ExpertCPA · Question 02 · Area I: Ethics & Tax Procedures
A tax return preparer is engaged to prepare a return for a client who has engaged in a transaction that lacks economic substance but generates a substantial tax loss. The preparer determines there is no 'substantial authority' for the position, but there is a 'reasonable basis' for it. The client refuses to disclose the position on Form 8275. If the preparer signs the return, which penalty is the preparer MOST likely subject to?
A tax return preparer is engaged to prepare a return for a client who has engaged in a transaction that lacks economic substance but generates a substantial tax loss. The preparer determines there is no 'substantial authority' for the position, but there is a 'reasonable basis' for it. The client refuses to disclose the position on Form 8275. If the preparer signs the return, which penalty is the preparer MOST likely subject to?
Answer options:
Penalty for understatement due to an unreasonable position (IRC §6694(a)).
Penalty for willful or reckless conduct (IRC §6694(b)).
No penalty, because a reasonable basis exists.
Penalty for aiding and abetting understatement (IRC §6701).
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