Tax opinion levels are the five standard confidence tiers a tax professional uses to rate how likely a position is to survive IRS scrutiny: reasonable basis (roughly 20–25%), substantial authority (about 40%), more likely than not (greater than 50%), should (at least 70%), and will (90% or higher). Where a position lands on that scale controls two things: your exposure to accuracy-related penalties, and, for businesses following GAAP, whether the tax benefit can appear on the financial statements.
Reasonable Basis: About 20–25%
Reasonable basis is the floor. A position at this level must rest on at least one recognized legal authority, such as a court decision, a Treasury regulation, or a revenue ruling that speaks to the taxpayer’s facts. A creative argument with no support in those sources falls short and is treated as frivolous.
The practical value here is penalty avoidance through disclosure. If your position only clears this bar, you can still avoid the 20% accuracy-related penalty for negligence or disregard of rules by attaching Form 8275 to your return and laying the position out for the IRS to see.1Internal Revenue Service. Instructions for Form 8275 When the position runs contrary to a specific Treasury regulation, you use Form 8275-R instead, and the position must represent a good-faith challenge to that regulation’s validity.2Internal Revenue Service. Instructions for Form 8275-R Regulation Disclosure Statement
Substantial Authority: About 40%
Substantial authority requires roughly a 40% probability that the position would prevail. The test is objective. A practitioner weighs every authority supporting the position against every authority cutting the other way. The odds of being audited and the taxpayer’s personal belief that the position is correct do not enter the analysis.3eCFR. 26 CFR 1.6662-4 – Substantial Understatement of Income Tax
The big advantage over reasonable basis is that substantial authority protects against the accuracy-related penalty without any special disclosure. No Form 8275, no flag on the return. That protection matters because the penalty it blocks is 20% of any underpayment tied to a substantial understatement of income tax.4Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments For individuals, an understatement becomes “substantial” when it exceeds the greater of $5,000 or 10% of the correct tax. For C corporations other than S corporations and personal holding companies, the threshold is $10,000.3eCFR. 26 CFR 1.6662-4 – Substantial Understatement of Income Tax
Most routine tax planning targets this tier. It delivers meaningful penalty protection without requiring the higher certainty of more-likely-than-not and without the disclosure paperwork that a reasonable-basis position needs.
More Likely Than Not: Greater Than 50%
More likely than not is the first tier where the odds actually favor the taxpayer. That threshold matters in two very different places: high-risk transactions the IRS has singled out for scrutiny, and corporate financial reporting.
For a “reportable transaction” under the tax code, the lower tiers stop helping. The standard 20% accuracy-related penalty applies to any understatement tied to the transaction, and it jumps to 30% if the taxpayer fails to adequately disclose it.5Office of the Law Revision Counsel. 26 U.S. Code 6662A – Imposition of Accuracy-Related Penalty on Understatements With Respect to Reportable Transactions Reasonable basis and substantial authority do not provide the same penalty relief here that they do for ordinary positions, so a more-likely-than-not opinion is often the minimum defense available.
Should Opinions: At Least 70%
A “should” opinion reflects at least 70% confidence. The practitioner is saying that the preponderance and weight of favorable authorities support the position, even though some counterarguments exist. These opinions show up most often in corporate reorganizations and mergers where the buyer needs comfort that a transaction qualifies for tax-free treatment. When millions or billions in potential tax liability ride on that characterization, deal participants typically refuse to close without at least a “should” opinion from tax counsel.
Will Opinions: 90% or Higher
A “will” opinion sits at or above 90% confidence and involves settled law. The practitioner is saying the answer is essentially certain because the statute is clear and the facts fit squarely within it. These opinions are rare, because genuinely unambiguous tax questions rarely need a formal opinion. When one does appear, it is usually a closing condition for a public offering, a major acquisition, or a debt restructuring where a board demands the highest available assurance. A “will” opinion carries no meaningful caveats, which is why practitioners sometimes call it an “unqualified” opinion.
Neither “should” nor “will” is defined by statute. They are professional conventions, and the exact confidence percentage a firm assigns to each label can vary, so the engagement letter and the opinion itself matter more than the shorthand.
How the Levels Map to Penalty Exposure
The baseline accuracy-related penalty is 20% of any underpayment caused by negligence, a substantial understatement, or certain other triggers listed in Section 6662.4Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments For an ordinary, non-shelter position there are two ways to avoid it:
- Reach substantial authority (about 40%), in which case no disclosure is needed and the substantial-understatement penalty does not apply.
- Reach reasonable basis (about 20–25%) and disclose the position on Form 8275, or Form 8275-R for a position contrary to a regulation.1Internal Revenue Service. Instructions for Form 8275
Section 6664 provides a separate reasonable-cause-and-good-faith defense that can eliminate the accuracy-related penalty entirely, regardless of the opinion tier, if the taxpayer shows genuine reliance on competent professional advice.6Office of the Law Revision Counsel. 26 U.S. Code 6664 – Definitions and Special Rules A well-documented written opinion is the best evidence of that reliance, which is why taxpayers pay for these opinions even when the law does not strictly require one.
For reportable transactions the calculus changes. A separate penalty under Section 6662A applies at 20%, rising to 30% without adequate disclosure, and the lower opinion tiers that work for ordinary positions do not provide the same relief.5Office of the Law Revision Counsel. 26 U.S. Code 6662A – Imposition of Accuracy-Related Penalty on Understatements With Respect to Reportable Transactions Practitioners in that territory aim for more-likely-than-not or higher.
Why Companies Care About More Likely Than Not
For publicly traded companies and many private companies following GAAP, the more-likely-than-not standard controls whether a tax benefit appears on the balance sheet at all. Under ASC 740, a company evaluates each uncertain tax position in two steps. First, recognition: the company asks whether the position is more likely than not to be sustained, assuming the taxing authority examines it with full knowledge of the facts. Only positions clearing that bar move to measurement, where the benefit is recorded at the largest dollar amount that has a greater than 50% chance of being realized upon settlement.7Financial Accounting Standards Board. Summary of Interpretation No. 48 Positions that fall short get no financial statement benefit, no matter how much tax they might save.
That creates a direct link between the opinion tier and reported earnings. A tax team that can support a more-likely-than-not opinion delivers a measurable improvement to the bottom line. One that can only reach substantial authority delivers the same tax savings on the return but cannot show it to shareholders until the uncertainty resolves.
Who Writes These Opinions and What Standards Apply
Treasury Department Circular 230 sets conduct rules for attorneys, CPAs, and enrolled agents who practice before the IRS. When providing written tax advice, a practitioner must base the analysis on reasonable factual and legal assumptions, consider all relevant facts they know or reasonably should know, and make reasonable efforts to identify additional relevant facts. A practitioner cannot rely on client representations that are unreasonable or known to be incorrect.8Internal Revenue Service. Guidance to Practitioners Regarding Professional Obligations Under Circular 230 Those standards are why a properly written opinion supports the reasonable-cause defense under Section 6664, and why one prepared without them may not.