Discussion:AICPA question

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Bfm321 (talk|edits) said:

24 January 2007
I have been asked to sign a return with a tax position of 15% being accepted by the IRS if the return were audited. It is not a careless mistake, but taking solely into account the AICPA statement on standard for tax services, would this be permissible?

PGattoCPA (talk|edits) said:

24 January 2007
What does "a tax position of 15% being accepted by the IRS if the return were audited" mean?

1) Do you mean the position only has a 15% liklihood of being sustained?

2) What do you mean you are being asked to sign? Did you prepare the T/R and the client is demanding that the 15% position be taken?

Need cleaer facts and circumstances.

Bfm321 (talk|edits) said:

24 January 2007
15% liklihood of being sustained, and my client asked me to sign a return and willing to take the chance because it is "unlikely to be audited.

PJLCPA (talk|edits) said:

24 January 2007
Sorry, I still don't know what you are talking about....Is this a return that you prepared? And if so, read the statement for preparers at the bottom before you sign.

PGattoCPA (talk|edits) said:

24 January 2007
Run, don't walk, from this client if you cannot convince him or her to withdraw the request. That % is so low, and the reason given (basically audit roulette), as to teeter on negligence and frivolousness.

The lowest % considered to be a "return position" that I hear is 33 1/3%.

This link (http://www.irs.gov/pub/irs-pdf/i8275.pdf) is to Form 8275, Disclosure Statement. The client obviously does not want you to file this, but it may be good reading for you.

You are opening yourself up to paid preparer penalties.

EDIT: It sounds like the 15% is the audit roulette portion of the position and that if it is audited, the position will not be sustained.

Bfm321 (talk|edits) said:

24 January 2007
I have prepared my clients return, and it includes a tax position in my judgement is not careless but would have a 15% chance of being accepted by the IRS if the return were audited. my client says it is unlikely to be audited and is willing to play audit roulette. are there circumstances where signing the return would be permissable solely under the AICPA statement on standards for tax services?

JR1 (talk|edits) said:

January 24, 2007
Playing audit roulette by definition means that for most taxpayers, they have a 99% chance of winning and for high income, 98% chance. So the roulette part shouldn't enter into the chance of success. The issue is, if audited, can you/will you win? And how do you compute 15% anyway...?

Kevinh5 (talk|edits) said:

24 January 2007
I don't know what the AICPA says, but PGattoCPA is correct, you need to file Form 8275 or (8275-R if you are taking a position contrary to a Regulation) to meet the disclosure requirements to avoid preparer penalties and some of the taxpayer penalties. I would make sure the client understood that that form was required, and my fee for that form is HIGH.

Kevinh5 (talk|edits) said:

24 January 2007
PS, please fill out your profile.

PJLCPA (talk|edits) said:

24 January 2007
I don't know where these audit %'s come from......When I sign a return I think that it has a 100% chance of being accepted by the IRS if the return was audited, otherwise I wouldn't sign it. Even if I am taking a "aggressive" stance, and disclosing it, I still feel that it will pass audit, or I won't sign.

PJLCPA (talk|edits) said:

24 January 2007
What do you say to IRS auditor when he/she says why did you file this return with a 85% of not being accepted, and you knew that when you filed it?......"Just kidding".....I don't think that that will work.

Death&Taxes (talk|edits) said:

24 January 2007
It's beginning to look a lot like April. What is going on here? Circular 230 10.34 defines one third as a realistic possibility, but in this case it doesn't sound like you are advising him, but rather he is advising you what to do. Your client is telling you he knows more about the IRS than you, the professional, but it is you that will be dragged down by his knowledge of IRS audits, not just him. Tax preparation is not a macho contest to see who can pee highest on the wall; sometimes we have to save our clients from themselves. I am not being holy; I think a one-third chance is doing the client a disservice, but if I think I understand a good position and can defend it, and my client knows the worst that can happen, and all the other possibilities, I will prepare to the best of my beliefs, but this.....


In earlier discussion today, I saw this: "The rules are you explain them are correct. However, the use of 100% owned businesses paying rent (deductibly), and then that employee taking rental expenses (depreciation, real estate tax, mortgage interest, utilities, cleaning and maintainence, etc.) is so widespread, it's almost never challenged." Everyone's doing it, huh.

Kevinh5 (talk|edits) said:

24 January 2007
I think the 1 in 3 rule is applied at the tax court level, and not at the IRS audit level anyway. Lots of stuff doesn't fly in an audit, but passes the tax court.

PGattoCPA (talk|edits) said:

25 January 2007
I wasn't clear in my earlier post. The 1 in 3 will generally keep you out of paid preparer penalties becasue you had a return position. Of course, the Service can always assess the penalty and then the preparer has to fight.

