R4 M2 - Professional Responsibilities and Tax Return Preparer Penalties

Question 1

A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable?

A.	There was a reasonable possibility of success for the position.

B.	There was a reasonable basis for the position.

C.	There was substantial authority for the position.

D.	It is reasonable to believe that the position would more likely than not be upheld.

Answer 1

Choice “D” is correct. With regards to a tax shelter, a penalty for understatement of taxpayer liability could apply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld on its merits. This is more stringent than a reasonable basis for the position, a reasonable possibility of success for the position, and substantial authority for the position.

Choices “C”, “A”, and “B” are incorrect per the above explanation.