Edward R. Jenkins, chair, PICPA Federal Tax Committee
President Donald Trump issued an executive order on Jan. 20, 2017, regarding the Patient Protection and Care Act (PPACA). Section 2 of that order states: “To the maximum extent permitted by law, the Secretary of Health and Human Services (Secretary) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the act that would impose a fiscal burden on any state or a cost, fee, tax, penalty, or regulatory burden on individuals, families, health care providers, health insurers, patients, recipients of health care services, purchasers of health insurance, or makers of medical devices, products, or medications.”
This executive order raises several tax questions.
What is the PICPA's position for filing a 2016 federal personal income tax return that calculates a penalty for not having mandated health insurance (shared responsibility payment)? Do we as CPAs and tax preparers not record a penalty, but instead record zero and attach an explanation that this executive order effectively negates that penalty?
CPAs in Pennsylvania are regulated by a variety of agencies from Pennsylvania and the federal government. The Pennsylvania CPA Act and related regulations incorporate standards promulgated by the AICPA and PICPA by reference; giving those standards the full effect of law. That means the AICPA Statements on Standards for Tax Services (SSTS) are binding on CPAs in Pennsylvania.
SSTS 1 addresses signing tax returns that contain tax return positions. That standard says you must have a realistic possibility of success (the 33 percent standard) in defending a tax return position against government examination, to the highest level of appeal allowed by law. That standard goes on to say that a CPA must adhere to a more rigorous level of confidence if a government jurisdiction applies such a higher level. In fact, IRC Section 6662 and the regulations thereunder do impose a higher standard. That standard, as well as the analytical process that must be documented, is codified in Treasury Regulation Section 1.6662-4(d). That statute defines the substantial understatement penalty imposed on a taxpayer if a tax return position does not have “substantial authority” (the 40 percent standard).
The documentation required to achieve substantial authority requires a recitation of facts and circumstances, identification of relevant law, an evaluation of the relative merits of those sources of law, application of that law to our facts and circumstances, and the drawing of a conclusion about how the law will be applied by the IRS. That standard applies to the taxpayer.
IRC Section 6694(a) provides a corollary structure for the tax preparer. That statute prohibits a tax return preparer from signing any tax return or claim for refund that contains a tax return position that does not meet the substantial authority standard, without disclosure of the tax return position in the return. The penalty for signing such a return is the greater of $1,000 or 50 percent of the fees charged for the advice or engagement.
Treasury Regulation Section 1.6662-4(d) defines substantial authority for the purposes of the imposition of the accuracy-related penalty. Specifically, Treasury Regulation Section 1.6662-4(d)(3)(i) requires a documented evaluation of the relative strength of authority for a tax return position. The relative weight of authorities is codified in Treasury Regulation Section 1.6662-4(d)(3)(ii), and that regulation indicates the weight of an authority is a function of the relevance and persuasiveness, as well as the type of authority. Treasury Regulation Section 1.6662-4(d)(3)(iii) actually lists out the authorities and gives the construct for evaluating the relative weights.
Treasury Regulation Section 1.6662-4(e) provides a reduced standard called “reasonable basis” (the 15 percent standard) if the tax return position is adequately disclosed. What constitutes adequate disclosure is published in a revenue procedure issued by the IRS each year. Form 8275 and Form 8275-R are available for a variety of disclosure items, and those forms are attached to the tax return that takes the disclosed tax return position. It should be noted that “reasonable basis” is below the “realistic possibility of success” standard required by SSTS 1. SSTS 1 does permit reasonable basis with disclosure in Paragraph 5b.
Analysis and Conclusions
A presidential executive order in the current tax year is not listed in the treasury regulations as an authority to be considered in the evaluation or determination of whether or not substantial authority exists for a tax return position in a prior tax year. Such an executive order may give you an idea of the shape of future regulations and enforcement, but an executive order does not constitute an authority for the purposes of evaluating substantial authority in support of a tax return position in a prior year.
The executive order issued on Jan. 20, 2017, is therefore not relevant to the determination of substantial authority, even as a disclosed tax return position, in this circumstance. The Office of the President does not have the authority to invalidate a statute enacted into law. Only Congress has the authority to change statutes. The federal court system, ultimately the Supreme Court of the United States, can find a law to be unconstitutional.
The conclusion of the PICPA Federal Tax Committee is that Trump’s “Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal” issued Jan. 20, 2017, is not authoritative for supporting a tax return position taken in a calendar 2016 individual income tax return that omits a required shared responsibility payment. Therefore, we conclude a member should calculate and include shared responsibility payments, as required by current law, in any income tax return that requires such payments under the law applicable to 2016 tax years.