What Is a Paid Preparer? Duties, Due Diligence, and Penalties

Paid tax preparer rules come from the Internal Revenue Code, Treasury regulations, and Circular 230, and they require anyone who prepares federal returns for compensation to register with the IRS, sign every return, meet specific accuracy and due diligence standards, protect client data, and keep records for at least three years. Breaking those rules can bring per-return fines, suspension or disbarment from practice before the IRS, and in serious cases criminal prosecution. Knowing what your preparer owes you under federal law makes it easier to spot a problem early and act on it if something goes wrong.

Who the Rules Cover

Internal Revenue Code Section 7701(a)(36) defines a tax return preparer as any person who prepares federal returns or refund claims for compensation, or who employs others to do so. Preparing a “substantial portion” of a return counts the same as preparing all of it, and the IRS weighs the size and complexity of the entry against the taxpayer’s overall liability when deciding whether a given item crosses that line.¹

Compensation is the trigger. Volunteers and people giving free advice are not covered, and the statute also excludes anyone providing only mechanical help like typing, employees preparing their own employer’s returns, and fiduciaries filing for someone they serve in that role.¹

Registration, Signing, and E-Filing

Every paid preparer, credentialed or not, must register with the IRS and obtain a Preparer Tax Identification Number. That PTIN has to appear on every return the preparer touches. The preparer must also sign each return, which means they are taking primary responsibility for its overall substantive accuracy, and they must hand the taxpayer a complete copy at the time of signing.²

If a preparer rushes you through signing and doesn’t give you a printed or electronic copy of the full return, that alone is a compliance violation.

A preparer who reasonably expects to file 11 or more individual income tax returns during the calendar year has to file them electronically. The mandate applies to returns for individuals, trusts, and estates, and a preparer who meets the threshold cannot offer paper filing as an option on a covered return unless a specific exception applies.³

Accuracy Standards for the Positions on Your Return

A preparer cannot simply transcribe whatever a client hands over. When numbers look incomplete, inconsistent, or implausible, the preparer is expected to ask follow-up questions and request documentation. Someone claiming $80,000 in business expenses against $90,000 of income should expect to produce receipts before those numbers go on a return.

Section 6694 sets the standard for the legal positions the return takes. For a position that is not disclosed, the preparer needs “substantial authority” supporting it before signing. If the position is disclosed on Form 8275 (or Form 8275-R, when the position runs against a Treasury regulation), the lower “reasonable basis” standard applies.⁴⁵

The bar is higher for tax shelters and reportable transactions. For those, the preparer must reasonably believe the position is “more likely than not” to be sustained on its merits, meaning a greater than 50% chance of success if challenged.⁶

Extra Due Diligence for Certain Credits

Congress singled out several high-risk tax benefits for additional scrutiny under Section 6695(g). When a return claims any of the following, the preparer owes extra due diligence:

Earned Income Tax Credit
Child Tax Credit and Additional Child Tax Credit
Credit for Other Dependents
American Opportunity Tax Credit
Head of Household filing status

For each of these, the preparer has to complete Form 8867 (a due diligence checklist) and submit it with the return, run the computation worksheets for each applicable credit, and keep records showing what information they relied on and how they got to the numbers. When something looks inconsistent, they have to ask follow-up questions and document the answers.⁷

The penalty for skipping these steps is steep. For returns filed in calendar year 2025, the IRS assesses $635 per failure, and each credit or filing status on a single return counts as a separate failure. A return claiming EITC, CTC, and Head of Household status without the required due diligence could draw nearly $1,900 in penalties on that one return alone. The amount adjusts for inflation each year.⁸

Confidentiality and Data Security

Section 7216 makes it a crime for a preparer to knowingly or recklessly disclose or misuse taxpayer information obtained during the preparation process. The only exceptions are disclosures required by law, such as a court order or subpoena.⁹

If a preparer wants to use your information for anything other than preparing your return, they need your specific written consent. Marketing financial products, sharing data with affiliates, or selling information to third parties all require a consent form that identifies exactly what will be disclosed and to whom. A general waiver buried in a stack of paperwork is not enough, and the e-file signature authorization on Form 8879 does not count as consent to use your data for other purposes.¹⁰

Preparers also have affirmative data security duties. Under the FTC Safeguards Rule, they must create and implement a written data security plan. IRS Publication 4557 spells out the expected safeguards: multi-factor authentication for anyone accessing client data, encryption of sensitive files and emails, anti-malware software on all devices, and routine monitoring of e-file applications and PTIN accounts for unauthorized use. Preparers must also limit internal access on a need-to-know basis, back up sensitive data to a secure external source, wipe or destroy old hard drives and printers that held client information, and review direct deposit details before e-filing. Noncompliance can trigger an FTC investigation.¹¹

Record-Keeping for Three Years

Preparers must keep either a completed copy of every return they prepare, or a record listing the taxpayer’s name, identification number, taxable year, and the type of return filed. These records must be retained for three years, measured from either the return’s due date or the date it was actually filed, whichever is later.¹²

For returns claiming EITC, CTC, AOTC, or Head of Household status, the bar is higher. The preparer has to retain the completed Form 8867, the computation worksheets, documentation showing how and when they received client information, and any substantiating documents the client provided.⁷

Penalties When Preparers Break the Rules

The penalty structure runs from small administrative fines up to prison time, depending on whether the violation involves a bad tax position, an administrative lapse, an ethical breach, or outright fraud.

