25.6 Tax Return Position Standards
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.
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
Question types to practice on positions:
- 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?
Reasonable basis
Substantial authority
More likely than not
Any colorable argument
What must practitioners inform clients about regarding return positions?
Only potential refunds
Potential penalties and disclosure options
IRS audit statistics
Other clients' returns
Which form is used to disclose a return position to the IRS?
Form 2848
Form 8821
Form 8275
Form 4868
Sections you finish are checked off in the contents.