Final answer:
A tax preparer can avoid penalties if the tax position taken has at least a reasonable basis and is disclosed on a return or filing. The reasonable basis standard implies a more than one in three chance of being upheld in court. Disclosure of the tax position is essential for this safeguard to apply.
Step-by-step explanation:
The tax preparer can avoid a penalty if the tax position has at least a reasonable basis, as long as it is disclosed on a tax return or a filing. To meet the reasonable basis standard, the position must have a greater than one in three chance of being upheld if challenged. This means the tax preparer must have a good-faith belief that the position has a reasonable chance of being correct based on the tax laws and existing precedents. Full disclosure is critical to taking advantage of this standard. If a tax position is only arguable and not fully grounded, disclosure on a tax return is essential to avoid penalties.