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Preparer Penalties for 2025

Overview of Tax Return Preparer Penalties

Tax return preparer penalties are comprehensive civil sanctions designed to ensure professional competence and compliance in tax preparation services. Under IRC 6694(a), the penalty is $250 per return for returns prepared on or before May 25, 2007 and the greater of $1,000 or 50 percent of the income derived or to be derived by the tax return preparer for returns/claims prepared on or after May 26, 2007. For penalties assessed under IRC 6694(b), use PRN 650. For returns/claims prepared on or before May 25, 2007, the penalty is $1,000 per return/claim and for those prepared after May 26, 2007, the penalty is the greater of $5,000 of the income derived or to be derived by the tax return preparer. 1 1 For returns prepared for taxable years ending after 12/18/2015, the penalty was increased to 75 percent. 1

The penalty structure reflects the serious nature of professional responsibilities in tax preparation, with escalating consequences based on the severity of violations and the preparer’s conduct. These penalties serve as both deterrent and enforcement mechanisms to maintain the integrity of the tax system.

Section 6694 Penalties – Understatement of Liability

Section 6694(a) – Unreasonable Positions

The Section 6694(a) penalty applies when a tax return preparer takes an unreasonable position that results in an understatement of tax liability. Estate tax return preparers who prepare any return or claim for refund which reflects an understatement of tax liability due to an unreasonable position are subject to a penalty equal to the greater of $1,000 or 50% of the income earned (or to be earned) for the preparation of each such return. 2 This penalty structure ensures that preparers maintain reasonable standards when taking positions on tax returns.

The penalty won’t apply if it can be shown that there was reasonable cause for the understatement and that the preparer acted in good faith. In cases where any part of the understatement of the liability is due to a willful attempt by the return preparer to understate the liability, or if the understatement is due to reckless or intentional disregard of rules or regulations by the preparer, the preparer is subject to a penalty equal to the greater of $5,000 or 75% of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. 3

Section 6694(b) – Willful or Reckless Conduct

The more severe Section 6694(b) penalty addresses willful attempts to understate liability or reckless disregard of tax rules and regulations. $5,000, or (B) 75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. 4 Generally, sec. 6694(b)(1) provides that “[a]ny tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to * * * [willful or reckless tax return preparer conduct] shall pay a penalty with respect to each such return or claim in an amount equal to the greater of” $5,000 or 75% of the income derived by the preparer with respect to the return or claim. 5

The willful conduct standard requires demonstrating that the preparer intentionally disregarded known legal requirements. A preparer is considered to have willfully attempted to understate liability if the preparer disregards, in an attempt wrongfully to reduce the tax liability of the taxpayer, information furnished by the taxpayer or other persons. For example, if a preparer disregards information concerning certain items of taxable income furnished by the taxpayer or other persons, the preparer is subject to the penalty. Similarly, if a taxpayer states to a preparer that the taxpayer has only two dependents, and the preparer reports six dependents on the return, the preparer is subject to the penalty. 6

Section 6695 Penalties – Procedural Violations

Current Penalty Amounts for 2025

The Section 6695 penalties address various procedural failures in tax return preparation. Failure to furnish copy to taxpayer (§ 6695(a)) | $60 | $31,500 | | Failure to sign return (§ 6695(b)) | $60 | $31,500 | | Failure to furnish identifying number (§ 6695(c)) | $60 | $31,500 | | Failure to retain copy or list (§ 6695(d)) | $60 | $31,500 | | Failure to file correct information returns (§ 6695(e)) | $60 per return and item in return | $31,500 | | Negotiation of check (§ 6695(f)) | $635 per check | No limit | | Failure to be diligent in determining eligibility for head of household filing status, child tax credit, American Opportunity tax credit, and earned income credit (§ 6695(g)) | $635 per failure | No limit | 7

These amounts represent the inflation-adjusted penalties for 2025, reflecting the ongoing effort to maintain the deterrent effect of these sanctions despite economic changes over time.

