CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresMedium
A tax preparer has been assessed a penalty under IRC Sec. 6694(b) for willful or reckless conduct related to an understatement of tax on a client's return. The preparer believes the penalty was incorrectly applied. Which of the following is the first step the preparer should take to challenge the penalty?
- AFile a petition with the U.S. Tax Court.
- BContact the Treasury Inspector General for Tax Administration (TIGTA).
- CRequest an administrative appeal with the IRS Office of Appeals.
- DPay the penalty and then file a claim for refund.
Show answer & explanationAnswer & explanation
Correct answer: C. Request an administrative appeal with the IRS Office of Appeals.
The first step to challenge most IRS penalties, including those under IRC Sec. 6694, is typically to request an administrative appeal with the IRS Office of Appeals. This allows for an independent review within the IRS before judicial action.
Why the other options are wrong
- A. Filing with Tax Court is a judicial step, typically taken after exhausting administrative remedies.
- B. TIGTA investigates IRS misconduct, not typically for challenging specific tax penalties assessed against preparers.
- D. Paying and claiming a refund is an option, but an administrative appeal is generally the first and often more efficient step to resolve disputes.
IRS Penalty Appeals Process (Preparers)
The initial step for a tax preparer to challenge an IRS-assessed penalty (e.g., under IRC Sec. 6694) is usually to request an administrative appeal with the IRS Office of Appeals.
- Administrative appeal is generally the first step.
- Allows for independent review within the IRS.
- Judicial remedies typically follow administrative exhaustion.
Memory trick: When 'IRS Penalizes', 'Appeal First', then Litigate.