Final answer:
To avoid a penalty, tax practitioners must believe a tax position has a realistic possibility of success and exercise due diligence. These standards ensure that recommendations are within legal and ethical boundaries, maintaining trust in the tax system.
Step-by-step explanation:
The tax practitioner's standards to avoid a penalty for recommending a tax return position require adherence to certain principles that ensure the advice given is within the boundaries of the law. In accordance with the Internal Revenue Code (IRC) and other relevant guidance, the practitioner must have a reasonable belief that the tax treatment of the position has a realistic possibility of being upheld upon an examination by the IRS, which generally equates to a greater than one in three chance of success if challenged. Due diligence must also be exercised with respect to the accuracy of representations and assumptions on which a tax position is based.
These standards are based on the expectation that tax systems should exhibit characteristics of being equitable, simple, and efficient. While the initial impetus might be to avoid a penalty, adherence to ethical guidelines serves a larger purpose of maintaining public confidence in the tax system. A tax practitioner should also be aware of and comply with the preparer penalty provisions under sections 6694(a) and 6694(b) of the IRC, which impose penalties for understatements due to unreasonable positions or willful/reckless conduct.