[Anonymous]

Hi,

I’m reviewing Ethics and getting a little confused with regards to tax preparer penalties and the corresponding probabilities.

I thought that a preparer was subject to a $1,000 or 50% penalty for an understatement of a liability due to an undisclosed position where there is not a reasonable belief that the position would more likely than not (> 50% probability) be sustained. However, I’ve recently seen “more likely than not” replaced with “realistic possibility,” which to me implies ≈ 33% probability. Has anyone come across this discrepancy or know which one is correct?

Also, a separate but related question – I know the penalty can be avoided with adequate disclosure and showing reasonable basis (≈20%), but where else do these probabilities apply? Are there other rules/situations that use the “more likely than not (>50%), substantial authority (≈40%), realistic possibility (≈33%), and reasonable basis (≈20%)” probabilities?

Thanks!

[Tux]

What study materials are you using? I'm using Becker.

I see the Penalty for understatement of taxpayer liability is $1,000 or 50% of the income received by the preparer for tax preparation services.

This penalty is imposed if:

a – there is no reasonable basis that the position would be sustained based on its merit

b – the preparer knew or should have known about the unreasonable position

c – disclosure of the position was not made

and

d – the position lacks “reasonable basis”

If a “reasonable basis” for the understatement exists and the preparer acted in good faith, the penalty will not apply.

Basically, all of the above is saying that you only need 20% chance or greater that the position will be sustained. NOT greater than 50%

To address your 2nd question –

Becker only provides 3 categories of likelihood –

greater than 50% = more likely than not

33%-50% = substantial authority

greater than 20% = reasonable basis

I'm not familiar with “realistic possibility”.

Where did you see this term used interchangeably with “more likely than not”?

Based on the description you provided, I understand how that would be confusing.

I don't believe they are to be used interchangeably.

FAR - 86 - 2/27/14
AUD - 75 - 5/29/14
BEC - 80 - 8/31/14
REG - 89 - 2/27/15
Praise Jesus! I'm done!!

Study resources:
Becker
Wiley test bank

[Anonymous]

@Tux, thanks for the reply. I'm using Roger CPA and Ninja MCQ. I think I'll just stick to what you provided and flag it as a something to be aware of.

[Tux]

OK. I came across some notes that refer to reasonable possibility –

It seems to only be used regarding disclosure of a position….

And it refers to at least 33% likelihood that position will be upheld.

If a position has less than 20% chance of being upheld, then it is frivolous and should not be taken at all.

If a position has between 20%-33% chance of being upheld, then it must be disclosed.

If a position as greater than 33% chance of being upheld, then it does NOT need to be disclosed.

Exception – a position regarding a tax shelter requires greater than 50% chance of being upheld.

I don't know what rule applies regarding disclosure of a tax shelter ??????

FAR - 86 - 2/27/14
AUD - 75 - 5/29/14
BEC - 80 - 8/31/14
REG - 89 - 2/27/15
Praise Jesus! I'm done!!

Study resources:
Becker
Wiley test bank

[Author]

Replies