Understatement Penalties (Section 6694)

When a preparer takes an unreasonable position that leads to an understatement of the taxpayer’s liability, the penalty is the greater of $1,000 or 50% of the income the preparer earned from that return. If the understatement results from willful conduct or reckless disregard of the rules, the penalty jumps to the greater of $5,000 or 75% of the preparer’s income from the return.⁶

Administrative Penalties (Section 6695)

Separate penalties apply for failing to meet basic administrative requirements like signing a return, providing the taxpayer a copy, including a PTIN, or retaining records. The statutory base is $50 per failure, capped at $25,000 per category per calendar year, and the amounts are adjusted for inflation annually. For returns filed in 2027, for example, the per-failure amount is $65 with a $33,000 cap.¹³

Discipline Under Circular 230

The IRS Office of Professional Responsibility can act against any practitioner who is incompetent, disreputable, or who violates professional conduct rules. Available sanctions include public censure, suspension from practice before the IRS, permanent disbarment, and monetary penalties up to the gross income the practitioner derived from the misconduct. These sanctions can be combined, so a preparer could face both a monetary penalty and a suspension at the same time.¹⁴

Criminal Penalties

Violating Section 7216’s confidentiality rules is a misdemeanor punishable by a fine of up to $1,000 and up to one year in prison. When the improper disclosure involves identity theft, the maximum fine rises to $100,000.⁹

A separate civil penalty under Section 6713 applies alongside the criminal provision: $250 per unauthorized disclosure or use of taxpayer information, capped at $10,000 per calendar year. For disclosures connected to identity theft, the civil penalty increases to $1,000 per incident with a $50,000 annual cap.¹⁵

The most serious exposure comes from Section 7206. A preparer who willfully helps prepare a fraudulent return, or aids in presenting a false document to the IRS, commits a felony punishable by up to $100,000 in fines and up to three years in prison.¹⁶

Reporting a Preparer Who Broke the Rules

If you believe your preparer filed an incorrect return, inflated your refund without your knowledge, or stole part of your refund, the complaint process starts with Form 14157. You can submit it online, by fax at 855-889-7957, or by mail to the IRS Return Preparer Office in Atlanta.¹⁷

If the preparer filed a return or changed your return information without your permission and you need the IRS to correct your tax account, you also have to submit Form 14157-A, a fraud or misconduct affidavit signed under penalties of perjury. You will need evidence that the person held themselves out as a preparer, such as a business card or advertisement, along with documentation of your interaction with them for the tax year in question. If you are claiming the preparer stole part of your refund, a police report describing the theft is also required.¹⁸

You Still Own the Return

This is the part that catches many taxpayers off guard. Hiring a paid preparer does not transfer your legal responsibility for the return. The IRS holds the preparer accountable for professional standards, but you remain personally liable for every number on the return. If the preparer understates your tax, you owe the difference plus any interest and penalties, even when the error was entirely the preparer’s fault. You can pursue a malpractice claim separately, but the IRS collects from you first.

Before signing, read the return. Confirm that the income figures match your records, that you recognize every deduction, and that the direct deposit information points to your account. Your preparer is legally required to be accurate; your signature says you are vouching for the return too.²

1
Office of the Law Revision Counsel. 26 USC 7701 Definitions
2
Internal Revenue Service. Topic No. 254 How to Choose a Tax Return Preparer
3
Internal Revenue Service. E-File Requirements for Specified Tax Return Preparers
4
eCFR. 26 CFR 1.6694-2 Penalty for Understatement Due to an Unreasonable Position
5
Internal Revenue Service. Instructions for Form 8275 Disclosure Statement
6
eCFR. 26 CFR 1.6694-1 Section 6694 Penalties Applicable to Tax Return Preparers
7
Internal Revenue Service. Due Diligence Law, Regulations and Requirements
8
Internal Revenue Service. Tax Preparer Penalties
9
Office of the Law Revision Counsel. 26 USC 7216 Disclosure or Use of Information by Preparers of Returns
10
Internal Revenue Service. About Form 8879
11
Internal Revenue Service. Safeguarding Taxpayer Data
12
eCFR. 26 CFR 1.6107-1 Tax Return Preparer Must Furnish Copy of Return or Claim for Refund to Taxpayer and Must Retain a Copy or Record
13
Office of the Law Revision Counsel. 26 USC 6695 Other Assessable Penalties With Respect to the Preparation of Tax Returns for Other Persons
14
Internal Revenue Service. Treasury Department Circular No. 230
15
Office of the Law Revision Counsel. 26 USC 6713 Disclosure or Use of Information by Preparers of Returns
16
Office of the Law Revision Counsel. 26 USC 7206 Fraud and False Statements
17
Internal Revenue Service. Make a Complaint About a Tax Return Preparer
18
Internal Revenue Service. Form 14157-A Tax Return Preparer Fraud or Misconduct Affidavit