Houston has found conflicting authorities that address a research question for one of his clients. The majority of the authorities provide a favorable answer for his client. Nonetheless, there are several authorities that provide an unfavorable answer. Houston estimates that if the client takes the more favorable position on its tax return there is approximately a 60 percent chance that the position will be sustained upon audit or judicial proceeding. If the client takes this position on its tax return, will Houston be subject to penalty? Will the client potentially be subject to penalty?
What will be an ideal response?
A tax preparer (Houston) may recommend any tax return position and avoid penalty if there is substantial authority that supports the tax return position. Substantial authority suggests that the probability that the taxpayer's position is sustained upon audit or litigation is in the 35 to 40 percent range or above. The tax practitioner can also avoid penalty if the tax return position has a reasonable basis (i.e., supported by one or more tax authorities) and the position is disclosed on the taxpayer's return. Given that there is a 60 percent chance that the position will be sustained upon audit or by the courts, Houston should not be subject to penalty and no disclosure is required.
Taxpayers are subject to the same standards as tax practitioners (substantial authority without disclosure; reasonable basis with disclosure). Thus, Houston's client will not need to disclose the position on its tax return to avoid penalty.
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