24211_ch02_final_p001-008

24211_ch02_final_p001-008 - 2 Tax Practice and Research...

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Tax Practice and Research Solutions to Problem Materials D I S C U S S I O N Q U E S T I O N S 2-1 a. T could be subject to one of several of the 20% accuracy-related taxpayer penalties, depending on whether the understatement is substantial. If the understatement is not substantial, the negligence penalty could be applied if it were determined that he failed to make a reasonable attempt to comply with the tax laws. To avoid this penalty, he must be able to show that he exercised reasonable care in the preparation of the return or had a reasonable basis for his position. In cases where a taxpayer does not meet these standards, the penalty may be waived if he can show there was reasonable cause for the understatement and that he acted in good faith. If the understatement exceeds (1) 10% of the correct tax or (2) $5,000 ($10,000 for corporations), whichever is larger, the substantial understatement penalty could be applied. The taxpayer can avoid assessment of this penalty only if there is a reasonable basis for the position (if disclosed) or there is substantial authority for the position (if undisclosed). As in the case of the negligence penalty, the taxpayer is not subject to the penalty if reasonable cause and good faith can be demonstrated. b. T should file an amended return (Form 1040X) to correct the depreciation error. Under these circumstances, penalties generally are not assessed, although T will be liable for interest on the additional tax due. (See SSTS No. 6 on p. 2-42.) (See Exhibit 2.7 and pp. 2-33 through 2-35.) 2-2 a. In the case of an undisclosed erroneous position, a taxpayer can avoid assessment of the negligence penalty (insubstantial understatement) only if there is a reasonable basis for his position. The reasonable basis standard is met if the position is arguable, but fairly unlikely to prevail in court. [Reg. § 1.6662-4(d)] This is generally construed to mean that there is at least a 20% chance of the position being sustained on its merits. (see Exhibit 2.7 and pp. 2-33 and 2-34.) If the understatement is substantial and the erroneous position is not disclosed, the taxpayer must meet the higher standard of substantial authority to support his position and avoid a penalty. Reg. § 1.6662-4(d) defines substantial authority as less stringent than the more-likely-than-not standard (generally accepted as greater than 50%) and more stringent than the reasonable basis standard. b. Adequate disclosure of the tax treatment of the lawn care expenses, either on the return or with a Form 8275, whichever is appropriate, would protect C from assessment of the negligence or substantial understatement penalty unless the position fails to satisfy the reasonable basis standard. (See Exhibit 2.7 and pp. 2-33 through 2-36) 2 2-1
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2-3 From the preparer s standpoint, where the tax treatment of an item is questionable, disclosure is invariably the best protection against all but frivolous positions. Lacking adequate disclosure, the preparer must be able to show that the position has substantial authority for the position.
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