Reconciliation Bill of 1989, and in November the Conference Committee adopted the penalty portion.

IMPACT OVERVIEW

IMPACT has generally simplified and integrated the penalty system into four broad areas:

* Accuracy-related penalties, including those for negligence, substantial understatements and substantial overstatements;

* Preparer, promoter and protestor penalties;

* Document and information return penalties; and

* Penalties for failure to file or pay.

The new structure eliminates the "stacking" of multiple penalties for the same infraction and calls for proportionate application of penalties only to that part of the tax related to non-compliant behavior.

IMPACT generally applies to returns due and actions taken after December 31,1989.

ACCURACY-RELATED PENALTIES

Effective for returns due after December 31, 1989, all of the generally applicable penalties relating to the accuracy of tax returns were consolidated into one accuracy-related penalty equal to 20% of the portion of the underpayment to which the penalty applies. The penalty, which is found in new Sec. 6662, applies only to that portion of any underpayment that is attributable to one or more of..

* Negligence or disregard of rules and regulations;

* Any substantial understatement of income tax;

* Any substantial valuation overstatement;

* Any substantial overstatement of pension liabilities; and

* Any substantial estate and gift tax valuation understatement.

While under prior law each of these penalties could be assessed separately, under IMPACT, only one penalty is imposed. In addition, the 120% interest rate on deficiencies caused by "tax motivated transactions" has been eliminated.

Under new Sec. 6664(c), subject to certain valuation misstatement rules, the accuracy-related penalty is not imposed on the portion of an underpayment that is due to reasonable cause where the taxpayer acted in good faith. If used wisely by the IRS, this section may be a valuable tool for the IRS to improve the fairness of tax administration.

In advance of future regulations, the IRS issued "Notice 90-20" in February 1990 to provide guidance with respect to both the accuracy- related penalty and the income tax preparer penalty under new Sec. 6694. To the extent that future guidance is inconsistent with the Notice, that guidance will have only prospective application. Negligence

Sec. 6662(c) defined the term "negligence" to include "any failure to make a reasonable attempt to comply with the provisions of this title," and the term "disregard" to include any "careless, reckless, or intentional disregard." While the negligence penalty has been substantially increased to 20% from 5%, it now applies only to the portion of the underpayment attributable to the negligence rather than the entire underpayment of tax.

In addition, Sec. 6621(c) was repealed; thus, the presumption under which an underpayment is treated as attributable to negligence if the underpayment is due to failure to include an amount shown on an information return no longer applies.

In Notice 90-20, the IRS has announced that it will not impose an accuracy-related penalty for negligence, with respect to a nonfrivolous position, if the taxpayer has made a "complete, item-specific disclosure of such nonfrivolous position" in accordance with rules set forth in the Notice. "In no event, " will mere completion of a tax form under regular instructions suffice. Disclosure may be made on Form 8275, even though the form relates to former Sec. 6661.

Substantial Understatement of Income Tax

IMPACT has replaced the prior penalty" for "substantial understatement of liability" contained in Sec. 6661 (now repealed) with a new accuracy- related penalty under Sec. 6662 (d). The new penalty applies to the portion of underpayment attributable to a "substantial understatement of income tax." A deficiency meeting the mathematical requirements is subject to the penalty unless the taxpayer can establish that "substantial authority" existed for the portion of the understatement or the portion was adequately disclosed.

While conceptually the penalty, remains largely unchanged, there are three principal modifications:

1) To conform with the other accuracy-related penalties, the penalty is lowered from 25% to 20%;

2) The authorities upon which taxpayers may rely have been expanded extensively to include: proposed regulations, private letter rulings and many other IRS memoranda, notices, and joint Committee of Taxation explanations of tax legislation (the Blue Book); and

3) The IRS is required to publish at least annually, a list of positions for which it believes there is no substantial authority. This list is intended to assist taxpayers in determining whether a position should be disclosed to avoid a substantial understatement penalty.

The expansion of substantial authority may prove to be a double-edged sword. While taxpayers and tax practitioners may derive added comfort in many situations, it may be more difficult to disagree with the less formal IRS authorities, such as private letter rulings and notices, without disclosure and still avoid imposition of the substantial underpayment penalty.

In February 1990, the IRS issued IRS Notices 90-16 and 90-20. Notice 90-16 identifies circumstances under which the proper completion of certain regular tax forms constitutes adequate disclosure for avoidance of the accuracy-related penalty for substantial understatement. Notice 90-20, discussed earlier, clarifies that the disclosure necessary to avoid the penalty, for substantial understatement max, not be sufficient to avoid the penalty for negligence, because, "in no event" will completing a tax form in accordance with IRS instructions suffice to meet the negligence disclosure standard. However, disclosure adequate to avoid the penalty for negligence will be adequate to avoid the accuracy related penalties for both negligence and substantial understatement.

