CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresMedium
A tax practitioner is preparing a federal income tax return for a client who insists on taking a deduction that the practitioner believes lacks a realistic possibility of being sustained on its merits. The practitioner advises the client of the low likelihood of success and the potential penalties. The client, after understanding the risks, still insists on taking the position. What is the practitioner's ethical obligation under Circular 230?
- AThe practitioner must withdraw from the engagement if the client insists on the position.
- BThe practitioner may include the position if it has a reasonable basis and is adequately disclosed.
- CThe practitioner must refuse to sign the return if the position is included.
- DThe practitioner must include the position as instructed by the client, as long as it is not frivolous.
Show answer & explanationAnswer & explanation
Correct answer: B. The practitioner may include the position if it has a reasonable basis and is adequately disclosed.
Under Circular 230, a practitioner may advise a client to take a tax return position that is not frivolous, even if it does not meet the 'realistic possibility' standard, provided the position has a 'reasonable basis' and is adequately disclosed to the IRS.
Why the other options are wrong
- A. Withdrawal is not explicitly required under these circumstances, provided the disclosure requirements are met.
- C. Refusal to sign is only required if the position is frivolous or lacks a reasonable basis, or if disclosure is not made when required.
- D. Simply 'not frivolous' is not enough; if it doesn't meet 'realistic possibility,' it needs 'reasonable basis' and disclosure.
Circular 230 Tax Return Position Standards
A practitioner may advise a client to take a tax return position that does not meet the 'realistic possibility' standard if the position has a 'reasonable basis' and is adequately disclosed to the IRS.
- Realistic Possibility: >= 1-in-3 chance of success.
- Reasonable Basis: > 1-in-5 chance of success; requires disclosure if not meeting realistic possibility.
- Frivolous: No basis in law or fact; cannot be advised or included.
Memory trick: For 'Tax Positions', 'Disclose if Doubtful, Refuse if Frivolous'.