SSTS No. 1: Standards for Recommending Tax Positions

The Statements on Standards for Tax Services (SSTS) are the enforceable ethical standards for members of the American Institute of Certified Public Accountants (AICPA). These standards, often incorporated by state boards of accountancy, govern a member’s professional conduct across all taxing jurisdictions, not just with the Internal Revenue Service (IRS). The SSTS guide tax professionals in balancing their duty as a client advocate with their obligation to uphold the integrity of the tax system. As of a 2024 revision, the standards for recommending tax return positions are located in SSTS No. 2, “Standards for Members Providing Tax Compliance Services, Including Tax Return Positions.”

Defining a Tax Return Position

A tax return position is any stance a tax professional advises a taxpayer to take on a return that the preparer knows, or should know, could be challenged by a taxing authority. This definition is broad, encompassing not just numbers on a form but the underlying decisions that produce them. It applies to any item affecting the computation of tax, including the inclusion or exclusion of income, claiming deductions and credits, and the characterization of transactions.

For instance, advising a client to claim a home office deduction is a tax position, as it relies on interpreting strict statutory requirements. Another common example is classifying a worker as an independent contractor rather than an employee, a decision based on a complex analysis of factors that a taxing authority could dispute. Other positions include treating a property sale gain as a long-term capital gain or determining an activity qualifies as passive, thereby limiting loss deductions.

The Substantial Authority Standard

The primary benchmark for recommending an undisclosed tax position is the substantial authority standard. This is an objective test requiring the weight of authorities supporting a position to be substantial when compared to the weight of authorities opposing it. This standard is more stringent than “reasonable basis” but less so than the “more likely than not” standard, which requires a greater than 50% likelihood of success. While not a formal rule, substantial authority is often associated with having at least a 40% chance of being sustained on its merits.

To evaluate whether a position meets this standard, a tax professional must analyze the relevant authorities. The Internal Revenue Code itself is the highest authority, followed by official interpretations like Treasury Regulations. Other primary sources include federal court cases, IRS Revenue Rulings, and Revenue Procedures. These documents provide insight into how the IRS officially interprets and applies the law to specific factual situations.

Certain sources carry less weight but can still be considered. For example, Private Letter Rulings (PLRs), which are issued by the IRS to a specific taxpayer, can provide insight but are not binding on other taxpayers. Technical Advice Memoranda (TAMs) also fall into this category. Conversely, materials like legal opinions, articles in tax journals, and treatises are viewed as commentary and are not considered authority.

The analysis involves assessing the persuasiveness and relevance of each authority, not just counting sources. A recent Supreme Court decision, for example, would carry far more weight than an older, lower court case with slightly different facts. The evaluation must be impartial and based solely on the legal merits, without considering the possibility that the return might not be audited.

The Reasonable Basis Standard and Required Disclosure

When a tax position does not meet the substantial authority standard, it may still be recommended if it has a reasonable basis. This standard is significantly higher than one that is merely not frivolous or patently improper. To have a reasonable basis, the position must be arguable and based on one or more of the same types of authorities that apply to the substantial authority standard, and is often considered to have a 20% or greater chance of success.

A position that only meets the reasonable basis standard requires adequate disclosure to the taxing authority. This transparency alerts the agency to the position and can help the taxpayer avoid certain accuracy-related penalties if the position is disallowed. The tax professional must advise the client of this disclosure requirement and the potential penalties for non-compliance.

The primary mechanism for this disclosure at the federal level is Form 8275, Disclosure Statement, which is attached to the tax return. The form requires a detailed description of the position and the legal basis for it, including citations to any statutes, regulations, or court cases that support it. In situations where a position is contrary to a specific Treasury Regulation, Form 8275-R, Regulation Disclosure Statement, must be used instead.

Documentation and Penalty Considerations

A tax professional’s responsibilities include documenting the analysis that supports a recommended tax position. The workpapers should contain the relevant facts, the specific authorities relied upon, and the reasoning behind the conclusion that the applicable standard was met. This contemporaneous record is valuable if a position is later challenged by a taxing authority.

Failure to adhere to these standards can lead to preparer penalties under Internal Revenue Code Section 6694. The penalty for an understatement due to an unreasonable position is the greater of $1,000 or 50% of the income the preparer received for preparing the return. An unreasonable position is defined as one that lacks substantial authority and was not disclosed, or one that was disclosed but lacked a reasonable basis.

These preparer penalties align closely with the taxpayer accuracy-related penalties under Internal Revenue Code Section 6662. By following the SSTS framework, a tax professional not only meets their ethical obligations but also helps protect the taxpayer from potential penalties. If a preparer can demonstrate that there was reasonable cause for an understatement and they acted in good faith, the penalty may be waived.

For more severe conduct, the penalties increase significantly. If an understatement is due to a preparer’s willful or reckless conduct, the penalty under IRC Section 6694 jumps to the greater of $5,000 or 75% of the preparer’s fee. This underscores the importance of the objective, authority-based analysis required by the SSTS, reinforcing the preparer’s dual role as a client advocate and a steward of the tax system.