The Section 6694 preparer penalty is a personal financial penalty the IRS assesses against a paid tax return preparer when a return or refund claim understates the client’s tax liability. It comes in two tiers: the greater of $1,000 or 50% of the fee earned when the understatement rests on an unreasonable position, and the greater of $5,000 or 75% of the fee when the preparer’s conduct was willful or reckless.1Internal Revenue Service. Tax Preparer Penalties The penalty attaches to the preparer, not the taxpayer, and it applies whether or not the preparer holds a professional credential.
Who the Penalty Can Reach
The statute defines a tax return preparer as anyone who prepares a return or refund claim for compensation, or who employs others to do so. CPAs, enrolled agents, and attorneys are covered, and so are uncredentialed seasonal preparers. Getting paid is what matters, not holding a license.2Office of the Law Revision Counsel. 26 USC 7701 – Definitions
A few roles fall outside the definition: purely mechanical or typing help, preparing a return for your own employer, acting as a fiduciary for the person whose return you prepare, and preparing a refund claim in response to a notice of deficiency or an audit.2Office of the Law Revision Counsel. 26 USC 7701 – Definitions
Section 6694 reaches both signing and non-signing preparers. The signing preparer is the person with primary responsibility for the return’s substantive accuracy. A non-signing preparer is anyone who works on a substantial portion of the return without signing it, meaning advice or entries tied to an item significant in relation to the overall tax. Advising on a complex Schedule C can be enough to bring a non-signing preparer within the penalty even if someone else puts a name on the return.
The individual preparer is on the hook, but the preparer’s firm can also be liable if it knew or should have known about the conduct. The IRS can assess against both but collect only once.
The Lower Tier: Unreasonable Positions Under 6694(a)
Section 6694(a) targets understatements caused by positions the preparer knew, or reasonably should have known, lacked adequate legal support at the time the return was filed. The penalty is the greater of $1,000 or 50% of the income the preparer earned from preparing that return.3Office of the Law Revision Counsel. 26 USC 6694 – Understatement of Taxpayer’s Liability by Tax Return Preparer A $3,000 fee produces a $1,500 penalty; a $500 fee produces $1,000 because of the floor.
Whether a position is “unreasonable” turns on two questions: was it disclosed, and does it involve a tax shelter?
Undisclosed Positions
An undisclosed position must meet the substantial authority standard. The weight of legal authorities supporting the position must be substantial compared to the weight against it. Tax professionals generally treat this as roughly a 40% or greater chance the position would survive an IRS challenge. Supporting authorities include the Internal Revenue Code, Treasury Regulations, Revenue Rulings, and court decisions.3Office of the Law Revision Counsel. 26 USC 6694 – Understatement of Taxpayer’s Liability by Tax Return Preparer
Disclosed Positions
Disclosing the position on Form 8275, or Form 8275-R for positions contrary to a Treasury Regulation, drops the required standard to reasonable basis. Reasonable basis is lower than substantial authority but still requires more than a frivolous argument; the position must rest on recognized legal authority rather than a taxpayer’s self-serving account of events.4Internal Revenue Service. Instructions for Form 8275 – Disclosure Statement Transparency earns a lower bar.
Tax Shelters and Reportable Transactions
Disclosure does not help when the position involves a tax shelter or a reportable transaction. For those, it must be reasonable to believe the position would more likely than not be sustained on its merits, meaning better than a 50% chance of winning. Congress set this higher bar so disclosure could not become a safe harbor for aggressive shelter positions.3Office of the Law Revision Counsel. 26 USC 6694 – Understatement of Taxpayer’s Liability by Tax Return Preparer
Reasonable Cause and Good Faith: The Defense to the Lower Tier
A preparer can defeat the 6694(a) penalty by showing the understatement was due to reasonable cause and that the preparer acted in good faith.3Office of the Law Revision Counsel. 26 USC 6694 – Understatement of Taxpayer’s Liability by Tax Return Preparer This is a facts-and-circumstances test that looks at the nature of the error, the preparer’s normal office practices, and whether standard professional procedures were followed.
The most common route is good-faith reliance on information the client provided. A preparer is not required to audit records or independently verify every line item. But reliance has limits. If a client reports $80,000 in business deductions against $30,000 in revenue and nothing about the industry explains that ratio, the preparer has a duty to ask follow-up questions. Blindly accepting numbers that look wrong is not good faith.
Documentation is what makes this defense work in practice. Preparers who record client interviews, note the questions they asked, and keep the source documents the client provided are in a far better position than those relying on memory two years after the return went out. Contemporaneous notes may be the only proof due diligence occurred.
One point catches many preparers off guard: this defense applies only to 6694(a). It does not reach the higher-tier penalty.