Specific Procedural Requirements

Failure to Furnish Identifying Number (Section 6695(c))

Any person who is a tax return preparer with respect to any return or claim for refund and who fails to comply with section 6109(a)(4) with respect to such return or claim shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $25,000. 8

Failure to Retain Copy or Record (Section 6695(d))

A person who is a signing tax return preparer as described in § 301.7701-15(b)(1) of this chapter of any return of tax under the Code or claim for refund of tax under the Code, and who fails to satisfy the requirements imposed upon him or her by section 6107(b) and § 1.6107-1(b) and (c) (other than the record requirement described in both § 1.6107-1(b)(2) and (3)) to retain and make available for inspection a copy of the return or claim for refund, or to include the return or claim for refund in a record of returns and claims for refund and make the record available for inspection, shall be subject to a penalty of $50 for the failure, unless it is shown that the failure is due to reasonable cause and not due to willful neglect. A person may not, for returns or claims for refund presented to the taxpayers (or nontaxable entities) during each calendar year, be subject to more than $25,000 in penalties under section 6695(d) and paragraph (d)(1) of this section. 9

Negotiation of Check (Section 6695(f))

Any person who is a tax return preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect of the taxes imposed by this title which is issued to a taxpayer (other than the tax return preparer) shall pay a penalty of $500 with respect to each such check. The preceding sentence shall not apply with respect to the deposit by a bank (within the meaning of section 581) of the full amount of the check in the taxpayer’s account in such bank for the benefit of the taxpayer. 10

Due Diligence Requirements (Section 6695(g))

The due diligence penalty represents one of the most significant enforcement mechanisms for ensuring preparer competence in claiming specific tax benefits. Section 1.6695-2(b), Income Tax Regs., prescribes due diligence requirements that a tax return preparer must satisfy to avoid a penalty under section 6695(g). These requirements include preparing and retaining certain IRS forms (e.g., Form 8867, Paid Preparer’s Earned Income Credit Checklist, and the Earned Income Credit Worksheet), and the tax return preparer must not know, or have reason to know, that any information that he relied upon in determining a taxpayer’s eligibility for, or the amount of, the EITC is incorrect. 11

The penalty applies separately to each credit or filing status for which due diligence requirements are not met. Preparer A did not meet the due diligence requirements under this section with respect to the CTC or the AOTC claimed on the taxpayer’s return. Unless the exception to penalty provided by paragraph (d) of this section applies, Preparer A is subject to two penalties under section 6695(g): One for failure to meet the due diligence requirements for the CTC and a second penalty for failure to meet the due diligence requirements for the AOTC. 12

Section 6713 – Disclosure and Use Penalties

Civil Penalties for Information Misuse

Section 6713(a) prescribes a related civil penalty for disclosures and uses that constitute a violation of section 7216. The penalty for violating section 6713 is $250 for each prohibited disclosure or use, not to exceed a total of $10,000 for a calendar year. Section 6713(b) provides that the exceptions in section 7216(b) also apply to section 6713. 13

Criminal Penalties for Serious Violations

Section 7216(a) prescribes a criminal penalty for tax return preparers who knowingly or recklessly disclose or use tax return information for a purpose other than preparing a tax return. A violation of section 7216 is a misdemeanor, with a maximum penalty of up to one year imprisonment or a fine of not more than $1,000, or both, together with the costs of prosecution. 13

Assessment and Collection Procedures

Administrative Process Requirements

Section 6696(b) provides in relevant part that the deficiency procedures of subchapter B of chapter 63 of the Code shall not apply with respect to the assessment or collection of the penalties provided by section 6695. 11 This means that preparer penalties follow different procedural rules than typical tax deficiencies.

Payment and Appeal Options

If the IRS assesses either of the two penalties described in section 6694(a) and section 6694(b), it will send to the tax return preparer a statement of notice and demand, separate from any notice of a tax deficiency, for payment of the amount assessed. Within 30 days after the day on which notice and demand of either of the two penalties described in section 6694(a) and section 6694(b) is made against the tax return preparer, the tax return preparer must either— (i) Pay the entire amount assessed (and may file a claim for refund of the amount paid at any time not later than 3 years after the date of payment); or (ii) Pay an amount which is not less than 15 percent of the entire amount assessed with respect to each return or claim for refund and file a claim for refund of the amount paid. 14

Collection Suspension Provisions

If the tax return preparer pays an amount and files a claim for refund under paragraph (a)(4)(ii) of this section, the IRS may not make, begin, or prosecute a levy or proceeding in court for collection of the unpaid remainder of the amount assessed until the later of— (i) A date which is more than 30 days after the earlier of— (A) The day on which the tax return preparer’s claim for refund is denied; or (B) The expiration of 6 months after the day on which the tax return preparer filed the claim for refund; and (ii) Final resolution of any proceeding begun as provided in paragraph (b) of this section. The IRS may counterclaim in any proceeding begun as provided in paragraph (b) of this section for the unpaid remainder of the amount assessed. 14

