6694 "unreaslonable positions" are not unreasonable

An “unreasonable position” is defined as a position that a tax return preparer cannot support with “substantial authority” if the position is not disclosed to the IRS. If the “unreasonable position” is disclosed to the IRS, then the tax return preparer need only have a “reasonable basis” to support the position taken. Either way, with or without disclosure of a position in your tax return to the IRS, the position is only “unreasonable” if a return preparer does not have the requisite technical authority or technical skill to support the position taken in your tax return. The term “unreasonable position” in section 6694 is a misnomer or erroneous classification of positions that can be supported with “substantial authority.”
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To make this point clearer, why is any position in a tax return deemed to be "unreasonable" if it can be supported with substantial technical authority? If the tax return decided to disclose the position to the IRS, he is disclosing a position he "thinks" might be unreasonable. There may be obvious substantial athority at the time the position is taken in the tax return. But the return preparer may want to disclose the position just to play it safe for the availability of the lower "reasonable basis" standard. If all return preparers, even those confident about their technical positions, "disclose" those positions to the IRS, the IRS will be bombarded with disclosed positions. Not a bad strategy. The IRS is not staffed to handle a millions of disclosed positions.

A more important point is the fact that return preparers who have little or no technical skills will get blased with 6694 penalties even if there is "substantial authority" for the positon. How can a return preparer supply any technical authority, even for the reasonable basis standard, if they lack the technical skill or technical resources to defend the position? IRS examiners are not your friends. They are aggressive. They like to make examples of return preparers. They will be motivated to go after the very large penalties. I predict the IRS examiners will treat return preparer negligence as "reckless" and go after the $5,000 penalties.

In my tax practice, I have lots of battles with the IRS over technical issues. Without the requisite technical research, analysis, interpretative skill, advocacy skill, the IRS would prevail over a raft of issues that they should not win. That is the point. Tax return preparers without the necessary technical skills, including the ability to draft a technical memorandum for managers, reviewers and appeal personnel, the IRS would win on those issues. Return preparers will inevitably get "nailed" for large 6694 penalties merely because they do not know how to find that support or analyze the nuances of that technical support.

I am left with the conclusion that positions that can be supported with strong technical support will be deemed to be "unreasonable positions" when handled by inept tax return preparers in many cases. Simple example: every side business with losses is nearly always treated as a hobby. But that is not necessarily the correct conclusion.

My personal belief is that all problematical positions should be disclosed to the IRS even those positions I believe that have strong technical support. The disclosure will cover for a missed detail in a regulation, a missed fact, or some kind of other error. Why take the chance? If the position appears factually or legally complex - disclose it. If your gut tells you that you are uncertain about the position - disclose it.

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