Preparer penalties under IRC 6694 and 6695: the conduct standards, the 2026 amounts, how the IRS builds the case and how to contest it

Who is a tax return preparer

IRC 7701(a)(36) and Treas. Reg. 301.7701-15 define a tax return preparer as a person who prepares for compensation, or employs others to prepare for compensation, all or a substantial portion of a return or claim for refund. IRM 20.1.6.4.2 tells examiners that a nonsigning preparer who prepares a schedule, entry or portion that is a substantial portion of the return may be a tax return preparer, and that in judging what is substantial they should weigh the size and complexity of the item against the taxpayer's gross income and the understatement against the reported liability. Advisors who never sign a return can be preparers; the regulation's examples include an attorney at a different firm whose advice the signer relied on.

The IRC 6694 penalties apply to the return categories in Rev. Proc. 2009-11 section 3: income, estate and gift (now including Form 709-NA), employment and excise tax returns. An ERC claim on a Form 941-X is therefore within IRC 6694; see ERC examinations.

IRC 6694(a): unreasonable positions

The penalty applies where there is an understatement of the taxpayer's liability due to a position the preparer knew or reasonably should have known of, and either the position was disclosed but had no reasonable basis, or it was not disclosed and lacked substantial authority. For tax shelters and reportable transactions the standard is that it was reasonable to believe the position would more likely than not be sustained. The amount is the greater of $1,000 or 50 percent of the income derived or to be derived by the preparer from the return or claim.

IRM 20.1.6.4.7.1 quotes the regulation on reasonable basis: it “is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper,” and is not met by a position that is merely arguable or a colorable claim. For a signing preparer, disclosure means Form 8275 or 8275-R (or disclosure on the return where the annual revenue procedure allows), delivery of the return with the disclosure to the taxpayer and, for penalties other than the substantial understatement penalty, documented advice to the taxpayer on the IRC 6662 standards; a nonsigning preparer satisfies it by advising of the penalty standards and documenting the advice (IRM 20.1.6.4.8).

IRC 6694(b): willful or reckless conduct

IRC 6694(b) applies where any part of the understatement is due to a willful attempt to understate the liability, or to reckless or intentional disregard of rules or regulations. The penalty is the greater of $5,000 or 75 percent of the income derived (the PATH Act raised 50 percent to 75 percent for tax years ending after December 18, 2015), reduced by any IRC 6694(a) penalty on the same return. IRM 20.1.6.4.12.1 sets the recklessness test: a preparer “is reckless in not knowing of a rule or regulation if the tax return preparer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the standard of conduct a reasonable tax return preparer would observe in the situation.”

The burden differs from the (a) penalty. Under IRC 7427 “the IRS bears the burden of proof on the issue of whether the tax return preparer willfully attempted to understate the tax liability,” and IRC 7491(c) gives the IRS the burden of production on penalties in court generally. There is no reasonable cause exception to IRC 6694(b), no statute of limitations on its assessment, and an assessed IRC 6694(b) penalty is a mandatory referral to the Office of Professional Responsibility.

Firm liability and the one-preparer rule

Since 2009 the regulations have replaced the old one-preparer-per-firm rule with a search for the individual primarily responsible for the position. Treas. Reg. 1.6694-1(b) provides that the signing preparer is generally treated as primarily responsible for all positions unless credible information shows otherwise, in which case the nonsigning preparer with overall supervisory responsibility is. The IRS may tell several people in a firm that they may be found responsible, but, as IRM 20.1.6.4.3 puts it, “A penalty, however, may only be assessed against the individual in the firm who is the primarily responsible tax return preparer.” Preparers at different firms can each be primarily responsible for the same position.

The firm itself is liable under Treas. Reg. 1.6694-2(a)(2) only if one of three things is true: a member of principal management or a principal officer participated in or knew of the conduct; the firm failed to provide reasonable and appropriate review procedures for the position; or the firm disregarded its review procedures through willfulness, recklessness or gross indifference, including ignoring facts that would lead a prudent person to investigate. Written review procedures that are actually followed are therefore the firm's defense, and the IRM lists the same three tests for examiners (IRM 20.1.6.4.4).

The reasonable cause and good faith exception

IRC 6694(a) is not imposed if the understatement was due to reasonable cause and the preparer acted in good faith. IRM 20.1.6.4.10, following Treas. Reg. 1.6694-2(e), lists the factors:

Documenting inquiries at the time is what makes the defense usable later; see reasonable cause for the general standard and Circular 230 duties for the parallel diligence rule in section 10.22.

IRC 6695: the conduct penalties and 2026 amounts

IRC 6695 penalizes procedural failures regardless of whether the return understates tax. IRC 6695(h) indexes the amounts for inflation, and Exhibit 20.1.6-1 publishes the figure for each year by the year the return was filed, not the year it was due. For returns filed in 2026 (Rev. Proc. 2025-32):

Two of these are strict. For IRC 6695(f) the IRM says “There is no reasonable cause exception to this penalty,” and it applies even where the taxpayer asked for the refund to be deposited in the preparer's account and even where the preparer holds a Form 2848. For IRC 6695(g) the penalty “should be applied per failure, not per return,” so one return with EIC, CTC and head of household errors can carry three penalties, and “The penalty has no reasonable cause exception.” The due diligence requirements in Treas. Reg. 1.6695-2 are four: complete Form 8867; complete the computation worksheet or equivalent record; meet the knowledge requirement, making and contemporaneously documenting reasonable inquiries where information appears incorrect, inconsistent or incomplete; and retain Form 8867, the worksheets and the record of inquiries for three years.

