Tuesday, February 12, 2013
Tax professionals get paid to predict whether a transaction or reporting position will withstand regulatory or judicial scrutiny. Yet few can describe with any precision how they go about ascertaining probabilities of success or attaining levels of certainty, especially on novel, aggressive, or grey-area positions. Instead they rely on the subjective “smell test,” on trusting their gut, or on borrowing from the science of handicapping horses. But that doesn’t cut it. Not for the regulator nor the court, not for the client, and not for the practitioner’s malpractice insurer (nor her firm’s). Indeed, in a world of accepted practice standards, of ethical codes and disciplinary rules, and of statutory accuracy requirements for taxpayers and their advisors, the tax practitioner must do more than rely on her intuition when faced with a tough call.
This article offers a more rigorous framework for undertaking probability assessments in rendering tax advice. It posits several analytical models that treat tax advice, both simple and sophisticated, as inherently an act of probability and thus as a behavior subject—at least in part—to empirical methods. The models, moreover, comport with the affirmative obligations imposed on tax advisors under the prevailing standards of care in rendering tax advice. In this way, we are not asking practitioners to do anything they are not already required to do. But we are asking them to consider an analytical framework that reinforces duties to their clients, to the tax system, and to their own professionalism.