Valuation Overstatements and Understatements

IMPACT has generally increased both the dollar thresholds, and the minimum percentages of error permitted for valuation misstatements to be subject to the new valuation penalties. This should eliminate many of the kinds of good-faith penalty disputes that were arising under former law. However, with the increase in threshold, the entry-level penalty, rates of 10% have been repealed and replaced with a flat 20% rate, which conforms with the other accuracy-related penalties. Penalties for "gross valuation misstatements" are subject to a 40% penalty.

The penalty that applies to a portion of an underpayment attributed to a substantial valuation overstatement, under Chapter 1 of the IRC, is based on the valuation overstatement penalty provided under previous law with five modifications: 1) IMPACT extends the penalty,, to all taxpayers; 2) a substantial valuation overstatement exists if the value or adjusted basis of any property claimed on the return is 200% or more of the correct value or adjusted basis; 3) no penalty is imposed unless a portion of the underpayment for the taxable year attributable to substantial valuation overstatements exceeds $5,000 ($10,000 in the case of most corporations); 4) the amount of the penalty, for substantial valuation overstatement is 20% of the amount of the underpayment if the value or adjusted basis claimed is 200% or more but less than 400% of the correct value or adjusted basis; and 5) the penalty is doubled to 40% if the value or adjusted basis claimed is 400% or more of the correct value or adjusted basis.

IMPACT provides similar modifications to the penalty for overstatements of pension liabilities and the penalty for estate gift tax valuation understatements.

TAX RETURN PREPARER PENALTIES

Preparer penalties were introduced in the 1976 Tax Reform Act. Congress, seeking to raise the standards for paid preparers, provided a $100 penalty for a negligent or intentional disregard of rules or regulations" and a $500 penalty for a "willful understatement of tax liability." The period immediately after enactment was a nightmare for some preparers, as IRS agents were asserting penalties without much guidance.

Essentially, Reg. 1.6694-1(a)(1) provided that a preparer would not be considered to be subject to penalty if he or she exercised "due diligence" in an effort to apply the rules and regulations to the information provided by the taxpayer and that he or she may take a contrary position only "in good faith and with reasonable basis."

Penalties Against Preparers Didn't Stop Shelter Abuses

Congress realized that penalties against preparers were not effective in curtailing tax shelter activity and so began to strengthen penalties against taxpayers creating the morass that existed prior to this legislation. Apparently, it was hoped that the substantial understatement penalty would serve two purposes: 1) it would discourage the taking of meritless positions for taxpayers wishing to play the audit lottery; and 2) it would encourage taxpayers to disclose positions that might have been questionable.

Under former Sec. 6661 (and continued with the new substantial understatement penalty), a taxpayer could be penalized for a posit ion which was neither supported by substantial authority nor adequately disclosed. in a tax shelter case, disclosure was of no help. The taxpayer would have to believe that the position would pass the "more likely than not" criteria.

Meanwhile, the IRS was not happy with the standards adopted by the professional organizations for taking positions in tax matters. The IRS believed that the "reasonable basis" standard followed by, both the ABA and the AICPA was too weak.

In August 1986, the IRS proposed amendments to Circular 230, the document regulating the practice of CPAs, attorneys, and enrolled agents before the IRS. Practitioners had always been required to exercise due diligence with regard to returns filed and to oral and written representations made. The proposed amendments would have taken the further step of linking the due diligence of tile preparer to the substantial understatement penalty of the taxpayer. The IRS proposed that a practitioner could not prepare a tax return or recommend a position to a client unless the practitioner determined that the taxpayer would not be liable for a substantial understatement penalty.

The professional societies strongly opposed adoption of the proposed regulation and, in fact, the ABA and the AICPA agreed on a new standard with slight variations between the AICPA's version and that of the ABA rule in its "Formal Opinion 85-352." The AICPA version is in Statement 1 of its Statements on Responsibilities in Tax Practice and says:

ACPAshouldnotrecommendtoa

clientthatapositionbetakenwith

respecttothetaxtreatmentofany

itemonareturnunlesstheCPAhasa

goodfaithbeliefthatthepositionhas

arealisticpossibility,ofbeingsustained

administratively,orjudiciallyon

itsmeritsifchallenged.,

The IRS, in its Task Force Report discussed earlier, originally concluded that the substantial authority standard be applied. However, in the collegial atmosphere of the Pickle Task Force, the views of the professional societies gradually took hold and were adopted by Congress as the new standard for the tax preparer penalty.

