Sectin 6694 appeal

Assessment, Refund and Appeal: Synopsis - assessment, refund and appeal procedures

The penalties imposed against return preparers under Code Sec. 6694(a) and Code Sec. 6694(b) for understating tax liability on a return or in a claim for a refund are assessed independently of any tax deficiencies. As a result, the deficiency procedures for income, estate, gift and certain excise taxes do not apply to these penalties (Code Sec. 6696(b)).

Prior to assessing return preparer penalties under Code Sec. 6694(a) and Code Sec. 6694(b), however, the IRS will send an examination report and, generally, issue a 30-day letter to the return preparer notifying him or her of the proposed penalty and giving the opportunity to pursue administrative remedies prior to assessment of the penalty (Reg. §1.6694-4(a)(1)).

If the IRS makes an assessment of the penalties, a statement of notice and demand will be sent to the preparer. The penalty amount is payable upon assessment (Reg. §1.6694-4(a)(2)). The penalty for an understatement attributable to an unrealistic position must be assessed within three years after the return or claim for refund for which the penalty was assessed was filed. There is no statute of limitations on assessing a penalty for a willful understatement or reckless or intentional disregard of the rules or regulations (Code Sec. 6696(d)(2)).

There are two ways in which a return preparer can appeal assessment of a penalty to the courts. First, he or she can appeal the assessment by paying the entire penalty within 30 days after the notice and demand is made and filing a claim for refund within three years from the date of payment. If the refund is denied, the return preparer can appeal the denial of the refund claim to the appropriate court (Reg. §1.6694-4(a)(3)(i)). Alternatively, a return preparer can appeal a penalty assessment by paying at least 15 percent of the assessed penalty within 30 days after the date on which notice and demand were made and then filing a claim for refund (Reg. §1.6694-4(a)(3)(ii)). If the return preparer takes the 15 percent payment option, the IRS may not proceed to collect the remainder of the penalty until the later of a date that is:


(1) the day the refund claim is denied or six months after the day the preparer filed the claim for refund, or



(2) final resolution of a district court proceeding brought by the preparer (Reg. §1.6694-4(a)(4)).


If the IRS does not act on the refund claim within six months after the date on which the claim was filed, the return preparer may commence a suit in the appropriate district court within 30 days after the end of the six-month period. If the preparer does not initiate a refund action within the 30-day period, the IRS may collect the remaining 85 percent of the penalty. If the IRS denies the claim, the return preparer may bring suit within 30 days after denial of the refund (Reg. §1.6694-4(b)). The IRS may counterclaim for the balance of the penalty where the preparer brings suit after making partial payment of the penalty (Code Sec. 6694(c)(1)).

Whether or not the imposition of a penalty under Code Sec. 6694(a) or Code Sec. 6694(b) is appealed by the return preparer, any payment of either penalty will automatically be refunded if a final administrative or judicial action indicates there was no understatement of liability on the return or refund claim for which it was assessed.

The 10-year statute of limitations (Code Sec. 6502) on collection is suspended for the period during which the IRS is prohibited from collecting the unpaid amount of the penalty (Code Sec. 6694(c)(3) and Reg. §1.6694-4(c))..