What does more likely than not mean on the CPA exam?
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More likely than not. A greater than 50 percent chance of being sustained on its merits. The highest of the return-position standards, and the one required for a tax shelter.
Defined against Sec. 6694(a)(2).
Worked example
A paid preparer charges a client $4,800 for a return that claims a loss from a listed transaction, an IRS-identified tax shelter. The preparer believes there is substantial authority for the position and attaches a full disclosure statement, but cannot reasonably conclude that the position has a better than even chance of surviving a challenge on its merits. The understatement is assessed, and nothing suggests reasonable cause or good faith.
Does the preparer owe the understatement penalty for an unreasonable position, and if so how much?
| For a tax shelter or reportable transaction, the preparer must reasonably believe the position has a better than even chance of being upheld. Substantial authority and disclosure do not lower that bar here. | |
| The preparer did not meet it, so the position counts as unreasonable and the penalty applies. | |
| Half the income derived from the return4,800 x 50% | 2,400 |
| Penalty: the greater of $1,000 or half the income derived | 2,400 |
Answer: Yes. The penalty is $2,400, half of the $4,800 fee, because that exceeds the $1,000 floor. On an ordinary position, substantial authority would have been enough to avoid it.
The trap: Applying the ordinary rules, under which substantial authority, or disclosure plus a reasonable basis, protects the preparer. More likely than not, a better-than-50% chance of being sustained, is the highest of the return standards and applies precisely to tax shelters.
Based on IRC Sec. 6694(a)(1); IRC Sec. 6694(a)(2)(C).
Which CPA exam sections use more likely than not?
More likely than not appears in the REG section of the CPA exam.
Related terms
- substantial authority: The standard between reasonable basis and more likely than not: roughly a 40 percent chance, judged on the weight of published authorities rather than on the preparer's confidence.
- reasonable basis: The lowest standard at which a return position may be taken without penalty if it is disclosed.
- deferred tax asset: A future tax saving created when an item is deducted for accounting before it is deducted for tax, or when a loss can be carried forward.
- valuation allowance: The contra account reducing a deferred tax asset to the portion more likely than not to be realized, meaning a likelihood above 50%.