CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresMedium
A tax preparer has been assessed a penalty under IRC Sec. 6694 for an understatement of tax liability due to an unreasonable position taken on a client's return. The preparer believes the penalty was unjustly imposed. What is the MOST appropriate first step for the preparer to challenge this penalty?
- ARequest an administrative appeal with the IRS Office of Appeals.
- BContact the client and request they amend their return to remove the unreasonable position.
- CPay the penalty and then file a claim for refund with the IRS.
- DFile a lawsuit in U.S. Tax Court to dispute the penalty.
Show answer & explanationAnswer & explanation
Correct answer: A. Request an administrative appeal with the IRS Office of Appeals.
When a tax preparer receives a notice of penalty assessment, the most appropriate first step to challenge it is to request an administrative appeal with the IRS Office of Appeals. This allows for a review of the penalty within the IRS without immediate litigation.
Why the other options are wrong
- B. Requesting the client amend their return does not directly challenge the penalty already assessed against the preparer.
- C. Paying the penalty and then filing a refund claim is an alternative, but an administrative appeal is generally preferred as a first step to resolve the issue without payment.
- D. While litigation is an option, it is typically pursued after exhausting administrative remedies.
IRS Penalty Appeals Process
Taxpayers and preparers can challenge IRS penalty assessments through an administrative appeals process before resorting to litigation.
- First step is usually an administrative appeal with the IRS Office of Appeals.
- Appeals process allows for independent review within the IRS.
- Can result in resolution without litigation or payment.
- If appeal fails, other options include paying and claiming refund, or litigation.
Memory trick: Appeal to the IRS, before legal stress.