Not every tax position is equally certain, and the IRS built a vocabulary to grade that certainty. A position isn't simply "right" or "wrong" — it sits somewhere on a ladder of confidence with recognized rungs: reasonable basis, substantial authority, and more-likely-than-not. Where a position lands on that ladder decides two practical things: whether you're required to disclose it on your return, and whether the IRS can make a 20% accuracy-related penalty stick if the position is later disallowed. Get the standard right and a lost position costs you the tax and interest. Get it wrong and it costs you the penalty on top.
The stakes are concrete. Under IRC Section 6662, the substantial-understatement penalty attaches when an individual understates income tax by the greater of 10% of the correct tax or $5,000. You escape that penalty in one of two ways: the position had substantial authority, or it had reasonable basis and you adequately disclosed it — typically on Form 8275. Understanding these standards isn't academic. It's the difference between taking a defensible aggressive position with your eyes open and stumbling into a penalty you could have disclosed your way out of.
The confidence ladder, rung by rung
The standards form a hierarchy, each requiring a stronger showing than the last. The percentages below are the widely used practitioner shorthand for how likely a position is to be sustained on its merits — not statutory numbers, but a useful mental model for where each rung sits.
| Standard | Rough likelihood of success | What it means |
|---|---|---|
| Frivolous | Near zero | No credible legal argument — never take this position |
| Not frivolous | ~10% | There is some argument, but weak; not enough on its own |
| Reasonable basis | ~20%+ | Reasonable in light of authorities; more than merely arguable |
| Substantial authority | ~40% | The weight of authority for the position is substantial |
| More likely than not | Greater than 50% | The position is more likely to be sustained than not |
| Will / should | 70%+ / 90%+ | High-confidence opinion levels used in formal tax opinions |
The two rungs that matter most for penalty protection are reasonable basis and substantial authority, because they're the ones written into the Section 6662 exceptions. "More likely than not" becomes decisive in narrower contexts — most notably for tax shelters and reportable transactions, where the ordinary disclosure protections don't apply.
Reasonable basis: the floor for a disclosed position
Reasonable basis is a real standard, not a throwaway phrase. It's significantly higher than "not frivolous" and requires that the position be reasonable based on one or more of the authorities the regulations recognize — the Code, regulations, revenue rulings, and case law, among others. A position built only on a plausible-sounding argument with no authority behind it does not clear reasonable basis.
Reasonable basis is the floor that makes disclosure work. If a position has at least reasonable basis and you adequately disclose it on Form 8275, you can avoid both the negligence and substantial-understatement portions of the accuracy-related penalty. Below reasonable basis, disclosure does not save you — the penalty can still apply, and you're exposed.
Substantial authority: the standard that avoids disclosure
Substantial authority is the sweet spot for a confident-but-not-certain position: meet it, and you avoid the substantial-understatement penalty without having to disclose the position at all. The test is a weighing exercise — the authorities supporting your treatment must be substantial in relation to the authorities against it. It's an objective standard about the authorities themselves, not about your subjective belief.
| Authority type | Counts toward substantial authority? |
|---|---|
| Internal Revenue Code and other statutes | Yes |
| Treasury regulations | Yes |
| Revenue rulings and revenue procedures | Yes |
| Court cases and IRS-issued guidance | Yes |
| Private letter rulings (to others) | Yes, with limited weight |
| A tax return preparer's opinion | No |
| A conclusion in a treatise or journal | No — not authority by itself |
Substantial authority is measured on the facts as they exist at the time you file — or on the last day of the tax year. If new authority (a court decision, a revenue ruling) undercuts your position after you file, it doesn't retroactively destroy substantial authority you had at filing. Document the authorities you relied on and the date you evaluated them, so you can reconstruct the analysis if the position is ever questioned.
When and how to disclose on Form 8275
If a position clears reasonable basis but you're not confident it reaches substantial authority, disclosure is the tool that buys down your penalty risk. Form 8275 discloses a position not contrary to a regulation; Form 8275-R discloses a position that is contrary to a regulation. Attaching the right form, with enough detail to apprise the IRS of the nature of the position, converts a gamble into a protected disclosure.
