Summary of Preparer Penalties Under Title 26

Treasury Department Circular 230, Regulations Governing Practicing before the Internal Revenue Service, applies to CPAs, enrolled agents, attorneys and other tax return preparers. The document outlines the requirements and prohibited conduct when practicing before the IRS. The IRS may impose penalties for tax preparers who aren’t compliant; these penalties are summarized by the IRS as follows:

IRC Sec. 6694 – Understatement of taxpayer’s liability by tax return preparer

• IRC Sec. 6694(a) – Understatement due to unreasonable positions. The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.
• IRC Sec. 6694(b) – Understatement due to willful or reckless conduct. The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

IRC Sec. 6695 – Other assessable penalties with respect to the preparation of tax returns for other persons

• IRC Sec. 6695(a) – Failure to furnish copy to taxpayer. The penalty is $50 for each failure to comply with IRC Sec. 6107 regarding furnishing a copy of a return or claim to a taxpayer. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.
• IRC Sec. 6695(b) – Failure to sign return. The penalty is $50 for each failure to sign a return or claim for refund as required by regulations. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.
• IRC Sec. 6695(c) – Failure to furnish identifying number. The penalty is $50 for each failure to comply with IRC Sec. 6109(a)(4) regarding furnishing an identifying number on a return or claim. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a calendar year.
• IRC Sec. 6695(d) – Failure to retain copy or list. The penalty is $50 for each failure to comply with IRC Sec. 6107(b) regarding retaining a copy or list of a return or claim. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a return period.
• IRC Sec. 6695(e) – Failure to file correct information returns. The penalty is $50 for each failure to comply with IRC Sec. 6060. The maximum penalty imposed on any tax return preparer shall not exceed $25,500 in a return period.
• IRC Sec. 6695(f) – Negotiation of check. The penalty is $510 for a tax return preparer who endorses or negotiates any check made in respect of taxes imposed by Title 26 which is issued to a taxpayer.
• IRC Sec. 6695(g) – Failure to be diligent in determining eligibility for earned income credit. The penalty is $510 for each failure to comply with the EIC due diligence requirements imposed in regulations.

IRC Sec. 6700 – Promoting abusive tax shelters

• The penalty is for a promoter of an abusive tax shelter and is generally equal to $1,000 for each organization or sale of an abusive plan or arrangement (or, if lesser, 100 percent of the income derived from the activity).

IRC Sec. 6701 – Penalties for aiding and abetting understatement of tax liability

• The penalty is $1,000 ($10,000 if the conduct relates to a corporation’s tax return) for aiding and abetting in an understatement of a tax liability. Any person subject to the penalty shall be penalized only once for documents relating to the same taxpayer for a single tax period or event.

IRC Sec. 6713 – Disclosure or use of information by preparers of returns

• The penalty is $250 for each unauthorized disclosure or use of information furnished for, or in connection with, the preparation of a return. The maximum penalty on any person shall not exceed $10,000 in a calendar year.

IRC Sec. 7206 – Fraud and false statements

• Guilty of a felony and, upon conviction, a fine of not more than $100,000 ($500,000 in the case of a corporation), imprisonment of not more than three years, or both (together with the costs of prosecution).

IRC Sec. 7207 – Fraudulent returns, statements, or other documents

• Guilty of a misdemeanor and, upon conviction, a fine of not more than $10,000 ($50,000 in the case of a corporation), imprisonment of not more than one year, or both.

IRC Sec. 7216 – Disclosure or use of information by preparers of returns

• Guilty of a misdemeanor for knowingly or recklessly disclosing information furnished in connection with a tax return or using such information for any purpose other than preparing or assisting in the preparation of such return. Upon conviction, a fine of not more than $1,000, imprisonment for not more than one year, or both (together with the costs of prosecution).

IRC Sec. 7407 – Action to enjoin tax return preparers

• A federal district court may enjoin a tax return preparer from engaging in certain proscribed conduct, or in extreme cases, from continuing to act as a tax return preparer altogether.

IRC Sec. 7408 – Action to enjoin specified conduct related to tax shelters and reportable transactions

• A federal district court may enjoin a person from engaging in certain proscribed conduct (including any action, or failure to take action, which is in violation of Circular 230).

Note:  Please see the Internal Revenue Code, corresponding Treasury Regulations, and other related published guidance for additional information on each penalty section.

Editor’s note: This is the third article in a new series by Mike D’Avolio, CPA, JD, focusing on ethics for tax practitioners.