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I’m using Becker software and these two MCQ answers seem to contradict eachother:
A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?
a. The tax preparer is responsible for disclosing both penalties to the company.
b. The tax preparer is responsible for disclosing only the accuracy-related penalty to the company.
c. The tax preparer is responsible for disclosing only the late-payment penalty to the company.
d. The tax preparer has no responsibility for disclosing any potential penalties to the company, because the position will probably be sustained on audit.
Solution:
Choice “a” is correct. This position passes the realistic possibility standard, and it is proper for the tax
preparer to recommend it to the client. However, the tax preparer is required to notify the client of all
possible penalties in the event that the position is not sustained.
I originally thought it would be “d” because if it is >50% chance, this fits the “more likely than not” standard. But now with this question it seems to back up my original though:
A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?
a. More likely than not.
b. Not frivolous.
c. Realistic possibility.
d. Substantial authority.
Solution:
Choice “a” is correct.
The CPA should inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction unless the transaction, at the minimum, meets the more-likely-than-not standard.
Choices “b”, “c”, and “d” are incorrect. Reason:
“Not frivolous,” “realistic possibility,” and “substantial authority” are lesser standards than the more-likely-than-not standard. So, if the transaction meets only one of these lesser standards, the CPA must inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction.
I am not seeing any fundamental difference in what the questions are asking. Why is there a difference? Any help would be appreciated.
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