The Higher Tier: Willful or Reckless Conduct Under 6694(b)
Section 6694(b) covers preparers who cross from carelessness into deliberate misconduct. The penalty is the greater of $5,000 or 75% of the fee earned from the return.1Internal Revenue Service. Tax Preparer Penalties Because 75% of the fee only exceeds $5,000 once the fee tops roughly $6,700, most 6694(b) penalties come in at the $5,000 floor.
Two kinds of conduct trigger the higher tier. The first is a willful attempt to understate the client’s tax, meaning the preparer knowingly reduced the tax through methods like fabricating deductions, hiding income, or deliberately mischaracterizing transactions. The IRS must show a conscious objective to understate, though it can build that case with circumstantial evidence such as a pattern of consistently aggressive positions across clients.
The second is reckless or intentional disregard of rules or regulations. Intentional disregard means the preparer knew a rule existed and chose to ignore it. Reckless disregard is a step below: not intent to violate the rule, but carelessness extreme enough to amount to the same thing. A preparer who makes no effort to determine whether a regulation applies, or who ignores red flags in the client’s information, falls here.
Adequate disclosure of a position with at least a reasonable basis takes the preparer out of the reckless-or-intentional-disregard category.4Internal Revenue Service. Instructions for Form 8275 – Disclosure Statement Disclosure protects on this tier too.
The reasonable cause defense does not apply to 6694(b). The only reduction available is a credit for any amount already paid under 6694(a) for the same return, so the IRS cannot stack both penalties in full.3Office of the Law Revision Counsel. 26 USC 6694 – Understatement of Taxpayer’s Liability by Tax Return Preparer
Contesting a Section 6694 Penalty
When the IRS proposes a 6694 penalty, it sends a notice identifying the return and the basis for the penalty. The preparer can protest to an IRS Appeals Officer before assessment becomes final and present evidence and legal arguments there. If the administrative appeal fails, the dispute can move to federal court, but the mechanics differ from typical tax litigation.
The 15% Deposit Rule
A preparer contesting a 6694 penalty in court does not have to pay the full penalty first, but cannot simply refuse to pay. Within 30 days after the IRS sends a formal notice and demand for payment, the preparer must pay at least 15% of the penalty and file a refund claim for that amount. Meeting that step bars the IRS from collecting the remaining 85% while the case is pending.3Office of the Law Revision Counsel. 26 USC 6694 – Understatement of Taxpayer’s Liability by Tax Return Preparer
After the refund claim goes in, the preparer must file suit in U.S. District Court within 30 days of the IRS denying the claim. If the IRS does not respond within six months, the preparer has 30 days after that six-month window to sue. Miss either deadline and the collection freeze lifts. The IRS can then pursue the full penalty.3Office of the Law Revision Counsel. 26 USC 6694 – Understatement of Taxpayer’s Liability by Tax Return Preparer
Assessment and Collection Windows
The IRS generally has three years from the date the return is filed to assess a preparer penalty. That window is open indefinitely when the understatement involves a fraudulent return. Once assessed, the IRS has 10 years to collect. That collection period can be paused or extended by events such as bankruptcy, an installment agreement request, or an offer in compromise.5Internal Revenue Service. Time IRS Can Collect Tax
Related Exposures the Same Conduct Can Trigger
Section 6694 is not the only risk on a bad return. Section 6695(g) imposes a separate per-return penalty for failing to meet due diligence requirements on the Earned Income Credit, Child Tax Credit (including the Additional Child Tax Credit and Other Dependents Credit), American Opportunity Tax Credit, and head-of-household filing status. For returns filed in 2026, that penalty is $650 per failure, and because a single return can involve all four items, one return can carry up to $2,600 under 6695(g) alone.6Internal Revenue Service. News and Updates for Paid Preparers These stack on top of any 6694 penalty for the same return.
Credentialed preparers face a second layer through Treasury Circular 230. Section 10.34 mirrors the 6694 standards, and the same conduct can lead to a disciplinary proceeding by the IRS Office of Professional Responsibility, with sanctions ranging from a private reprimand to suspension or disbarment from practice before the IRS.7eCFR. 31 CFR 10.34 – Standards With Respect to Tax Returns and Documents, Affidavits, and Other Papers A pattern of aggressive positions across clients is specifically identified as a factor in the willful-or-reckless analysis.
Reducing the Risk Before the IRS Calls
The strongest protection against a 6694 penalty is documentation created at the time of preparation, not reconstructed later. Interview the client, write down what you asked and what they answered, note the red flags you looked into, and keep the legal research behind any position that is not obvious. That file is what a reasonable cause defense is built on.
Disclosure is the other main tool. When a position has support but falls short of substantial authority, filing Form 8275 (or 8275-R for a position contrary to a regulation) drops the required standard to reasonable basis and blocks the reckless-disregard branch of 6694(b).4Internal Revenue Service. Instructions for Form 8275 – Disclosure Statement Preparers often skip disclosure out of fear it will draw an audit, but a disclosed reasonable-basis position going into an audit is a much better place to stand than an undisclosed one that fails substantial authority.