A tax return preparer is facing a penalty for an understatement of tax liability on a client's return. The understatement resulted from a position that did not have substantial authority but had a reasonable basis. The position was NOT disclosed on the return. Which of the following statements is correct regarding the preparer's liability under IRC §6694?

Under IRC §6694(a), a penalty is imposed for an understatement due to an unreasonable position. A position is unreasonable unless: (1) there is substantial authority for the position (if undisclosed), or (2) there is a reasonable basis for the position AND it is adequately disclosed (e.g., Form 8275). Since this position had only a reasonable basis and was NOT disclosed, it is considered unreasonable, and the penalty applies.