Reasonable basis standard

The "reasonable bais" standard applies for section 6694 disclosed positions, as follows:


Section 1.6694-2(c)(2) of the regulations defined “reasonable basis” as the standard for disclosed positions and provides: “For purposes of this section, “reasonable basis” has the same meaning as in §1.6662-3(b)(3) or any successor provision of the accuracy-related penalty regulations. For purposes of determining whether the tax return preparer has a reasonable basis for a position, a tax return preparer may rely in good faith without verification upon information furnished by the taxpayer, advisor, other tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer’s firm), as provided in §1.6694-1(e).

§1.6662-3(b)(3) of the regulations defines Reasonable basis.

--Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. If a return position is reasonably based on one or more of the authorities set forth in §1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments), the return position will generally satisfy the reasonable basis standard even though it may not satisfy the substantial authority standard as defined in §1.6662-4(d)(2). (See §1.6662-4(d)(3)(ii) for rules with respect to relevance, persuasiveness, subsequent developments, and use of a well-reasoned construction of an applicable statutory provision for purposes of the substantial understatement penalty.) In addition, the reasonable cause and good faith exception in §1.6664-4 may provide relief from the penalty for negligence or disregard of rules or regulations, even if a return position does not satisfy the reasonable basis standard.

COMMENT: Obviously, the "reasonable basis" standard is subjective, however it can be based on the analysis and authorities cited in §1.6662-4(d)(3)(ii) and (iii). For this reason, one can never know if the return preparer will be subject to the 6694 penalty even if the position is disclosed. One cannot ever assume that and IRS examiner is going to give you the benefit of the doubt when the standard is subjective. The IRS examiners are aggressive. For this reason, one must use a large amount of substantiation to support the position rather than a minimum substantiation standard.

I do not think one can take comfort in the reliance standard based on the above list of advisors if the advisors are wrong. The person used for "reliance" should be a strong professional prepared to write a legal memorandum on the issues.

If you have any questions on this important topic, call 888 712-7690 ex 106 or send an e-mail to ab@irstaxattorney.com

How and when does that authority have to be documented? The common sense answer is that it should be documented in writing to be disclosed with the tax return; otherwise, the tax return will be earmarked for examination by the IRS.