Tax Preparer Penalties and Client Conflicts

By Seth Hammer

Different rules for determining taxpayer and tax preparer penalties may create conflicts between the two when it comes time for disclosure of aggressive tax positions. Recent amendments to IRS Circular 230 exacerbate this problem. Here is an explanation of the rules and why they create conflicts.

Recent amendments to IRS Circular 230 tightened standards of reporting for tax preparers involved with tax returns that contain ambiguous allowability positions. These amendments make the consequences more ominous for preparers whose clients report positions that are disallowed and considered inadequately disclosed.

Under the amendments, compliance with rules closely modeled after IRC Sec. 6694 [Understatement of Taxpayer's Liability by Income Tax Preparer] is now expressly required under the standards of conduct of Circular 230. Willful failure to comply with these standards can lead to suspension of the right to practice before the IRS. Formerly, tax preparers were directly concerned only with the limited sanctions under IRC Sec. 6694, which primarily provide a $250 penalty for noncompliance. The IRS may still apply this fine as well as invoke sanctions under provisions of the Circular.

The amendments to Circular 230 raise the stakes for preparers and may likely exacerbate practitioner/client conflicts. These conflicts would arise when separate disclosure of a tax position is required to protect the tax preparer, but not the taxpayer, from a potential penalty.

Example 1. Taxpayer Smith, a client of Johnson CPA, wishes to claim a medical deduction for recently incurred hospital and surgery expenses. There is some question as to whether these expenses are medically necessary [deductible] or cosmetic [nondeductible]. The position, if disallowed, would not result in a "substantial underpayment of tax." Johnson researches the issue and is confident there is a reasonable basis for claiming the deduction. She is less confident the position meets the next higher threshold for reporting, the "realistic possibility of success" standard.

If the nondisclosed tax position is disallowed, Taxpayer Smith would normally not be subject to a penalty, since the deduction met the applicable taxpayer standard of Reg. Sec. 1.6662-7T for "reasonable basis." However, if it is determined the position neither met the "realistic possibility of success" standard nor qualified as a tax preparer reporting exception, Johnson CPA could be subject to both a $250 fine and sanctions under IRS Circular 230 because the disallowed position was not adequately disclosed.

The tax preparer must balance personal concerns (i.e., penalties) with client concerns. Excessive conservatism (e.g., demanding client disclosure unless there is almost virtual certainty of compliance) may not be compatible with the client's best interests, which may be to minimize disclosure. Prior to the amendment to IRS Circular 230, Johnson CPA may have been less conservative because she could absorb a $250 penalty as an unfortunate cost of operating her business.

Patchwork of Rules

Tax practitioners who attempt to evaluate potential liability issues with respect to tax positions of ambiguous allowability must consider at least the following four sets of rules:

* IRC Sec. 6694: Understatement of taxpayer's liability by income tax return preparer,

* IRS Circular 230: Practice before the IRS‹standards for tax return positions and preparing or signing returns,

* IRC Sec. 6662(c): Accuracy related penalty‹negligence or disregard of rules or regulations,

* IRC Sec. 6662(d): Accuracy related penalty‹substantial underpayment of income tax.

Members of the AICPA should also consider the Statements of Responsibilities in Tax Practice (SRTP) and its interpretation No. 1-1. These statements are advisory in nature and do not constitute enforceable standards.

An inherent cause of tension between preparers and clients under this patchwork of rules is that each party must abide by separate standards of reporting. Taxpayers generally must meet either a reasonable basis or substantial authority threshold. Tax preparers must meet either a nonfrivolous or realistic possibility of success threshold.

There are also shifts in minimum reporting thresholds between tax preparers and taxpayers. It cannot be presumed that by meeting the minimum applicable tax preparer standard the taxpayer will also be protected. Nor can it be assumed the opposite will be true. This unusual state of affairs arises, in part, because Congress failed to act on Senate committee recommendations [Senate committee reports on P.L. 103-66, Omnibus Reconciliation Act of 1993] to apply a reasonable basis threshold to both taxpayer and tax preparers, rather than just taxpayers, for positions subject to the accuracy-related penalties. As a result, it becomes necessary for preparers to become knowledgeable of the full set of standards to adequately advise clients and protect themselves against professional liability.