Preparer Penalties

Under new Sec. 6694(a), a $250 penalty is imposed if: 1) any part of any understatement of tax liability on any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits; 2) the preparer knew or reasonably should have known of the position; and 3) the position was not adequately disclosed, or was frivolous.

Under IRS Notice 90-20, the standard for adequate disclosure of nonfrivolous positions to avoid the Sec. 6694(a) preparer penalty, is the same as that for the accuracy-related penalty for substantial understatement discussed above, rather than the more stringent negligence disclosure standard.

A $1,000 penalty may be imposed, under Sec. 6694(b), for a willful attempt in any manner to understate liability for tax and a reckless or intentional disregard of rules or regulations. The penalty can be avoided by special disclosure for nonfrivolous positions.

The Committee Reports for new Sec. 6694(b), state that rules "which provide that specified disclosure tends to demonstrate that there was no intentional disregard of rules and regulations for purposes of the negligence penalty, also apply to this penalty." Accordingly, under Notice 90-20, a safe harbor from the penalty for Sec. 6694(b) willful or reckless conduct" is provided for nonfrivolous positions, if they are disclosed under the standards discussed above for the accuracy-related penalty for negligence. The more lenient standard for substantial understatement disclosure, which is acceptable under Sec. 6694(a), will not suffice for Sec. 6694(b).

With the proliferation of IRS notices and other less formal IRS guidance, and their elevation to substantial authority, intentional disregard of such guidance may become more of a problem, as it is likely that taxpayers and practitioners will disagree in good faith with some of these pronouncements. It is not clear at this time to what extent such disagreement should cause concern under Sec. 6694(b). It would be especially helpful in this regard for the IRS to retain the concepts espoused in the regulations regarding willful and intentional disregard" under former Sec. 6694 before amendment by IMPACT.

The $1,000 penalty for aiding and abetting the understatement of tax liability continues in the IRC, which also provides that if the aiding and abetting penalty is assessed, no preparer penalty may be assessed. The aiding and abetting was strengthened somewhat by IMPACT. The penalty applies to a person not necessarily a tax return preparer who "aids, assists in, procures or advises with respect to" all or any portion of a "return, affidavit, claim or other document" who knows or has reason to know that the portion will be used in connection with any material matter arising under the tax laws and who knows that the portion used would result in an understatement of liability.

The Committee Reports, however, contain language which should provide comfort to practitioners. The Committee indicated that an isolated imposition of a preparer penalty should not lead to an automatic referral to the IRS Director of Practice and that the IRS should exercise discretion in referring cases, and not expand its preparer penalty investigations. Referrals should be made only when a pattern can be established. The Committee also suggested that the IRS instruct its employees not to threaten imposition of a preparer penalty during an audit or appeals conference.

DOCUMENT AND INFORMATION RETURN PENALTIES

Failure to File Correct Information Returns

Effective for returns after December 31, 1989, a maximum penalty of $50 per return will be imposed for:

* Any failure to file an information return on or before the required filing date;

* Any failure to include all the information required to be shown on the return; and

* The inclusion of incorrect information on a return.

The maximum penalty that may be imposed on any one person for all such failures in a calendar year is limited to $250,000.

Sec. 6721 (b) Reduction Where Correction is Made in Specified Period

This penalty adopts the previously discussed philosophy from the IRS Penalty Task Force that the method of computing a penalty should encourage the noncompliant taxpayer to take early corrective action.

If a person files a correct information return on or before a day, 30 days after the required filing date, the penalty imposed shall be $15 per return with a maximum penalty of $75,000 per calendar year. If a correct information return is filed after the date that is 30 days after the prescribed filing date but on or before August 1, the penalty increases to $30 per return, with a maximum penalty of 150,000 per calendar year.

If a correct information return is not filed on or before August 1, of any year, the penalty further increases to $50 per return with a maximum penalty of $250,000 per year.

IMPACT also provides an exception that would apply to incorrect information returns that are corrected on or before August 1. Small businesses, defined as firms having gross receipts of $5 million or less, who file a correct information return on or before August I will have lower maximum penalties as follows:

* $25,000 instead of 75,000;

* $50,000 instead of $150,000; and

* If after August 1, $100,000 instead of $250,000.

Failure to Furnish Correct Payee Statements

Sec. 6722 provides that any failure to furnish a payee statement on or before the date prescribed and any failure to include the information required on or before the date prescribed will be subject to a $50 penalty for each statement with a maximum penalty of $100,000 per calendar yen.

