Preparer penalties: IRC 6694 and 6695
The Internal Revenue Code penalises paid return preparers in two main ways. Section 6694 punishes a return or refund claim with an understatement caused by a bad position, and the amount depends on how bad: negligent or unreasonable under §6694(a), willful or reckless under §6694(b). Section 6695 punishes failures of procedure, such as not signing, not giving the client a copy, or not meeting due diligence. The decision rule: if the error is in the tax answer, think §6694; if it is in the paperwork or the checking, think §6695.
Version and sources: statutory text from the Code as published by Cornell LII, checked in October 2026, with regulations at 26 CFR 1.6694-2. The dollar amounts quoted for §6694 are written into the statute and are not indexed. The §6695 amounts are indexed for inflation each year, so this guide gives only the statutory base amounts and no 2026 adjusted figures. For a real exam year, read the revenue procedure the IRS publishes for that year.
Match the trigger to the penalty
| What the preparer did | Penalty | Base amount in statute |
|---|---|---|
| Understatement from an unreasonable position (see the standards below) that the preparer knew or should have known of | §6694(a) | Greater of $1,000 or 50% of the income derived from the return |
| Understatement from a willful attempt to understate, or reckless or intentional disregard of rules | §6694(b) | Greater of $5,000 or 75% of the income derived |
| Did not give the taxpayer a copy of the return | §6695(a) | $50 per failure, capped at $25,000 per calendar year |
| Did not sign the return as preparer | §6695(b) | $50 per failure, capped at $25,000 per calendar year |
| Did not include the preparer identifying number | §6695(c) | $50 per failure, capped at $25,000 per calendar year |
| Did not keep a copy or a list of returns prepared | §6695(d) | $50 each, capped at $25,000 per return period |
| Did not file the §6060 return listing the preparers employed, or left out a required item | §6695(e) | $50 each, capped at $25,000 per return period |
| Endorsed or negotiated a client’s refund check | §6695(f) | $500 per check |
| Failed due diligence on head of household status or on the credits listed in §6695(g) | §6695(g) | $500 per failure |
The §6695 amounts shown are the statutory base figures, which are adjusted for inflation, including the $500 amounts in (f) and (g), for returns and claims filed in calendar years after 2014 (§6695(h)). Do not use them as current amounts. Subsections (a) to (e) have a reasonable cause exception. Amounts stated in a question are what the question writer wants you to use.
How §6694(a) is decided
The preparer is penalised only if the position fails a standard:
- Not disclosed: it needs substantial authority.
- Disclosed: a reasonable basis is enough, with disclosure on Form 8275 or Form 8275-R or another permitted method.
- Tax shelter or reportable transaction: the preparer must reasonably believe the position would more likely than not be sustained on the merits.
The penalty also needs the preparer to have known, or have reason to know, of the position, and does not apply if the preparer shows reasonable cause and good faith. Under the regulation, a preparer may generally rely in good faith on client information without verifying it, but not if it looks incorrect, inconsistent or incomplete. Factors for reasonable cause include whether the error was isolated, the provision was complex and the preparer followed normal office practice. Flagrant or repeated errors do not qualify. If a final decision finds no understatement, the penalty is abated (§6694(d)). A preparer can pay at least 15% within 30 days of notice and demand and file a refund claim to stop collection while the case is heard (§6694(c)).
Worked example. A preparer earns a $400 fee on a return that deducts an expense with no authority behind it and no disclosure. The preparer knew the facts. The §6694(a) penalty is the greater of $1,000 or 50% of $400. Fifty percent is $200, so the penalty is $1,000. Had the fee been $5,000, the percentage would be $2,500, which is greater, so the penalty would be $2,500. The same facts under §6694(b), if the preparer deliberately understated, give the greater of $5,000 or 75% of the fee. The §6694(b) penalty is reduced by any §6694(a) penalty already paid on the same return.
A firm is not automatically liable. Under the regulation, a firm is penalised if its principal management or a branch office participated in or knew of the conduct, or if the firm lacked reasonable review procedures or disregarded them willfully, recklessly or with gross indifference.
Due diligence under §6695(g)
For returns claiming head of household status and the credits named in §6695(g) (the earned income credit, the child tax credit and credit for other dependents under §24, and the American opportunity credit), the regulation (26 CFR 1.6695-2) sets four requirements: complete and submit Form 8867, complete the credit computation worksheet or otherwise record the computation, meet the knowledge requirement, and retain records. The knowledge requirement means asking reasonable questions when the information seems incorrect, inconsistent or incomplete, and documenting the questions and answers. The penalty is per failure, so one return can produce several. Deductions and credits covers the credits themselves, and filing status explains head of household.
Beyond 6694 and 6695
Other Code sections can reach preparers: the penalty for aiding and abetting an understatement (§6701), penalties for unauthorised disclosure or use of return information (§6713, and §7216 as a crime), and injunctions against abusive preparers (§7407). Know the headings for the exam, but the section 6694 and 6695 distinction is what is tested most. A preparer can also face Circular 230 sanctions for the same conduct; see Circular 230 basics.
Which exams test this
| Exam | How it appears | On this site |
|---|---|---|
| SEE Part 3 | Domain 1, Practices and Procedures (26 of 85 scored questions), “Rules and penalties”: assessment and appeal of preparer penalties, penalty types, furnishing a copy to the taxpayer, signing and identifying numbers, keeping copies or lists, the section 6060 employee records, and preparer due diligence penalties | Practices and procedures, cheat sheet |
| SEE Part 1 | Minor: Deductions and Credits lists the earned income credit with the paid preparer’s checklist (Form 8867), eligibility and disallowance, so the due diligence side appears there | Deductions and credits |
The Part 2 outline (2026-27 testing window) lists no preparer penalty objective.
How the questions are built
- Knowledge words such as “knew or should have known” point to §6694(a); “willful” or “reckless” to §6694(b).
- Disclosure turns a substantial-authority question into a reasonable-basis question.
- Paperwork failures (no signature, no copy, no PTIN) are §6695, not §6694, and need no understatement.
- Computations ask for the greater of a dollar floor and a percentage of the fee. Compute both.
- Trap: applying the penalty to the taxpayer. These penalties are on the preparer; the taxpayer’s own accuracy penalties are separate.
Practice questions
Question 1. A preparer earns a $3,000 fee on a return with an undisclosed position that lacks substantial authority. The preparer should have known the position was improper and has no reasonable cause defence. What is the section 6694(a) penalty, using the statutory amounts?
- A. $1,000
- B. $2,250
- C. $1,500
- D. $5,000
Show answer
Answer: C
The penalty is the greater of $1,000 or 50 percent of the income derived from the return. Fifty percent of $3,000 is $1,500, which is greater than $1,000. The $5,000 floor and 75 percent rate belong to section 6694(b), which needs willful or reckless conduct. The $1,000 figure is only the minimum.
Question 2. A preparer completes and files a return but forgets to sign it as paid preparer, and no tax is understated. Which penalty provision most directly applies?
- A. Section 6694(a)
- B. Section 6694(b)
- C. Section 6695(g)
- D. Section 6695(b)
Show answer
Answer: D
Failure to sign is a procedural failure covered by section 6695(b). Section 6694 requires an understatement caused by an unreasonable position or willful conduct, which is not present. Section 6695(g) concerns due diligence for certain credits and head of household status, and section 6695(f) concerns negotiating refund checks.
Go deeper
- 26 U.S.C. 6694 and 26 U.S.C. 6695.
- 26 CFR 1.6694-2, the regulation on reasonable cause, disclosure and firms.
- Related: Circular 230 basics, filing status, business entity types and the SEE Part 3 representation guide.