Grade the position honestly
Decide, based on the authorities, whether it reaches substantial authority, only reasonable basis, or neither. Be honest — optimism here is expensive later.
Substantial authority → no disclosure needed
If the weight of authority is substantial, you can take the position without Form 8275 and still avoid the substantial-understatement penalty.
Reasonable basis only → disclose
Attach Form 8275 (or 8275-R for a contrary-to-regulation position) describing the item and the position clearly enough to flag it for the IRS.
Below reasonable basis → don't take it
Disclosure won't protect a position without reasonable basis. Either strengthen the authority behind it or drop it.
Keep the file
Retain the authorities, the analysis, and a copy of any disclosure with the return. If questioned, the contemporaneous file is your defense.
Adequate disclosure protects against the negligence and substantial-understatement penalties, but it does not protect a position that lacks reasonable basis, and it does not help with tax-shelter or reportable-transaction understatements, which require the higher more-likely-than-not standard. Disclosure also doesn't make a wrong position right — if the IRS disallows it, you still owe the tax and interest. It only takes the penalty off the table when the standards are met.
Putting it together: a decision the return preparer and client share
The practical workflow is a short conversation between you and your tax preparer for any position that isn't clearly settled. The preparer identifies the position, evaluates the authorities, and grades it; you decide, with that grading in front of you, whether to take it, disclose it, or pass. The point is to make the choice deliberately rather than discover the standard only after a notice arrives.
Take it without disclosure
- Position reaches substantial authority (~40%+)
- Authorities weighed and documented at filing
- No Form 8275 required to avoid the penalty
- Keep the analysis file in case it's questioned
Disclose on Form 8275
- Position has reasonable basis but not substantial authority
- You want penalty protection on an uncertain item
- Form 8275 (or 8275-R) attached with clear detail
- Understand the item may still draw IRS attention
Every uncertain position on your return has a name and a consequence. If it reaches substantial authority, take it and keep your file. If it only reaches reasonable basis, disclose it on Form 8275 to protect against the 20% accuracy-related penalty. If it doesn't reach reasonable basis, don't take it — disclosure won't save it. Grading positions before you file, rather than after a notice, is what turns aggressive-but-defensible into simply defensible.
Take defensible positions — and know they're defensible
Talk to our team about your situation — when a position on your return is debatable, understanding the authority behind it and keeping good documentation is what makes the accuracy-related penalty a non-issue.
Talk to a tax proSources
- IRS — Internal Revenue Code Section 6662 (Accuracy-related penalty; substantial understatement)
- IRS — Treasury Regulation Section 1.6662-4 (Substantial understatement, substantial authority, disclosure)
- IRS — Treasury Regulation Section 1.6662-3 (Negligence, disregard, reasonable basis)
- IRS — About Form 8275, Disclosure Statement
- IRS — About Form 8275-R, Regulation Disclosure Statement
- IRS — Internal Revenue Code Section 6664 (Reasonable cause and good-faith exception)
Frequently asked questions
Substantial authority is a standard under IRC Section 6662 that's met when the weight of authorities supporting your position is substantial relative to those against it. It's a lower bar than more-likely-than-not but higher than reasonable basis — generally understood as roughly a 40% likelihood of being sustained. A position with substantial authority avoids the substantial-understatement penalty even without disclosure.
Reasonable basis is the lower standard — a position that is reasonable based on authorities, significantly higher than 'not frivolous,' roughly a 20% or better chance of success. Substantial authority is stronger. Reasonable basis can protect a disclosed position from the negligence penalty, but you generally need substantial authority to avoid the substantial-understatement penalty on an undisclosed position.
File Form 8275 (or 8275-R for a position contrary to a regulation) to adequately disclose a return position that has at least reasonable basis but may not rise to substantial authority. Disclosure can protect you from the substantial-understatement and negligence portions of the Section 6662 accuracy-related penalty — but it does not shield a position that lacks even a reasonable basis.
It's part of the IRC Section 6662 accuracy-related penalty: a 20% penalty applies when you understate income tax by the greater of 10% of the tax required to be shown or $5,000 (for individuals). You can avoid it by having substantial authority for the position, or by having reasonable basis and adequately disclosing the position on Form 8275.
