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Liability mitigation and tax return positions

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#1
Posts:
35
Joined:
26-May-2016 12:53pm
Location:
Hartford, CT
What do you do if your taxpayer wants to take a position that you believe is more likely than not to be contested?

Background: Taxpayer wants to take a deduction, after looking at case law, I think it’s more likely than not to be disallowed if audited. Now I could see how an argument could be made for its deductibility, but in the few cases found with similar facts, it was disallowed in all. In such a situation, would you refuse to take the position on a return you prepared and signed, or express and document your concerns but take the position?
 

#2
Posts:
599
Joined:
21-Apr-2014 7:09pm
Location:
NC
Pretty broad description but I would not do something I could not support with case law... a primary source preferably.
 

#3
makbo  
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6135
Joined:
23-Apr-2014 3:44pm
Location:
District 13
Clients may choose to play the audit lottery even if we can't. What happens if it's disallowed is most likely an understatement of tax liability penalty for the client, and a related penalty for the preparer. However those penalties are avoided in most cases if you disclose the position on the return using Form 8275.

It's a false notion that Form 8275 is a red flag. I've never had one trigger an IRS response, even when it turned out the position was absolutely incorrect (in that case, it was related to COD income, when there was a period of some months one year earlier this decade where the IRS stated in writing that California non-judicial foreclosure was equivalent to a non-recourse loan, which they later retracted).

I do not believe it is required for a paid preparer to generate substantial authority for a position in order to sign a return taking that position.
 

#4
Posts:
35
Joined:
26-May-2016 12:53pm
Location:
Hartford, CT
Thanks makbo that is very helpful. Would you file form 8275 in any instance of a position taken on a tax return you believe is not more likely than not to stand?
 

#5
ATSMAN  
Posts:
1189
Joined:
31-May-2014 8:34pm
Location:
MA
Makbo gives sound advice. I don't think it is prudent to go along with the taxpayer's position if YOU believe after doing your research that you have very weak legs to stand on. I have disengaged many times when client and I did not see eye to eye on certain tax issues and I felt that my exposure was not warranted playing the "audit lottery" :roll: :roll: :roll:
 

#6
Posts:
202
Joined:
12-Jun-2014 6:13pm
Location:
North Carolina
In addition to the presumed inclination you must have to behave ethically, whatever the client pays you is not enough to risk discipline from the OPR and maybe putting your CPA license at risk. If the position he wants to take is wrong and you know it is wrong, don't do it.
Because on T.A. ten was the most you were allowed
 

#7
Posts:
528
Joined:
21-May-2018 7:50am
Location:
Hilton Head Island, SC
If I know it is unlikely to be supported by primary sources in event of audit, I will not take the tax position and potentially disengage from client. No client will ever drive my decisions. The consequences are not worth it, even if fully disclosed on tax return. Mere disclosure on the aforementioned 8275, from my understanding, does not fully remove the risk (and yes, I realize that is what makbo said) and if the position is questionable enough, still leaves the preparer open to penalties and other severe risks.
 

#8
Doug M  
Posts:
2924
Joined:
22-Apr-2014 1:09pm
Location:
Oregon
As a CPA, you are held to a higher standard than the rest of the tax preparer pool. Read the AICPA Statement on Standards for Tax Services No. 1, Tax Return Positions. This is our world, not Circular 230

A member should not recommend a tax return position or prepare or sign a tax return taking a position unless the member has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged.
 

#9
Coddington  
Moderator
Posts:
1988
Joined:
21-Apr-2014 8:50pm
Location:
Fort Worth, TX
A realistic possibility of success on the merits is a lower standard than the general, undisclosed tax return filing standard of substantial authority under section 6694(a)(2)(A) and substantial authority is a lower standard than MLTN. Section 6694 previously used the same standard as the SSTS, but switched to the higher substantial authority standard last decade. As for the different levels, the informed pundits generally hold that a realistic possibility of success is seen as 33%, substantial authority as 35-45%, and MLTN as a greater than 50% chance of success on the merits. So it possible for the Service to have a MLTN position and the client to have a position with substantial authority. As a practical matter, if you believe the Service will challenge a position and you do not believe you have a MLTN position, it is safer to disclose the position on Form 8275 than not so as to increase the odds of avoiding a penalty.
-Brian
Tax accounting methods and credits consultant for hire.

http://www.coddingtontax.com
 


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