[hessmt]

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?

A. More likely than not.

B. Substantial authority.

C. Not frivolous.

D. Realistic possibility.

Original Answer: A

Correct Answer: D

Can someone explain why a Tax Shelter would not be subject to the “More likely than not standard”? Or is my problem that I am reading the question wrong?

[Jim Deal]

You are right with respect to the IRC, you would use the “more likely than not” standard:

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Section 10.35(d) requires a practitioner providing a tax shelter opinion to make certain disclosures in the beginning of marketed tax shelter opinions, limited scope opinions and opinions that fail to conclude at a confidence level of at least more likely than not.

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However, the call of the question is with respect to the standard put forth by the AICPA's Statements on Standards for Tax Services:

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ABA Opinion 85-232 (Tax Shelters)

ii) Replaced the “reasonable basis” standard with a new standard of reporting. The practitioner must possess a good faith belief that the position is warranted in existing law and there is some realistic possibility of success if the matter were litigated.

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They were looking for you to know that this update was put into place within that body of literature exchanging terms “reasonable basis” with “realistic possibility”.

Got to love when they split hairs over these types of semantics.

[hessmt]

Thanks Neurons, that answer is extremely helpful! I knew I was missing something. In short, if I am understanding correctly, the AICPA has different standards that could potentially be tested. Is there a reasonable basis for this showing up on the exam?

[Author]

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