CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresMedium
A tax preparer has a reasonable belief that a client's tax return position, if challenged, would more likely than not be sustained on its merits. However, the position involves a complex interpretation of a new tax law provision with no clear IRS guidance. Under Circular 230, what is the MOST appropriate reporting standard for this position?
- AThe preparer can take the position without disclosure, but only if there is substantial authority for the position.
- BThe preparer must disclose the position on Form 8275, 'Disclosure Statement,' regardless of the 'more likely than not' standard.
- CThe preparer can advise the client to take the position without disclosure, as the 'more likely than not' standard is met.
- DThe preparer must refuse to take the position due to the new and complex nature of the tax law, lacking clear IRS guidance.
Show answer & explanationAnswer & explanation
Correct answer: C. The preparer can advise the client to take the position without disclosure, as the 'more likely than not' standard is met.
Under Circular 230, a practitioner may advise a client to take a position on a tax return if the practitioner has a reasonable belief that the position would more likely than not be sustained on its merits. If this standard is met, disclosure is generally not required for non-reportable transactions.
Why the other options are wrong
- A. 'Substantial authority' is a lower standard than 'more likely than not.' If 'more likely than not' is met, 'substantial authority' is also met, and disclosure is generally not needed.
- B. Disclosure on Form 8275 is typically required for positions where the 'substantial authority' standard is met but 'more likely than not' is not, or for certain reportable transactions.
- D. Refusing to take the position is only required if the position falls below the 'reasonable basis' standard or other specified thresholds.
Circular 230 Tax Return Position Standards
Circular 230 sets standards for advising on tax return positions, primarily 'more likely than not' (MLTN) and 'reasonable basis'.
- MLTN: >50% chance of being sustained on merits; generally no disclosure needed.
- Substantial Authority: >33% but <50% chance; disclosure may be needed to avoid penalties.
- Reasonable Basis: >20% chance; disclosure always needed to avoid preparer penalties for undisclosed positions.
- Frivolous Position: No reasonable basis; cannot advise.
Memory trick: More Likely Than Not, no disclosure sought.