Key Takeaways
- Must have reasonable basis for positions taken on returns.
- Undisclosed positions require "substantial authority" standard.
- Disclosed positions require only "reasonable basis" standard.
- Must inform clients of potential penalties for positions.
- Must advise of disclosure opportunities to avoid penalties.
- Frivolous positions are disreputable conduct.
Tax Return Positions (Section 10.34)
Why This Matters for the Exam
Position standards determine when you can ethically take a position on a return. The exam tests whether you understand the difference between disclosed and undisclosed positions and the applicable standards.
Expect at least 3-4 questions on position standards and penalty disclosure.
The Position Standards Hierarchy
Tax return positions must meet certain confidence thresholds:
| Standard | Confidence Level | When Required |
|---|---|---|
| Reasonable basis | ~20% chance of success | Disclosed positions |
| Substantial authority | ~40% chance of success | Undisclosed positions |
| More likely than not | >50% chance of success | Tax shelter positions |
Disclosed vs. Undisclosed Positions
| Position Type | Standard Required | Disclosure Form |
|---|---|---|
| Disclosed | Reasonable basis | Form 8275 or 8275-R |
| Undisclosed | Substantial authority | No disclosure |
Key Point: Disclosure allows you to take a position with a lower confidence level because you're alerting the IRS to the issue.
Penalty Disclosure Duties
Practitioners must inform clients about:
| Duty | Description |
|---|---|
| Potential penalties | What penalties may apply if position is disallowed |
| Disclosure opportunities | How disclosure can reduce penalty risk |
| Documentation options | What records should be maintained |
Reasonable Basis vs. Substantial Authority
| Factor | Reasonable Basis | Substantial Authority |
|---|---|---|
| Confidence | ~20% | ~40% |
| Frivolous? | No (must be beyond frivolous) | No |
| Technical support | At least one authority | Multiple authorities |
| When used | Disclosed positions | Undisclosed positions |
Frivolous Positions
A frivolous position is one with no colorable basis in law—it's patently improper.
Examples of Frivolous Positions:
- "Wages are not income."
- "Filing returns is voluntary."
- "The IRS is unconstitutional."
Consequence: Taking a frivolous position is disreputable conduct under Section 10.51.
Continuing Representation
If a client takes a position the practitioner believes is improper:
- Practitioner must explain how to correct noncompliance.
- Consider whether continuing representation is appropriate.
- Cannot sign a return containing a frivolous position.
Real-World Scenario
Scenario: A client wants to claim a home office deduction. You research and find it's a close call—maybe 30% chance of prevailing if challenged.
- Undisclosed: Does not meet substantial authority (~40%). Cannot claim without disclosure.
- Disclosed: Meets reasonable basis (~20%). Can claim with Form 8275 disclosure.
- Your duty: Inform client of penalty risk and disclosure option.
On the Exam
Expect 3-4 questions on positions, typically:
- Standard Questions: "What standard applies to undisclosed positions?"
- Disclosure Questions: "What form is used to disclose return positions?"
- Frivolous Questions: "Which position is considered frivolous?"
- Penalty Disclosure Questions: "What must practitioners inform clients about?"
The key is to remember: Undisclosed = substantial authority. Disclosed = reasonable basis. Frivolous = disreputable conduct.
What standard applies to undisclosed tax return positions?
What must practitioners inform clients about regarding return positions?
Which form is used to disclose a return position to the IRS?