Example 1 - 1.6694-2(b) of the regulations

Example 1 posits a situation where there is a statute and no regujlations.

The more likely than not standards is satisfied with a well-reasoned construction of the statutory text.

The example does not state whether the "well-reasoned" construction of the statute needs to be oral or in writing.

Example 1 sets forth a very simple set of facts where the unreported position is based on a statute. Any return preparer with an undisclosed position who merely cites the statute is get blasted with the section 6694 penalty. A mere reference to the statute is not a "well-reasoned construction" of the position taken.

How can a return preparer do more than cite to the statute? The term "well-reaoned" means that the IRS wants a an EXPLANATION THAT REASONS WHY THE TAX PREPARER TOOK THE POSITION ON THE STATUTE. How does one make an explanation? Wise return preparers will provide the reasoning in writing in the retained file; that is something that is not being done today by most return preparers.

There is an alternative. The return preparer can wait to see if there is an audit examination. During the audit the return preparer can prepare a written explanation.
The problem with this strategy is that the IRS can make an assessment before the return preparer has the opportunity to write the explanation.

The 6694 penalty is one of those viscious penalties that can be assessed at will that is not subject to the normal appeal rights. In order to protest the penalty, the return preparer has to file a protest with a 15% deposit followed by a claim for a refund. In lieu of the claim for refund, one of the options is to take that appeal to the District Court. Denial of the refund will also give you a right to go to the District Court. I have a case with over a $6 million penalty under section 6700 and the 15% of that amount is not an option because of the 15% is approximately $1 million. The appeal rights for the assessment are not the same for any other audit change. Also, the penalty may not be signaled. The IRS Examiner can close the audit and, on reflection, just file the 6694 penalty and leave it up to the return preparer to pay the 15%. The better approach would be to justify the position taken in writing in the client's file before the tax return is filed. If there is a resulting audit examination, the IRS examiner will read the "well-reasoned constructin" of the statute and, therefore, is more likely to be dissuaded from filing the 6694 penalty.