ExpertMedium1 markMultiple Choice
CPA · Question 02 · Area 1: Ethics & Procedures
A CPA is preparing a tax return for a client who wishes to take a position that the CPA believes has a 'reasonable basis' but does not meet the 'substantial authority' standard. To avoid a preparer penalty for an understatement of liability due to an unreasonable position, which of the following actions must the CPA take?
A CPA is preparing a tax return for a client who wishes to take a position that the CPA believes has a 'reasonable basis' but does not meet the 'substantial authority' standard. To avoid a preparer penalty for an understatement of liability due to an unreasonable position, which of the following actions must the CPA take?
Answer options:
A.
Ensure the position is more likely than not (>50%) to be sustained on its merits.
B.
Disclose the position on Form 8275.
C.
Obtain a written representation letter from the client accepting responsibility.
D.
The CPA cannot sign the return under any circumstances.
How to approach this question
Map the confidence levels: Frivolous (<20%) -> Reasonable Basis (~20%) -> Substantial Authority (~40%) -> More Likely Than Not (>50%). Know the requirements for each.
Full Answer
B.Disclose the position on Form 8275.✓ Correct
IRC §6694 imposes a penalty for understatements due to unreasonable positions. A position is unreasonable unless there is substantial authority OR there is a reasonable basis and the position is disclosed.
Common mistakes
Assuming 'reasonable basis' alone is enough without disclosure (it is not).
Practice the full CPA REG Practice Exam
72 questions · hints · full answers · grading
More questions from this exam
Q01Under Circular 230, which of the following scenarios represents a permissible contingent fee arra...HardQ03Regarding the retention of client records under Circular 230, which of the following statements i...HardQ04Under the Ultramares rule regarding accountant liability to third parties for negligence, which o...MediumQ05Taxpayer A filed their Year 1 tax return on April 15, Year 2. The return omitted ,000 of gross in...MediumQ06A taxpayer owes ,000 in taxes on a return filed 2 months late. They also paid the tax 2 months la...Hard