Conservation Easement Deduction and Preparer Ethics
Ravi, CPA, prepares the 2024 Form 1040 for a client who claims a $2,400,000 charitable deduction for a conservation easement on land with a basis of $300,000. The client provides an appraisal from an appraiser referred by the promoter. The appraisal values the easement at $2.4 million but omits the required qualified appraisal summary, and the promoter's materials project $1.8 million of tax savings. The client refuses to provide the recorded deed or the baseline documentation and tells Ravi to sign the return without disclosure. Ravi concludes the position has a reasonable basis but not substantial authority. The return position would understate tax by $840,000. Ravi's fee is $8,000. Ravi asks whether he may sign, what he must do if the client refuses disclosure, and what preparer penalties may apply.
1. May Ravi sign the return as proposed?
Read the worked answer
Ravi may not sign the return as proposed. Under §6694(a), an undisclosed return position must satisfy the substantial authority standard; a reasonable basis is enough only if the position is adequately disclosed. Circular 230 §10.34(a) imposes the same discipline on signing practitioners and requires Ravi to advise the client about penalties. The missing deed, baseline documentation, and qualified appraisal summary also mean Ravi cannot rely on the appraisal in good faith under §10.22 and §10.34(d). The promoter's projected tax savings are a red flag, not authority. Ravi should tell the client he cannot sign without substantial authority or, alternatively, disclosure on Form 8275 and a reasonable basis. On these facts, he lacks a complete factual foundation and substantial authority, so he should not sign.
2. What should Ravi do if the client refuses to provide documents and refuses disclosure?
Read the worked answer
If the client refuses to provide the documents and refuses disclosure, Ravi should decline to sign and should withdraw from the engagement if the return cannot be prepared properly. He should document the request, the client's refusal, and his advice in the file. Circular 230 §10.34(a)(4) requires advising the client of the penalties and of the opportunity to disclose; §10.22 requires due diligence. Ravi must not rely on incomplete or incorrect information. If the client proceeds without him, Ravi should not assist in any way that facilitates the understatement. He should also consider firm counsel and whether the client's conduct triggers any reporting obligation, but withdrawal and documentation are the core steps.
3. What preparer penalties could apply if Ravi signs?
Read the worked answer
Preparer penalty exposure: §6694(a) imposes a penalty for an understatement due to an unreasonable position. The base penalty is $1,000 or 50% of the preparer's fee, whichever is greater; here 50% × $8,000 = $4,000. If Ravi signs with no substantial authority and no disclosure, the position is unreasonable. If he signs willfully or recklessly, §6694(b) applies: the greater of $5,000 or 75% of the fee ($6,000), and the §6694(a) penalty is not also imposed for the same conduct. The client may also face §6662 accuracy-related penalties, and the promoter or appraiser may face other penalties. Ravi's best protection is not signing without substantial authority or disclosure and documenting his advice.