In order for an individual to take a tax position on a tax return and not be penalized if that position is subsequently overturned, the position must have what minimum level of confidence (i.e., what is the floor for a penalty-free position)?

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BlackTom AI · Accepted Answer

The question asks about the minimum level of confidence a taxpayer must have in a tax position to take it on a return without facing penalties if later challenged or overturned.
Option 1: Not Frivolous. While the IRS does consider frivolous positions improper, the floor for penalty-free positions is lower than many test materials suggest, and not Frivolous alone does not meet the standard described for a position that requires disclosure when appropriate.
Option 2: Substantial Authority. This is a higher standard than the penalty-free floor and is used in some contexts to avoid penalties, but it is not the baseline requirement for positions taken with disclosure to avoid penalties if later overturned.
Option 3: More Likely Than Not. This represents a higher burden of proof used in some positions, but it is not the minimum floor for penalty avoidance in the general rule about positions that may be overturned.
Option 4: Reasonable basis (with disclosure). This option aligns with the idea that a position can be taken if there is a reasonable basis, and disclosure can protect against penalties if the position is later found to be incorrect. The concept of reasonable basis provides a baseline confidence level that is not overly stringent, yet sufficient to avoid penalties when disclosed appropriately.
In evaluating these, you weigh the relative stringency of standards: frivolous versus substantial authority versus more likely than not, and finally the baseline of reasonable basis with disclosure. The question targets the floor level that preserves penalty avoidance at the minimal acceptable confidence, which corresponds to the notion of a reasonable basis with disclosure.
Therefore, the option describing the floor as a reasonable basis (with disclosure) is the one that fits the described penalty-free threshold, while the other options describe stricter standards or different contexts that are not the baseline floor referenced by the question.

accy_505_120258_250069 Module 2 Graded Quiz

In order for an individual to take a tax position on a tax return and not be penalized if that position is subsequently overturned, the position must have what minimum level of confidence (i.e., what is the floor for a penalty-free position)?

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