Standards for tax returns and documents under section 10.34

• Apply the 10.34(a) position standards and their link to IRC 6694
• Explain the 10.34(c) duty to advise clients about penalties and disclosure
• Determine when 10.34(d) requires reasonable inquiries about client information
• Distinguish the return standard from the standard for other documents and affidavits

Positions on returns: 10.34(a)

Section 10.34(a)(1) says a practitioner may not willfully, recklessly, or through gross incompetence sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that:

• lacks a reasonable basis;
• is an unreasonable position as described in IRC 6694(a)(2) (including the related regulations and guidance); or
• is a willful attempt to understate tax, or a reckless or intentional disregard of rules or regulations, as described in IRC 6694(b)(2).

The same three limits apply when the practitioner advises a client to take a position, or prepares a portion of a return containing a position. Section 10.34(a)(2) adds that a pattern of conduct is a factor in deciding whether the practitioner acted willfully, recklessly or through gross incompetence.

The link to section 6694 is deliberate. Under 6694(a)(2), a position is unreasonable unless there is substantial authority for it. If the position was adequately disclosed, it is unreasonable unless there is a reasonable basis. For a tax shelter or a reportable transaction to which section 6662A applies, the position is unreasonable unless it is reasonable to believe it would more likely than not be sustained on its merits. So the conduct rule and the penalty rule use one ladder of standards.

Documents, affidavits and other papers: 10.34(b)

For documents other than returns, a practitioner may not advise a client to take a position unless it is not frivolous. A practitioner also may not advise a client to submit a document whose purpose is to delay or impede tax administration, that is frivolous, or that shows intentional disregard of a rule or regulation, unless the practitioner also advises submitting a document that evidences a good-faith challenge to the rule.

Advising about penalties: 10.34(c)

A practitioner must inform the client of any penalties reasonably likely to apply to the client for a position on a return the practitioner advised on, prepared or signed, and to any document submitted to the IRS. The practitioner must also tell the client about any opportunity to avoid the penalty by disclosure and what adequate disclosure requires. This duty applies even if the practitioner faces no penalty.

In practice this is a short written note in the file and to the client: "This position carries a risk of the accuracy-related penalty. Disclosure on Form 8275 would reduce that risk. You chose not to disclose."

Relying on the client: 10.34(d)

A practitioner generally may rely in good faith without verification on information the client furnishes. The practitioner may not ignore the implications of information furnished or actually known, and must make reasonable inquiries if the information appears incorrect, inconsistent with an important fact or another factual assumption, or incomplete.

Good inquiry practice:

• Compare the client's numbers to the prior year and to related items (wages to withholding, rental income to days rented).
• Ask open questions when a number looks wrong and write down the answer.
• Ask for the document when the answer leads to a deduction that requires substantiation.

You do not need to audit the client. You do need to notice what is in front of you. The uncertain tax positions standard is the financial reporting cousin of this analysis for entities that issue GAAP statements.

Home office claim: Quinn Design Studio