IRC Sec. 6694

IRC Sec. 6694(a) provides that a preparer will be assessed a $250 penalty in situations where a taxpayer's liability is understated due to a position that does not have a "realistic possibly of being sustained on its merits." A $1,000 penalty may be assessed if any part of the taxpayer's underpayment of tax liability is attributable to a willful attempt to understate the tax liability or to either recklessly or intentionally disregard the rules or regulations. The regulations under IRC Sec. 6694 provide that penalties may be waived in cases where it is shown the preparer's error was due to reasonable cause and he or she acted in good faith.

Reg. Sec. 1.66994-2(b) provides that the realistic possibility of success standard is met "if a reasonable and well-informed analysis by a person knowledgeable in the tax law would lead such a person to conclude the position has approximately a one in three, or greater, likelihood of being sustained on its merits." The likelihood the tax return would be audited, or the position itself would be examined upon an audit, is not to be taken into account in reaching the probabilistic assessment.

The regulations under IRC Sec. 6694, unfortunately, provide no indication as to how it would be mathematically determined whether a position meets the one in three standard. Neither do they describe who is deemed to be a person knowledgeable in the tax law. The regulations do, however, provide limited guidance through nine examples of situations where the realistic possibility of success standard is deemed to be either met or not met.

Authorities to be relied upon in evaluating whether a position satisfies the realistic possibility of success standard are the same as those utilized for determining whether a tax position has "substantial authority" [Reg. 1.6662-(4)(d)(3)(I)]. These authorities include items such as revenue rulings, private letter rulings, technical advice memoranda, and general counsel memoranda The regulations note that all authorities do not carry equal weight (e.g., a revenue ruling has greater weight than a private letter ruling). Additionally, the authorities must be weighted in relationship to subsequent developments (e.g., a recent letter ruling will be accorded more weight than an older one).

Adequate disclosure of nonfrivolous positions will preclude assessment of preparer penalties under IRC Sec. 6694 in cases where the realistic possibility of success standard is not met. A position is deemed to be frivolous if it is "patently improper" [Reg. 1.6694-2(c)(2)].

Disclosure will be deemed adequate if it is made on a properly completed and filed Form 8275, Form 8275-R, or on the return in accordance with an annual revenue procedure. Although disclosure is normally not required in situations where the position taken is consistent with a committee report, an exception provides that disclosure is still required where the taking of that claim would constitute disregard of a rule or regulation.

Example 2. A recently issued statute provides that all manufacturers of widgets are subject to a new tax requirement. This requirement, as worded, is adverse to the taxpayer. The committee report clearly indicates the statute was not intended to apply to the taxpayer. Thus, there is a conflict between the statute and the committee reports.

A position consistent with either the statute or with a committee report satisfies the realistic possibility of success standard. Nonetheless, since the position constitutes a disregard of a rule or regulation, it must be disclosed.

In this situation, failure to provide adequate disclosure will subject a preparer to the provisions of IRC Sec. 6694(b) that provides a $1,000 penalty for willful or reckless conduct. Additionally, noncompliant conduct deemed to be willful or reckless can subject preparers to disciplinary procedures under IRS Circular 230.

Under the above scenario, both preparer and taxpayer are required to provide disclosure. More liberal rules [Reg. Sec. 1. 6662-3(b)(2)] apply to the taxpayer if the position is contrary to a revenue ruling or notice, rather than provisions of the IRC or regulations. Under such circumstance, the taxpayer would not be required to provide separate disclosure of the position. This exception does not apply, however, to the tax preparer. If the undisclosed tax position was disallowed, the tax preparer could, theoretically, be held subject to penalty.

Advice Provided by Nonsigning Practitioners. Practitioners who provide advice but do not actually sign the return are also subject to the provisions of IRC Sec. 6694. Nonsigning preparers must adequately advise their clients who are contemplating claiming positions that do not meet the realistic possibility of success standard. Specifically, the taxpayer must be advised of the penalties that may apply under the substantial underpayment of tax provisions [IRC Sec. 6662(d)] for claiming a position that lacks "substantial authority." Substantial authority is the next higher tax reporting threshold above the realistic possibility of success standard. The taxpayer must also be advised as to how such penalties may be avoided through appropriate disclosure.

Advice to the taxpayer regarding the penalties need not be in writing. Further, if the advice regarding the penalties is in writing, the disclosure advice need not be in writing. The IRS determination as to whether appropriate oral advice was given is based on facts and circumstances. Contemporaneously prepared documentation of the oral advice will generally provide sufficient evidence to protect the adviser from penalties.

