Why your tax advisor covers most bets

Only mothers have the ability to distinguish the sound of their child’s voice calling “Mom” in the Target store.

A father will turn his head towards any child while saying “Dad”, even when his children are adults and the voice is clearly that of a 5 year old.

Moms also have an innate ability to say the same things. Whether [name of other child] jumped off a bridge [or some other stupid thing]Would you?

Or, before you feel bad about yourself, think about all the other people in the world who are worse off. Just the other day I heard [some horrible thing that happened to some other person].

Each of us feels entitled to feel that we are, at least sometimes, the most humiliated person in the world. Don’t tell your mom you feel like that.

So let’s focus on me. As a tax advisor, I have to evaluate complex tax laws and determine the chances of success of a particular tax position.

It’s not easy, and I often expect, and sometimes even appreciate, people to understand how difficult it is for me.

And then a mum, really any mum, reminds me of others who have it worse. And the meteorologist on TV, says mom.

The meteorologist must predict the probability of rain over seven days. He or she can say, 20% chance of rain on Tuesday.

Joni Mitchell reminded us, so many things I would have done, but the clouds got in the way. When we hear a rain forecast, we change our plans.

If there is a 20% chance of rain on Tuesday, I will change my zoo plans for Wednesday. Two psychologists, Amos Tversky and Daniel Kahneman, developed what is called “prospect theory”.

Part of the theory suggests that people overweight the likelihood of low-probability events occurring. That 20% chance of rain becomes a higher risk in our minds.

So I’m canceling Tuesday’s planned trip to the zoo. What if it doesn’t rain? Boy, do I hate that meteorologist. They told me it was raining.

But that’s the other guy’s problem. Back to me, and all the other tax advisers. We need to assess the probability of success of a tax position.

Weather forecasters never say there’s a 22% chance of rain. They just round the number. Tax professionals do the same thing.

We have seven possible outcomes. From low probability of “fiscal success” to high, we have “frivolous”, “reasonable basis”, “realistic possibility”, “substantial authority”, “more likely than not”, “should” and “will”.

No one knows exactly what these words mean except one. The one we know is that “more likely than not” means a little over 50% chance of success. We then work on others using that as an anchor.

We tax people, and our clients, can be penalized if a tax position lacks substantive powers. Penalties can be avoided if the position has a reasonable basis and is disclosed.

Like meteorologists, we assign round numbers to the seven results. Starting with frivolous, 10% or less, 20%, 33-1/3%, 40%, more than 50%, 60% and 80%.

Not everyone agrees with these numbers. Most results don’t matter. It is more likely than not, should and will be used only for tax opinions purchased by clients.

If a meteorologist says 80% chance of rain, the listener can hear 100%. A tax person might intend that “will” means 80% or more. Clients may interpret “will” as 100%. What we have is the inability to communicate.

If “will” really meant 100%, it’s unlikely anyone would pay for needing to buy an opinion to hear the evidence. As Bob Dylan said, you don’t need a meteorologist to know which way the wind is blowing.

The urban legend of a tax advisor, modeled after Candyman or Bloody Mary, is that if you say “will” or “should” five times in front of a mirror, a client will sue you for malpractice.

Most advisers avoid tax advice to survive the legend. Most only deal with the standard of substantial authority, agreed to be around 40% and 45% chance of success.

To avoid the wrath of meteorologists, tax advisers avoid discussing the meaning of these standards, knowing that clients will overweight low probabilities.

Jim Hamill is the Tax Practice Manager at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]

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