I think most preparers don't want to go down that road, which is what D&T is saying and I whole-heartedly agree.

D&T's last paragraph is also true and TA threads are no exception. There have been more than a few discussions where preparers argue a point, but never give the technical support. Finally they admit their support is that none of the returns have been audited.

I'm not saying you cannot take pragmatic approaches, but to get back on point to this thread, 15% is not pragmatic, the client is trying to be the preparer (and guess who he'll hide behind and pointing a finger at if it is audited).

I also have to respectfully disagree with the characterization of the OP, Bfm321, when s/he states, "I have prepared my clients return, and it includes a tax position in my judgement is not careless but would have a 15% chance of being accepted by the IRS if the return were audited."

There is not a supportable tax position out there that has only a 15% chance of being sustained if the IRS audited it. (And as others have asked, how does one come up with 15%?) 15% may be a guess at how much of the deduction you could keep once you got to appeals or could talk the auditor into somehow accepting. The research may have been meticulous and, therefore, not careless becasue Bfm321 realizes there is only a 15% chance the position will be sustained. However, the conclusion that somehow that translates into being able to sign the T/R I believe is wrong.

That being said, Bfm321 did post the question and began a discussion and that is all good.

Uncle Sam (talk|edits) said:

25 January 2007
Regardless of what % it is - if a client wants you to commit to preparing return YOU KNOW is wrong - it's against your professional ethics to even be involved with that client.

I had a new client just today, not agreeing with what I discussed, wanted me to prepare the return her way without me signing the return as preparer. I very frankly told her - come, pick up your stuff, pay me for consultation - have someone else prepare your return. It's not worth the risk.

Actionbsns (talk|edits) said:

25 January 2007
I learn something new everyday from this board and this one is really new. If I understand what I've read here and the instructions for form 8275, some people are actually preparing returns that fly against the rules and the form provides a source for preparers to explain why they did that. My question, then, would be, why do it at all? I'm always really concerned that what I do is correct, I'd rather do a little more research and be sure I'm taking the right steps than to be concerned if it will fly in an audit. Am I missing something? Are there ever good reasons for doing this?

PGattoCPA (talk|edits) said:

25 January 2007
Quick example: Let's say the IRS loses a case in the Ninth Circuit wherein the court ruled that a particular regulation is not valid. The Service refuses to acquiesce because they want to go to the Supreme Court or it's only one Circuit and the issue has not been addressed in other Circuits yet, etc.

Your client has virtually the same fact pattern, but does not live in the Ninth Circuit. If the reg is valid, client has $100,000 of income. If the reg is invalid, client has $0 of income.

You perform your research and find the above case was recently decided. You read the opinion and find no obvious holes in the reasoning. (Wouldn't be the first time for the Ninth Circuit.) You citate it and find that nothing new has occurred that would tell a reasonable preparer that the Circuit Court decision is going to be over-turned. The commentaries on the opinion all say that the Court "got it right".

You inform the client of the risks involved and the client gives you the go ahead to take the position. You tell her that you need to file Form 8275-R to disclose the fact that the position has been taken. Client agrees and signs the letter you have prepared in advance wherein she acknolwedges all of the above.

You have fulfilled both your responsibility to your professsion as well as to your client.

Death&Taxes (talk|edits) said:

25 January 2007
This may not be quite the same, but for years the Circuits were split on where to deduct legal fees on settlements. In this case the Supremes finally ruled Schedule A, but until then there was wiggle room. I am 3rd Circuit; a client won a civil judgment, similar to that awarded in the OJ Case, before the Supremes made their ruling. The prestigious big city law firm told him to show the yearly payments net on Line 21, and to write something like "Legal Settlement-Net." In their cover letter they explained the whys and wherefores, that the issue had not been settled. He asked me and I told him I thought it was a loser, but we went along because his siblings were doing likewise. After the SC settled the matter, the law firm changed tack and said to use report it gross. We also amended open years to reflect this, but this on our discretion, not on the advice of the firm.


On a slightly different tack, this year Congress finally realized the problem with AMT credits and ISOs, how a evening up method first put into law in 1987 was simply not working, but part of the reason were court cases where taxpayers attempted other methods of computing AMT NOLs and where the courts could not overrule what Congress had originally put in the law.


There is a line in Rattigan's 'The Winslow Boy:' "Easy to do justice. Very hard to do right." and that sometimes sums up the course of tax interpretation.

Actionbsns (talk|edits) said:

27 January 2007
So the bottom line is that if you are going to do this, there is going to be a pretty good reason out there. It's not really flying against the rules, the examples above seem to have a very real basis in fact. Thanks for the help.

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