6694(c) appealing the penalty

The IRS has the absolute right to assess as 6694(a)or(b) penalty in their total discretion on every position taken in every tax return. There does not have to be an IRS warning. There is no appeal to a Manager. And you do not have the normal appeal rights to the IRS Office of Appeals. Read the remedy below under 6694(c). The only appeal right is to pay the 15% and then file a claim for a refund. With an aggressive IRS, one has to assume that they will go for the $5,000 6694(b) penalty and assess the $5,000 (or the higher of 50% of the fee) for multiple "positons" taken in the return.

This is a hold-over from pre-5/25/2007 law when the penalty was only $250 and the 15% was not a big deal.

This appeal procedure means you have to be out-of-pocket even when the penalty is capricious and arbitrary. I have already been called by return preparers when the penalty is being assessed capriciously WITHOUT EXPLANATION! And that is under the pre-Small Business Act law. As the expression goes: "Let the games begin!" The assessment of the penalty is presumed to be correct. Will you be prepared to deal with the penalty with an "analysis" of the relevant "authorities" to negate the penalty?

The claim for refund is a simple procedure but it should be accompanied by a technical memorandum on the facts and on the law for each penalty.

Although not mentioned in the statute or proposed regulations, you can also request abatement of the penalties by asserting "no liability" on Form 656 (the offer in compromise form dealing with "no liability"). I believe you can also file a request for audit reconsideration. Indeed, you should or could use all of these appeal procedures because there are parts of the IRS that are "black holes" (they often claim they did not receive it or they do not react). Remember we are dealing with a large organization with employees who are not necessarily well trained or well educated. And they tend to sit on requests that they do not understand. They get paid regardless of the quality or lack of quality of what they do. Always send important applications to the IRS in any manner that you can prove that the claim was filed.

The "reasonable cause" exception only applies to 6694(a) penalties and not to 6694(b) penalties. It appears that the only way to can argue "reasonable cause" would be after the penalty is assessed or if the penalty is discussed with you prior to the assessment of the penalty.

The proposed regulations can resolve this issue by writing a rule that the penalty cannot be assessed without first giving the return preparer the opportunity to argue "reasonable cause." Under present rules, one can only argue "reasonable cause" during the 15% refund procedure.

I have been dealing with the 6677 penalty which also has a "reasonable cause" exception. But the IRS is famous for not allowing the "reasonable cause" before the penalty is assessed.







6694(c) EXTENSION OF PERIOD OF COLLECTION, WHERE PREPARER PAYS 15 PERCENT OF PENALTY. --

6694(c)(1) IN GENERAL . --If, within 30 days after the day on which notice and demand of any penalty under subsection (a) or (b) is made against any person who is an income tax return preparer, such person pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421(a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).

6694(c)(1) IN GENERAL . --If, within 30 days after the day on which notice and demand of any penalty under subsection (a) or (b) is made against any person who is a tax return preparer, such person pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421(a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).
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Everyone should be prepared for the IRS penalties for the tax returns filed for the 2008 tax year. Now is the time to prepare for the possibility that penalties will be assessed after the 2008 tax returns are filed. For any questions on positions taken or to be taken for the 2008 tax year, contact ab@irstaxattorney.com