Taxpayers claiming tax shelter positions do not have the option of providing disclosure to avoid penalties. The taxpayer in this situation should also be advised that disclosure will not be a viable alternative for penalty avoidance.

Example 3. Coleman CPA, advises but does not prepare the return for his client, Taylor. Coleman has a discussion with Taylor, who is contemplating claiming a medical deduction for a position Coleman believes would meet the threshold for the reasonable basis standard, but not the realistic possibility of success standard.

Coleman must advise Taylor the position lacks "substantial authority," and that he may be subject to a penalty for substantial underpayment of tax unless it is adequately disclosed. Coleman should contemporaneously record his oral advice as a means of documenting that he fulfilled his responsibilities.

Even though the client may be subject to a penalty for claiming a position that lacks substantial authority, the advisor will be held subject to penalty for failure to advise the taxpayer only in cases where the position fails to at least meet the realistic possibility of success standard. The practitioner in this case is held to a lower standard than the client. While an advisor may be provided some slack in this scenario under IRC Sec. 6694, similar slack is not provided under the provisions of IRS Circular 230. As a practical matter, advisors should inform their clients as to the risks of penalties in all cases where they may be applicable.

The regulations do not address whether a preparer is excused from providing notification to taxpayers in cases where disallowance for positions lacking substantial authority would not result in a substantial underpayment of tax. Theoretically, it would seem possible for a preparer to be assessed penalties for nonnotification in such situations. Therefore, in all cases where nondisclosed positions do not have substantial authority, nonsigning preparers should advise clients as to the "substantial underpayment of tax" provisions and to explain what amount of disallowance would lead to a definition of a substantial underpayment of tax.

IRS Circular 230

IRS Circular 230 contains rules governing practice before the IRS. Amendments to the circular were adopted and made effective, June 20, 1994, to more closely reflect standards that apply to tax preparers under IRC Sec. 6694. Only violations deemed willful, reckless, or resulting from gross incompetence will subject a preparer to suspension or disbarment from practice before the IRS. There is no express reasonable cause and good faith exception, according to the IRS, because actions that are willful, reckless, or grossly incompetent are incompatible with reasonable cause and good faith.

The basic requirement for a signing tax preparer is now the same under both the circular and IRC Sec. 6694. A tax preparer may not sign a return unless its positions either meet the realistic possibility standard or are nonfrivolous and adequately disclosed. The amended circular has also adopted the quantitative threshold (i.e., probability of one in three or greater) for the realistic possibility standard.

Responsibilities under Circular 230 for advising taxpayers, irrespective of whether the advisor signs the return, are somewhat broader than those provided under IRC Sec. 6694. Under the amended circular, advisors are now required to inform their clients of any penalties likely to apply and any appropriate means for their avoidance (e.g., disclosure). Apparently, advisors must now be specific in advising taxpayers of potential penalties and the means for their avoidance. Taxpayers must be provided with this information even if disallowance would not otherwise result in a tax preparer penalty. This notification, however, is not required to be in writing.

Example 4. Assume the situation is the same as in Example 1, except the tax position, if disallowed, would result in a "substantial underpayment of tax."

The taxpayer, presumably, must now be advised that he could be subject to a 20% fine for a substantial underpayment of tax [discussed below in "Accuracy Related Penalties­Substantial Underpayment of Tax"] unless there is adequate disclosure of the tax position.

Under the scenario in the above example, the tax preparer may now be in a better position vis-a-vis the taxpayer than she was in Example 1. Under the first example there is a higher probability of tension between the preparer and the taxpayer because only one party, the preparer, benefits from disclosure. In Example 4, tension may be reduced because both parties gain from disclosure. Nonetheless, as a practical matter, the client may still be less inclined to disclose than the preparer, especially if he believes disclosure would lead to an increased probability of audit.

Taxpayer Accuracy Related Penalties

The primary penalties of which tax preparers may need to advise taxpaying clients are those referred to as the "accuracy-related" penalties. A 20% penalty may be applied if any portion of a taxpayer's understatement of tax shown is‹

* attributable to negligence [IRC Sec. 6662(c)], or

* attributable to careless, reckless, or intentional disregard of rules or regulations [also IRC Sec. 6662(c)], or

* results in a "substantial underpayment of tax" [IRC Sec. 6662(d)].

