Corporate Tax Research Paper

Paper Assignment

Paper Part 1

William has found conflicting authorities that address a research question for one of his clients.  Although many authorities provide an unfavorable answer for his client, William estimates that if the client takes the more favorable position on its tax return there is an approximately 48 percent chance that the client’s position will be sustained upon audit or judicial proceeding.  If the more favorable position is taken on his client’s tax return will William be subject to penalty if he signs the return as preparer?  Will the client potentially be subject to penalty?    

IRC Sec. 6694 imposes a penalty on a tax preparer for any position that is not supported by substantial authority. A good tax professional evaluates whether supporting authority is substantial based upon the supporting and opposing authorities’ weight and relevance. William (A tax preparer) could recommend any tax return position (either favorable or unfavorable) and avoid penalty if there is substantial authority. Since substantial authority supports the tax return position, it suggests that the probability, which the taxpayer’s position is sustained upon audit or litigation, is in the 35 to 40 percent range or above. The tax preparer can also avoid penalty under IRC Sec. 6694 if the tax return position has a reasonable basis (supported by one or more authorities) and the position is disclosed on the taxpayer's return. In this problem shows that there is a 48% chance that the client’s position will be sustained upon audit or judicial proceeding, William will not be subject to penalty and no disclosure is required.
Taxpayers are subject to the same standards as tax preparers (if there is substantial authority without disclosure and reasonable cause with disclosure). Thus, William's client will not need to disclose the position on its tax return to avoid penalty.

Paper Part 2

Using the same facts from Part 1, how would your answers change if William estimates that there is instead only a 25 percent chance that the position will be sustained upon audit or judicial proceeding?

IRC Sec. 6694 imposes a penalty on a tax preparer for any position that is not supported by substantial authority. A good tax professional evaluates whether supporting authority is substantial based upon the supporting and opposing authorities’ weight and relevance. William (A tax preparer) could recommend any tax return position (either favorable or unfavorable) and avoid penalty if there is substantial authority. Since substantial authority supports the tax return position, it suggests that the probability, which the taxpayer’s position is sustained upon audit or litigation, is in the 35 to 40 percent range or above. In this problem shows that there is a 25% chance that the client’s position will be sustained upon audit or judicial proceeding, William will be subject to penalty and disclosure is required. But if the tax return position has a reasonable basis (supported by one or more authorities) and the position is disclosed on the taxpayer's return, the tax preparer can avoid penalty under IRC Sec. 6694. The penalty for unreasonable undisclosed positions is an amount equal to the greater of $1,000 or 50% of the income-derived form the position.