Internal Revenue Service Notice 2009-05 

In recent years, Congress and the IRS have raised the standard of care for tax return preparers in an attempt to make them more accountable for positions they take on tax returns that might not be supported under applicable law.

Under these rules, if the preparer takes a position that does not meet the applicable standard of care, the preparer is subject to a separate return preparer penalty. As the standard of care was raised, many tax advisors began taking more conservative positions on returns, for example, whether a property qualifies as a vacation home under the recent Rev. Proc. 2008-16.

Under prior law, the standard of care was “a reasonable belief that the position would be more likely than not be sustained on the merits.” That standard required the return preparer to assess the merits of the return position under all applicable laws as a judge would. The standard created concern and uncertainty among accountants and lawyers that might fall into the broad definition of a return preparer.

Recently, Congress ratcheted the standard down a notch. On October 3, 2008, President Bush signed into law the 2008 Act. The Act modifies the return preparer penalty standard for undisclosed tax return positions by reducing the applicable tax return preparer standard from “more likely than not” to one of “substantial authority.” Thus, a position might be viable under the standard even if there is some contrary authority so long as there is authority to support the position. More technically, "substantial authority exists only if the weight of the taxpayer's authorities is substantial in relation to the contrary authorities." 26 C.F.R section 1.6662-4(d)(3) (1997). The new standard is made retroactive to May 25, 2007.

Click here to view the full text of IRS Notice 2009-05.