Reasonable Basis Standard. The penalty provisions applicable to taxpayers for negligence or disregard of rules or regulations were amended as part of the Omnibus Budget Reconciliation Act of 1993 [OBRA '93] to require all taxpayer positions meet, at the very least, a reasonable basis standard. Of course in many situations, the required minimal threshold is higher than reasonable basis (e.g., substantial authority or realistic possibly of success).

The term reasonable basis can be defined currently by reference to Reg. Sec. 1.6662-7T and the legislative history of OBRA '93. Reg. Sec. 1.6662-7T(d)(2), adopted in corrected form March 29, 1994, states that the reasonable basis standard is significantly higher than the not frivolous standard. The legislative history indicates that the reasonable basis standard is not satisfied by a merely arguable or colorable claim. This interpretation apparently supersedes Reg. Sec. 1.6662-4(d)(2), enacted prior to OBRA '93, which states "a return position that is arguable but fairly unlikely to prevail in court, satisfies the reasonable basis standard." Although a more detailed definition is not currently contained within the regulations, the Treasury Department apparently does intend to provide one at some future date. It has reserved Reg. Sec. 1.6662-7T(d)(1) as the location for a general definition of reasonable basis.

Taxpayers may still be able to avoid accuracy-related penalties for disallowed positions found to lack reasonable basis where it can be shown claims were made in good faith and with reasonable cause. According to proposed Reg. Sec. 1.6664-4, issued January 4, 1995, such a determination is to be made on a case-by-case basis, taking into account all facts and circumstances.

Negligence. Reg. Sec. 1.6662-7T provides that the penalty for negligence may not be avoided by providing disclosure. Under previous law, taxpayers could follow the general standard applicable to tax preparers, which in most cases precludes the imposition of penalties in cases where there is adequate disclosure of a non-frivolous position.

Taxpayer Disregard of Rules or Regulations. The accuracy-related penalty may apply where taxpayers are deemed to be carelessly, recklessly, or intentionally disregarding rules or regulations. A taxpayer is considered to be "carelessly" disregarding rules or regulations if he or she does not exercise reasonable diligence in evaluating the correctness of a position that is contrary to a rule or regulation. Where there is even less care or diligence, a taxpayer may be deemed to be recklessly disregarding the rules or regulations. In either case and/or in situations where there is an intentional disregard of the rules or regulations, taxpayers are subject to the accuracy-related penalty for underpayment of tax.

Rules and regulations are defined [Reg. Sec. 1.6662-3(b)(2)] as including IRC provisions, temporary or final IRS regulations, and revenue rulings or notices issued by the IRS and published in the Internal Revenue Bulletin. Not included within this group are notices of proposed rulemaking.

Despite seemingly onerous regulations, taxpayers may, in some cases, make good faith challenges to rules or regulations without being subject to the accuracy-related penalties. Taxpayers who choose to challenge an existing rule or regulation may do so without being deemed to be disregarding rules or regulations, provided the claimed position meets all of the following requirements:

* The challenge to the existing regulation is made in good faith;

* The position meets reasonable basis standard; and

* The position is disclosed on Form 8275-R (for positions contrary to an IRC provision and/or regulations).

Importantly, a taxpayer also has the opportunity to claim positions that are contrary to revenue rulings and/or notices, without disclosure, provided they meet the realistic possibility of success standard. Thus, as discussed previously, the position claimed in Example 2 would not have required taxpayer disclosure had it been contrary to a revenue ruling or notice, rather than the IRC.

Substantial Underpayment of Tax

Taxpayers, in general, are subject to the accuracy-related penalties where claimed positions are disallowed, no exceptions are met, and an underpayment of tax results that is the greater of‹

* 10% of the tax required to be shown on the return, or

* $5,000 [$10,000 for corporations].

Disallowed positions will not be deemed subject to the substantial underpayment-of-taxes penalties if any of the following exceptions are met:

* Substantial authority exists for claiming the position,

* There is a reasonable basis for the deduction and the position is adequately disclosed, or

* There is reasonable cause for the position and the taxpayer acted in good faith.

Tax preparers, when advising their clients of potential disallowance and penalty risks, may need to evaluate ramifications of the $5,000 or 10% threshold.

