A tax preparer is assessed a penalty under IRC Sec. 6694(a) for an understatement of tax on a client's return due to an unreasonable position. The preparer wishes to appeal this penalty. Which of the following is the initial step in the administrative appeal process for such a penalty?
- AFile a petition with the U.S. Tax Court within 90 days of the penalty notice.
- BPay the penalty and then file a claim for refund.
- CRequest a conference with the IRS Office of Appeals.
- DSubmit a written protest to the IRS service center that issued the penalty notice.
Show answer & explanationAnswer & explanation
Correct answer: D. Submit a written protest to the IRS service center that issued the penalty notice.
For penalties under IRC Sec. 6694, the initial administrative appeal step is typically to submit a written protest to the IRS service center that issued the penalty notice, if the amount exceeds a certain threshold (currently $25,000 for income, estate, gift, and generation-skipping transfer taxes, or $10,000 for other penalties). If below the threshold, an informal request for conference can be made. This usually precedes a formal Appeals conference.
Why the other options are wrong
- A. The Tax Court is a judicial appeal, typically following administrative appeals or when administrative appeals are not available/exhausted.
- B. Paying and claiming a refund is an alternative method, but not the initial step in the *administrative appeal process* before payment.
- C. A conference with the Office of Appeals is usually the next step *after* filing a protest or an informal request for conference, not the initial step for a formal appeal.
IRC Sec. 6694 Penalty Appeal
The initial administrative step for appealing an IRC Sec. 6694 preparer penalty is typically to submit a written protest to the IRS service center, which can lead to a conference with the IRS Office of Appeals.
- IRC Sec. 6694 penalties relate to preparer conduct (e.g., unreasonable positions).
- Administrative appeals precede judicial appeals (e.g., Tax Court).
- A written protest is a common initial step for formal administrative appeals.
- Thresholds exist for formal protest vs. informal request for conference.
Memory trick: First, Protest and then you may progress!