Time to change taxpayer standard for reporting on tax returns?

Congress recently adopted a more-likely-than-not standard for tax return preparers under Internal Revenue Code section 6694.  Various groups representing accountants and lawyers who advise about taxes have complained about that change. See, e.g., AICPA

Now Congress is considering whether to also raise the standard for taxpayer reporting.  The current standard for undisclosed positions is "substantial authority"--that is, taxpayers who do not specifically disclose an uncertain position are required to have substantial authority for the position taken on their return.  A position may have substantial authority even when it is not in accord with the predominant weight of authority. 

Congress is now considering whether to raise the taxpayer standard to the more-likely-than-not standard.  I have argued for this position because I think that it will counter the prevailing tax minimization norm that encourages taxpayers and tax advisers to take more and more aggressive positions on returns.  When standards for reporting are too low, it is easier for tax advisers and taxpayers to rely on hyperliteral interpretations to create tax-saving loopholes.  A more-likely-than-not standard, in contrast, should encourage structurally coherent interpretations of the tax laws. 

This spring, I spoke at a conference in Wisconsin as keynoter on a panel that included among others a national manager from a large accounting firm.  His response to my proposal for a more-likely-than-not standard was strongly negative: he argued that substantial authority was the appropriate standard, because it permits taxpayers to interpret statutes, where there is considerable uncertainty, to support their desired objective rather than the government's.  A more-likely-than-not standard implies that ties break in favor of the government.  That is the right result, I argued, because the taxpayer can always challenge the result through litigation.  The adversarial process is intended to bring out the relevant information and lead to an appropriate decision.  On the contrary, with a substantial authority standard that encourages more aggressive filing (sometimes based solely on the taxpayer's reasoned interpretation of a statute), the taxpayer has the advantage of the audit lottery and may never have to defend the aggressive interpretation.

The Tax Executives Institute has reacted quickly to the discussion of higher standards by sending a letter to the Senate Finance Committee today urging Congress not to change the taxpayer standard.  See this link on BNA.  Instead, they argue for "tightening" the substantial authority standard, which suggests at least an implied acknowledgment that tax advisors and taxpayers have treated that standard rather loosely in filing under aggressive interpretations of the Code.