Example 5. Taxpayer Madison is considering claiming two deductions on his return that potentially could be disallowed by the IRS on audit. One deduction for medical care would yield a tax savings of $4,700. The other, an unreimbursed employee expense would yield a tax savings of $400. No other items on the tax return are believed to be subject to disallowance.

Madison's CPA, Hathaway, is extremely confident both deductions meet the reasonable basis standard. He is also reasonably confident each deduction would be deemed to meet the realistic possibility of success standard. He is somewhat less confident, however, that each deduction meets the substantial authority standard.

Hathaway, CPA, should advise Madison that exposure to the substantial underpayment of tax penalty could be virtually eliminated by providing disclosure for the $400 tax deduction.

This example also illustrates the potential for shifting responsibilities back and forth between the tax preparer and taxpayer.

Assume neither item is disclosed and both are disallowed. Results: If minimum threshold met is‹

* substantial authority‹neither party is potentially subject to penalty.

* realistic possibility of success‹only the taxpayer is potentially subject to penalty [both items].

* reasonable basis‹both the taxpayer and tax preparer are each potentially subject to penalty [both items].

Assume one item is disclosed and both are disallowed. Results: If minimum threshold met is‹

* substantial authority‹neither party is potentially subject to penalty.

* realistic possibility of success‹neither party is potentially subject to penalty [undisclosed item only].

* reasonable basis‹only the tax preparer is potentially subject to penalty [undisclosed item only].

Note again the potential for conflict between tax preparer and taxpayer. If the threshold met is deemed to be less than the realistic possibility of success, the preparer could be potentially subject to penalty for each deduction disallowed. However, under such circumstances, the taxpayer has no incentive to disclose the second item, since disallowance would not result in a substantial understatement of tax. Neither would the taxpayer have any incentive to disclose under the taxpayer-negligence provisions. As discussed in the previous section, disclosure may not be used as a means of precluding imposition of penalties under the negligence provisions.

AICPA Statements on Responsibilities in Tax Practice

The AICPA's SRTP are currently advisory in nature and do not constitute enforceable standards under the AICPA's Code of Professional Conduct. [However, the AICPA Tax Division has a project currently to make the SRTPs enforceable technical standards.] These standards, in general, are more restrictive than those established by the IRS and the Treasury Department. Although specific statements and interpretations are not enforceable under the IRC, AICPA members are required to comply with the broader requirement that they perform their duties with integrity and not perform acts that are "discreditable to the profession."

STRP Interpretation No. 1-1 provides, similar to the provisions of IRC Sec. 6694 and Circular 230, that a tax position must either meet at least a reasonable possibility of success standard or be not frivolous and adequately disclosed. One distinguishing characteristic of this interpretation is that it holds that the standard "cannot [emphasis added] be stated in terms of percentage odds." The standard is characterized as being more stringent than that applicable for "reasonable basis," but less stringent than that used for "substantial authority."

Outlook

The current patchwork of standards has created a complex system that provides different and often conflicting incentives for tax preparer and taxpayer reporting. A major consequence of this system is that preparers and advisors can now be expected to frequently face difficult issues of professional ethics and judgment, especially with respect to information disclosure.

Decision judgments may become increasingly difficult because of the high level of ambiguity surrounding the newest standard of taxpayer reporting, the realistic possibility of success. Preparers will often be unable to conclusively determine whether a particular item meets the quantitative threshold.

Presently, there is no acceptable baseline rule of reporting whereby preparers can easily comply with their duties to both the government and taxpayers (e.g., extreme conservatism may be compatible with duties to the government, but not to the taxpayer, who must bear the cost of an audit). The outlook, therefore, is that preparers will have to continue to work with these standards on a case-by-case basis and draw upon their professional judgment, at least until more uniform standards of reporting are adopted.

Exhibit A contains a summary of the standards and Exhibit B is a comparison of those standards where client conflicts may arise. *

Seth Hammer, PhD, CPA, is with Towson State University and is a member of Tax Accounting Problems Committee of the NYSSCPAs.

Standard Explanation Authority

Not frivolous Position not patently Reg. Sec. 1.6662-3
improper.

Reasonable basis Significantly higher than Reg. 1.6662-7T
not frivolous. Not satisfied Legislative history of

by a merely arguable or OBRA
colorable claim.

