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Return Preparer Penalties Under IRC Section 6694

1. The definition of a tax return preparer for purposes of Sections 6694 and 6695 is provided in IRC 7701(a)(36) and Treasury Regulation 301.7701-15.

2. IRC 6694 penalties can only apply if there is an understatement of tax liability.

3. The IRC 6694(a) penalty is the greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer with respect to each return, amended return or claim for refund prepared if there is an understatement on the return or claim due to an unreasonable position taken on the return or claim that the preparer knew or reasonably should have known about. A position is unreasonable if:
A. There was not substantial authority for the position and the position was not disclosed.

B. The position was disclosed but there was not reasonable basis for the position.

C. The position is with respect to a tax shelter or reportable transaction under IRC 6662A and it is not reasonable to believe the position will be more likely than not sustained on the merits. See Notice 2009-5. Refer to IRM 20.1.6.4.10 for tax shelters and reportable transactions to which IRC 6662A applies.
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5. The IRC 6694(b) penalty is the greater of $5,000 or 50% of the income derived (or to be derived) by the tax return preparer with respect to returns, amended returns, and claims for refund prepared after May 25, 2007. The penalty may be imposed against a tax preparer if:

A. There is an understatement of liability, on a return or claim for refund prepared by the preparer, which is due to a willful attempt in any manner to understate the tax liability by the preparer, or

B. The preparer has recklessly or intentionally disregarded rules or regulations.
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7. Reduce the IRC 6694(b) penalty by the amount of the IRC 6694(a) penalty if both the IRC 6694(a) and (b) penalties are asserted against the preparer on the same return or claim.

8. Because the IRC 6694(b) penalty involves willfulness, there is no statutory period for assessment of this penalty. On tax return preparer penalties asserted under section 6694(a) and 6695, the three year statute of limitations for assessment begins to run on the statutory due date of the return or, if filed late, the filing date of the return. The statute of limitations on assessment for the section 6694(a) and 6695 penalties may be extended using a Form 872-D, Consent to Extend the Time on Assessment of Tax Return Preparer Penalty. IRC 6696(d) addresses periods of limitation.

9. Refer to IRM 20.1.6.4, IRC 6694 Understatement of Taxpayer’s Liability by Tax Return Preparer, for additional information.
10. These penalties are generally processed under the pre-assessment penalty procedures.


Preparer Penalties Under IRC Section 6695

1. The return preparer penalties under IRC 6695 are assessed against preparers who:

A. Fail to provide the taxpayer with a copy of the return, $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(a),

B. Fail to sign the return, $50 per failure, up to a maximum of $25,000 for each calendar year, per IRC 6695(b),

C. Fail to provide an identifying number, $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(c),

D. Fail to retain a copy of the return or a list of returns prepared, $50 per failure, up to a maximum of $25,000 for each return period, per IRC 6695(d),

E. Fail to file a tax return preparer information return or set forth an item in the return as required under IRC 6060, $50 for each failure, up to a maximum of $25,000 for each return period, per IRC 6695(e),

F. Negotiate a refund check or misappropriate a refund via electronic means, $500 per failure per IRC 6695(f), or

G. Fail to be diligent in determining eligibility for the Earned Income Tax Credit, $500 per failure per IRC 6695(g).
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3. These penalties are generally processed under the pre-assessment penalty procedures.

4. Refer to IRM 20.1.6.5, IRC 6695 Penalties That May Apply to a Tax Return Preparer, for additional information.

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