How the IRS builds a preparer penalty case

IRM 20.1.6.4 describes the sequence. During a client's examination the examiner decides on the penalty lead sheet whether the preparer may be responsible for the understatement, discusses it with the supervisor and must obtain supervisory approval before opening a preparer penalty investigation. If approved, a separate penalty case is opened on ERCS with Form 5809, Preparer Penalty Case Control Card, signed by the supervisor; SB/SE examiners may instead refer the case to the Return Preparer Penalty Working Group. Disclosure rules keep any reference to the client's exam out of the preparer's file and vice versa. Written supervisory approval under IRC 6751(b) is required for each penalty, and the August 2026 revision of IRM 20.1.6.1.9 added a documentation checklist.

Third-party contact rules shape what the examiner may ask. IRM 20.1.6.19 explains that pro forma questions to the client about whether the preparer furnished a copy or negotiated the check are not third-party contacts, but once the examiner asks the client for information needed to decide the preparer's liability, the client is a third party with respect to the preparer and the IRC 7602(c) notice rules apply. The penalty is assessed on Form 8278 and posts to a civil penalty module (MFT 55 for an individual, MFT 13 for a business).

The statute of limitations

IRC 6696(d)(1) and IRM 20.1.6.18 give the periods. IRC 6694(a) and IRC 6695 penalties “shall be assessed within 3 years after the return or claim for refund with respect to which the penalty is assessed was filed.” “There is no statute of limitations on assessment for IRC 6694(b), IRC 6700, IRC 6701, and IRC 6713 penalties,” and none on injunction actions under IRC 7407 or 7408. The preparer's statute is separate from the client's: “Extending the statute using Form 872, Consent to Extend the Time to Assess Tax, on a taxpayer's return does not extend the statute for the tax return preparer penalty case.” The preparer's consent is Form 872-D, Consent to Extend the Time on Assessment of Tax Return Preparer Penalty, which the IRM says examiners solicit when less than 180 days remain and must obtain if the preparer wants Appeals with less than 365 days remaining, because deficiency procedures do not apply and Appeals will not take a case with under a year left. See the assessment statute and Form 872 extensions.

Contesting the penalty: Letter 1125, Appeals, Form 6118

1. Pre-assessment: Letter 1125. Treas. Reg. 1.6694-4(a)(2) provides pre-assessment appeal rights for IRC 6694, and IRM 20.1.6.16.1 extends the same practice to IRC 6695 and 6713. The preparer receives Letter 1125, Transmittal of Preparer Penalty Report, with the examination report and Publication 5, and has 30 days to agree or protest. No response means assessment. A formal protest should address the standard (substantial authority, reasonable basis, reasonable cause) position by position and attach the contemporaneous file.
2. Appeals. Preparer penalties are an Appeals Coordinated Issue referred to Appeals Technical Guidance, and IRM 8.11.3 governs. An unagreed penalty case generally does not go to Appeals before the related client return does. Preparer penalties generally cannot be challenged in a CDP hearing unless there was no prior opportunity.
3. Post-assessment: pay and claim. Form 6118, Claim for Refund of Tax Return Preparer and Promoter Penalties, is filed within three years of payment (IRC 6696(d)(2); Treas. Reg. 1.6696-1(g)). A preparer who never had an Appeals hearing may request one after the claim is proposed for denial, and IRM 20.1.6.16.4 allows a hearing on a denied claim even after a pre-assessment hearing.
4. The 15 percent special claim. Under IRC 6694(c), a preparer who within 30 days after notice and demand pays at least 15 percent of an IRC 6694 penalty and files a claim for refund stops levy and collection suits on the remainder until the claim is resolved administratively or in court; the IRM notes collection and the collection statute are suspended (TC 470 CC 95) and the claim is expedited. The IRM warns that a post-assessment appeal does not extend the IRC 6694(c) period, so the 30-day clock runs from notice and demand regardless of Appeals. IRC 6695 penalties have no special claim; they are paid in full and claimed.
5. Abatement where the client's liability was not understated. IRC 6694(d): a final administrative or judicial determination that there was no understatement on the client return requires abatement of the IRC 6694 penalty and refund of any amount paid without regard to any limitations period. Form 6118 is used; there is no statute on this claim. This is why the client case outcome should be tracked after the preparer case closes.

Referral to OPR and injunctions

IRM 20.1.6.12.3 separates discretionary and mandatory referrals to the Office of Professional Responsibility. Assessed IRC 6694(a) and IRC 6695(a) through (g) penalties are discretionary referrals, and “Referrals of assessed IRC 6694(a) penalties should be based on a pattern of failing to meet the required penalty standards under IRC 6694(a).” Assessed IRC 6694(b), 6700 and 6701 penalties are mandatory referrals. The referral is on Form 8484 through the area return preparer coordinator with management approval, and the IRM tells examiners the referral is not negotiable and is never to be discussed with the practitioner. Separately, IRC 7407 authorizes a civil action to enjoin a preparer from specified conduct or, for continual or repeated conduct, from acting as a preparer at all, and IRM 20.1.6.10 covers the referral to Counsel and the Department of Justice. What OPR does with a referral is the subject of the Office of Professional Responsibility guide.

Questions practitioners ask