Failure to Comply With Other Information Reporting Requirements

Sec. 6723 provides that the failure of any person to comply with certain specified information reporting requirements on or before the prescribed date will result in a penalty of $50 for each such failure up to a maximum of $100,000 in a calendar year. For purposes of this provision, the specified information reporting requirements include:

* That transferor must give notice to a partnership concerning the exchange of an interest in the partnership;

* The requirement that a person must include his or her taxpayer identification number on any return, statement or other document (other than an information return or payee statement), furnish his or her taxpayer identification number to another person, or include on any return, statement or document (other than an information return or payee statement) made with respect to another person, the taxpayer identification number of that person;

* The requirement that a person must furnish his or her taxpayer identification number to another person or include on his or her return the taxpayer identification number of another person reporting alimony payments; and

* The requirement that a person must include the taxpayer identification number of any dependent claimed on his or her return.

Regulations Requiring Returns On Magnetic Media

Sec. 6011(e) sets forth that "the Secretary shall not require any person to file returns on magnetic media unless such person is required to file at least 250 returns during the calendar year, and shall take into account, among other relevant factors, the ability of the taxpayer to comply at a reasonable cost per the requirements of such regulations."

Thus, it can be concluded that the 250-return requirement is to be applied on the basis of the total or aggregate number of information returns filed during the calendar year, rather than on the basis of the total number of each type of information return as required by Reg. 301.6011-2(b).

In addition, the provision that required magnetic media filing for more than 50 information returns involving interest, dividends, and patronage dividends has been repealed.

PROMOTER, PROTESTOR AND OTHER PENALTIES Frivolous Petitions

The growth of tax shelter litigation caused an enormous increase in the number of cases petitioned to the U.S. Tax Court. Over the Nears, Congress and the Court itself have expanded the use of Sec, 6673. Prior to the most recent change, the Tax Court was authorized to award damages to the U.S. for frivolous petitions filed, positions instituted or maintained primarily for delay, or for unreasonably failing to pursue administrative remedies.

IMPACT increases the maximum statutory penalty, from $5,000 to $25,000 although the committee reports note that the increased penalty, should apply primarily but not exclusively, to tax shelter cases where the $5,000 maximum appears to be ineffective in deterring taxpayers from taking frivolous positions. The reclassification of the award as a penalty" as opposed to "damages" was to make it clear that specific damages incurred need not be proved before the court may impose the penalty.

IMPACT also extends a similar sanction against attorneys and others representing taxpayers before courts. it provides that when the person has unreasonably and vexatiously multiplied the proceedings in any case, he or she shall pay the excess costs, expenses, and attorneys' fees which result.

Finally, IMPACT extends the ability to impose a penalty to courts other than the Tax Court to a maximum of $10,000.

Penalties on Shelter Promoters

In the 1982 Tax Act, Congress decided to attack the promotion of tax shelters by penalizing a promoter who knowingly makes a false or fraudulent statement or makes a gross valuation overstatement. The amount of the penalty was the greater of $1,000 or 10% of the gross income derived from such activity. The penalty was increased to 20% in the 1984 Tax Act.

There was confusion over the interpretation of Sec. 6700 raising the question of whether the minimum penalty could be imposed on each transaction. Most of the cases held that the minimum ($1,000) applied in total, not per sale, so that 10% or 20% of the amount of income derived was always higher. See In Re: Tax Refund Litigation, 698 F. Supp 439 (U.S.D.C.-E.N.Y.); Gates v. US., 874 F.2d 584 (8th Cir., 1989); Spriggs . US., 850 F.2d 690 ( 4th Cir., 1988).

IMPACT increases the penalty to the greater of $1,000 or 100% of the gross income derived but, more importantly, clarifies that each sale is to be a separate activity. Thus, the minimum is $1,000 multiplied by the number of sales.

DELINQUENCY

Under the IRC, a penalty can be imposed for delinquent filing of a return. The penalty runs at 5% per month to a maximum of 25%. The delinquency penalty is imposed only on the balance of tax due. There is a minimum penalty of $100 or the amount of tax required to be shown on the return, whichever is less, when a return is not filed within 60 days of its due date. In the past few years, the IRS has sought to impose other penalties for delinquent filing.