Realistic possibility Approximately a one-in-three Reg. Sec. 1.6694-2(b)
of success or greater likelihood of

being sustained on its merits

Substantial authority More stringent than realistic Reg. Sec. 1.6662-4(d)(2)
possibility of success but less
stringent than more likely
than not

More likely than not Greater than 50% likelihood Reg. Sec. 1.6662-4(d)(2)
position would be upheld

Realistic Possibility Reasonable Not

of Success Basis Frivolous

Not Not Not

Disclosed Disclosed Disclosed Disclosed Disclosed Disclosed

Substantial Underpayment of Tax OK OK OK PENALTY OK PENALTY

Tax Preparer OK PENALTY (1) OK PENALTY PENALTY PENALTY

Taxpayer tax preparer

standard is lower

No Substantial Underpayment of Tax OK OK OK PENALTY OK PENALTY

Tax Preparer OK (2) OK OK OK (3) PENALTY PENALTY

Taxpayer tax preparer standard is higher

1. Penalty is not assessed if there is substantial authority for the position; preparer must advise client as to potential risk
and how it may be avoided through disclosure.

2. Neither preparer nor taxpayer would benefit from disclosure.

3. Taxpayer, by disclosing, assumes increased audit risk without an offsetting benefit. Only the preparer benefits from
disclosure in this situation.

PARTIES SUBJECT TO TAX PENALTIES

FINAL REGS ON REASONABLE BASIS
AND REASONABLE CAUSE

By James A. Woehlke

The 1993 Omnibus Budget Reconciliation Act changed the accuracy related penalties by removing a disclosure exception for the negligence penalty. In addition, the act raised the confidence level from "not frivolous" to "reasonable basis" for the disclosure exception to apply for the penalties for disregard of rule or regulations, substantial understatements of income tax. Changes made in 1989 include the absolute defense for taxpayers who acted with "reasonable cause in good faith" for these penalties.

On August 31, 1995 the IRS and the Department of the Treasury issued final regulations defining "reasonable basis" and "reasonable cause." Also, the regulations cover changes made by the GATT act that remove the "more likely than not" exception from the substantial understatement penalty for corporations owning tax shelters.

The regulations' guidance on "reasonable basis" is both elegant in its simplicity and useless for its comprehension. Space is "reserved" for a real definition. The regulations merely identify the location of "reasonable basis" relative to one other confidence level. Here's the guidance: "The reasonable basis standard is significantly higher than the not frivolous standard applicable to preparers under Sec. 6694 and defined in [Reg. Sec.] 1.6694-2(c)(2)." The government had requested and received suggestions for a real definition of "reasonable basis" but declined to accept any of the suggestions at this time. In the meantime, taxpayers and the courts are left the opportunity to fashion their own definition.

The elaboration of "reasonable cause" is helpful. After stating that "reasonable cause and good faith" must be a case-by-case determination, based on all the pertinent facts, the regulations mention some of the pertinent facts. As an overall consideration, "the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability." An honest, reasonable misunderstanding of the law in light of the taxpayer's experience, knowledge, and education will not preclude the existence of reasonable cause and good faith.

Isolated errors won't preclude it either. But reliance on a paid tax return preparer or on data contained on an information return provided by someone else will not guarantee the existence of reasonable cause and good faith. Reliance on W-2's or 1099 forms will be deemed to be reasonable cause unless other information from the party providing the information would lead the taxpayer to question the W-2 or 1099.

Information provided by a subsidiary or division used in a corporate return can result in reasonable cause and good faith if there are adequate internal controls reasonable to the circumstances. A mere appraisal will not indicate reasonable cause and good faith, but an independent appraisal based on reasonable assumptions and using appropriate methodology will.

The regulations provide minimal requirements for, but not definitive guidance on, reliance on advice of others, including paid tax professionals. No reasonable cause or good faith exists if the taxpayer knew, or should have known, that the tax professional lacked knowledge of the relevant area of the tax law. This provision is undoubtedly intended to discourage savvy taxpayers from shopping for ignorant tax advisors. To be effective, the tax advice must be based on all the relevant facts. The provision will not apply if the taxpayer withholds information from the tax advisor. A curious requirement in this regard is that the advice must "take into account the taxpayer's purposes...for entering into a transaction and for structuring a transaction in a particular manner." The advice cannot be based on unreasonable factual or legal assumptions. *

Source: T.D. 8617, Fed. Reg. ___, (Sept. 1, 1995), promulgating regulations under IRC Secs. 6662 and 6664.

JANUARY 1996 / THE CPA JOURNAL