SEE-3 - Representation before the IRS (29% of the exam) - Section 2.3

Identify and weight sources of tax authority - the Code, regulations, rulings, and case law - and apply the substantial authority and reasonable basis standards to support a position.

Rank the sources of federal tax authority from the Internal Revenue Code and Treasury Regulations through revenue rulings, revenue procedures, and case law, distinguishing primary authority from secondary sources such as IRS publications. Apply the disclosure-and-penalty standards a position must meet - more likely than not, substantial authority, and reasonable basis with adequate disclosure on Form 8275 - to avoid accuracy-related and preparer penalties.

Sources of tax authoritySubstantial authorityReasonable basisForm 8275Revenue ruling

Practice question for this objective

Free sampleRepresentation before the IRShard

Enrolled agent Marguerite Lefebvre is advising her client, Anselm Boateng, about a large deduction that would cause a substantial understatement of income tax if disallowed. Marguerite judges the position has a reasonable basis but not substantial authority, the position is not contrary to a regulation, and it is not a tax shelter. Anselm wants to avoid the accuracy-related penalty on his own return. Under Section 6662, how can the substantial understatement penalty be avoided for this position?

ABy adequately disclosing the position on Form 8275 and ensuring it has a reasonable basis, because disclosure plus reasonable basis defeats the substantial understatement penalty for a non-shelter item. Correct
BBy treating the deduction as automatically protected, because Section 6662 never applies to a position that the taxpayer's preparer has reviewed and signed.
CBy having the taxpayer obtain a private letter ruling confirming the deduction, because only an advance ruling shields a reasonable-basis position from the substantial understatement penalty.
DBy showing the position meets substantial authority, because the substantial understatement penalty can be avoided only by substantial authority and disclosure gives a reasonable-basis item no relief.

Under Section 6662, a non-shelter item escapes the substantial understatement penalty either with substantial authority or with adequate disclosure on Form 8275 plus a reasonable basis. Section 6662 imposes the accuracy-related penalty for a substantial understatement, but the understatement is reduced for any non-shelter item if there is substantial authority or if the relevant facts are adequately disclosed on Form 8275 and the position has a reasonable basis; because Anselm's deduction has a reasonable basis but not substantial authority, disclosure on Form 8275 with that reasonable basis is the route to relief, and neither preparer review nor a private letter ruling is the operative protection.

Why A is correct: Under Section 6662 the substantial understatement penalty does not apply to a non-shelter item if the position is adequately disclosed and has a reasonable basis; since Marguerite has reasonable basis, disclosing the position on Form 8275 satisfies both requirements and protects Anselm.

Why B is wrong: It is comforting to think preparer review removes the penalty, but Section 6662 turns on the strength and disclosure of the position, not on the fact that a preparer signed the return.

Why C is wrong: A ruling sounds like solid protection, but Section 6662 provides a disclosure route to relief; an expensive advance ruling is not required to protect a reasonable-basis, non-shelter position from the substantial understatement penalty.

Why D is wrong: Substantial authority is one route to relief, which makes this tempting, but disclosure of a reasonable-basis non-shelter position is a separate route under Section 6662, so the item is not left unprotected merely because it falls short of substantial authority.

See more SEE-3 practice questions, answers explained.

Exam traps in Representation before the IRS

Answers that look right on this material and are not. Each one is a distractor from a different question in the SEE-3 bank for this domain.

An Internal Revenue Service publication carries the same binding weight as a Treasury Regulation, because both are issued by the Service to interpret the Internal Revenue Code for taxpayers.
Why it is wrong: Publications and regulations both come from the tax administration, which makes equal weight seem plausible, but a regulation has the force of law while a publication is only an informal secondary source, so treating them as equal is wrong.
Take the position without disclosure, because reasonable basis alone always satisfies the Section 6694 standard for a non-shelter position whether or not it is disclosed.
Why it is wrong: It is tempting to treat reasonable basis as enough on its own, but for an undisclosed non-shelter position Section 6694 demands substantial authority; reasonable basis suffices only once the position is adequately disclosed.
Disclosure on Form 8275 raises the required standard to more likely than not, because the act of flagging a position to the Service signals doubt and invites a higher level of scrutiny from examiners.
Why it is wrong: It is tempting to think disclosure attracts tougher treatment, but disclosure lowers rather than raises the required standard, so claiming it triggers a more likely than not threshold reverses the rule and is wrong.

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