In TAM 8802003, the IRS sought to impose a substantial understatement penalty under Sec. 6661 theorizing that the taxpayer did not have substantial authority for the delinquency, nor was the delinquency disclosed. IRS sought to impose the penalty on the gross tax due, unreduced by payments and credits, citing its own regulation defining the term "understatement. The Tax Court rejected the IRS position in Woods v. Commissioner, 91 T.C. 88 (1988) holding that the statute dealt with the "underpayment." In an interesting later case, the Court limited the Woods decision to one where the return showed a tax liability over and above the payments and credits. That is, Woods was held not applicable where the taxpayer obtained a refund of the withholding or estimated payments. (Smith v. Commissioner, 93 T.C. No. 33.)

In TAM 8527012, a 5% negligence penalty was imposed on the theory that the late filing was caused by negligence. The negligence penalty, by statute, applies to the tax liability unreduced by withholding taxes and estimated tax payments not shown on a timely-filed return. The Tax Court supported this view and upheld the application of the negligence penalty in Schneiker v. Commissioner, T.C. Memo 1989-378, where the original return, a tax protester return, was held invalid.

IMPACT, in essence, overturns the positions specifically providing that fraud and negligence penalties are not to apply in the case of a negligent or fraudulent failure to file a return. However, where the IRS establishes that the taxpayer's failure to file is fraudulent, the penalty is increased to 15% per month of the net amount of tax due up to five months, i.e., to a maximum of 75%, which is the same as the fraud penalty.

As noted, the IRS has the burden of proving this fraudulent delinquency. The burden remains on the taxpayer, however, on the basic 5% per month penalty. The taxpayer would have to prove that the delinquency was due to reasonable cause and not willful neglect. In a court case, if the IRS cannot sustain its burden on the fraud, the regular 5% penalty could be imposed only if the IRS pleaded it as an alternative in the notice of deficiency. The IRS could also assert the basic penalty as an alternative in its answer, but then it would have the burden of proof as it does generally on all issues it raises subsequent to the issuance of a notice of deficiency.

OTHER PENALTIES

While this article has concerned itself with the more complex penalties of greatest concern to taxpayers and practitioners, IMPACT covers other penalties as well. Some of these involve failure to make timely tax deposits, failure to withhold on income of foreigners and penalties related to foreign owned corporations. The penalty for failure to make timely tax deposits is generally a graduated scale of 2% of the amount underpaid for payments made within 5 days of the due date, 5% for payments made more than 5 days but not more than 15 days and 10% after 15 days. The exceptions for reasonable cause have been retained.

OBSERVATIONS FOR THE PRACTITIONER

The question for the tax return preparer or tax advisor has always been: How strong does my position have to be before I can reflect it on a client's tax return without fear of penalties? Only the question is simple.

The answer has been complicated by various standards proposed. However, as for the penalty on tax preparers, the new "realistic possibility of being sustained on its merits" standard should remain a higher standard than reasonable basis came to be interpreted, but should be a less stringent test than both "substantial authority" and the "more likely than not" standard. This interpretation has taken hold with many practitioners. In addition, though there are many problems with the IRS approach of assigning percentage odds of success to these standards, the IRS seems to take the same view.

IRS Notice 90-20 states that "The new realistic possibility of being sustained on its merits' standard under section 6694(a) of the Code is a stricter standard than that of section 6694(a) prior to revision by the Act. The new standard does not, however, require certainty, nor does it require that the position is more likely than not' to succeed. For example, the iRS will treat a position as having a realistic possibility of being sustained on its merits if a reasonable and well-informed analysis by a person knowledgeable in the tax law would lead such a person to conclude that the position has approximately a one in three, or greater, likelihood of being sustained on its merits."

We should also observe that the lesser penalty (the $250 penalty) requires the taking of a position. This seems to be different than the necessity that an understatement be due to negligence. IRS interpreted the former provision as allowing it to penalize negligent preparation of a return, omission of 1099s, failure to follow the results of a prior examination, or failure to compute minimum tax. Under the new provision, this conduct, even assuming it's negligent, is not the taking of a position and should not result in a $250 penalty. Thus conduct can be penalized only if willful, and the IRS has the burden of proof on willfulness.

"t should be noted, however, that the IRS has expressed a contrary view in Notice 90-20, indicating that negligent behavior that would have been subject to a penalty under old law will continue to be subject under new law. Finally, IMPACT is an important tax law milestone for two reasons. First, it is a true simplification. Some 150 unrelated penalties have been whittled down and streamlined into an organized and sensible system. Second, IMPACT is the result of a highly collegial effort between Congress, IRS, other government representatives, professional associations representing practitioners and other interested parties. Unlike much recent tax law, IMPACT was the product of thoughtful deliberation.

Chairman Pickle deserves high marks from the practitioner community for taking this route. Hopefully, the process can be a model for developing future tax legislation as well.