Electronic Filing Provider Considerations

Mechanical Assistance Exception

Under IRC 301.7701-15(d), Providers are not income tax return preparers for the purpose of assessing most preparer penalties, as long as their services are limited to “typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund.” If an ERO, ISP, Transmitter, or the tax preparation product of a Software Developer alters the return information in a non-substantive way, this alteration will be considered under the “mechanical assistance” exception described in IRC 301.770115(d). A non-substantive change is a correction or change limited to a transposition error, misplaced entry, spelling error, or arithmetic correction. If an ERO, ISP, Transmitter, or the tax preparation product of a Software Developer alters the return in a way that does not come under the “mechanical assistance” exception, the Provider may be considered “income preparers” for purposes of asserting income tax return preparer penalties. 15

Case Management and Documentation Requirements

ERCS Record Establishment

Statute of Limitations Considerations

If the remaining assessment statute of limitations is greater than 365 days then proceed to paragraph (17). There must be a minimum of 12 months (365 days) remaining on the statute at the date when the case reaches the Office of Appeals. See IRM 25.6.23.7.1, Minimum Time Remaining on ASED. Guidance for reviewing and extending the return preparer penalty assessment statute is provided in IRM 20.1.6.18, Statute of Limitations. 16

New Penalties Under the One Big Beautiful Bill Act

Qualified Opportunity Fund Reporting Penalties

If any person required to file a return under section 6039K fails to file a complete and correct return under such section in the time and in the manner prescribed therefor, such person shall pay a penalty of $500 for each day during which such failure continues. The maximum penalty under this section on failures with respect to any 1 return shall not exceed $10,000. In the case of any failure described in subsection (a) with respect to a fund the gross assets of which (determined on the last day of the taxable year) are in excess of $10,000,000, paragraph (1) shall be applied by substituting ‘ $50,000 ‘ for ‘ $10,000 ‘ . 17

Enhanced Penalties for Intentional Disregard

If a failure described in subsection (a) is due to intentional disregard, then— “(1) subsection (a) shall be applied by substituting ‘ $2,500 ‘ for ‘ $500 ‘ , “(2) subsection (b)(1) shall be applied by substituting ‘ $50,000 ‘ for ‘ $10,000 ‘ , and “(3) subsection (b)(2) shall be applied by substituting ‘ $250,000 ‘ for ‘ $50,000 ‘ . 17

Professional Standards and Reasonable Cause Defenses

Reasonable Cause Standards

The reasonable cause defense provides relief from penalties when preparers can demonstrate that failures were not due to willful neglect. A preparer isn’t considered to have recklessly or intentionally disregarded a rule if a position is adequately disclosed and has a reasonable basis. 3 This standard recognizes that good faith efforts to comply with complex tax laws should not be penalized when reasonable interpretations lead to different conclusions.

Documentation Requirements for Defense

Your disclosure will be considered adequate if you file Form 8275-R and provide the required information in detail. 3 Proper documentation and disclosure can serve as important elements in establishing reasonable cause defenses and demonstrating good faith compliance efforts.

The 2025 preparer penalty structure reflects a comprehensive approach to ensuring professional competence and compliance in tax preparation services. The escalating penalty amounts, combined with procedural safeguards and reasonable cause defenses, create a balanced framework that promotes accuracy while recognizing the complexity of tax law interpretation. Preparers must maintain current knowledge of these requirements and implement robust quality control procedures to minimize penalty exposure while serving their clients effectively.

Sources

1 IRS IRM 25.25.10 Frivolous Return Program
2 IRS – Instruction 706 Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
3 IRS – Instruction 8275-R Instructions for Form 8275-R, Regulation Disclosure Statement
4 IRC § 6694(b)
5 Dawson U.S. Tax Court Opinions Julie A. Rockafellor
6 Treasury Regulation 1.6694-3
7 Rev. Proc. 2023-34
8 IRC § 6695(c)
9 Treasury Regulation 1.6695-1
10 IRC § 6695(f)
11 Dawson U.S. Tax Court Opinions Abdiwali Suldan Mohamed
12 Treasury Regulation 1.6695-2
13 Treasury Regulation 301.7216-1
14 Treasury Regulation 1.6694-4
15 IRS – Publication 4163 Modernized e-File (MeF) Information for Authorized IRS e-file Providers for Business Returns
16 IRS IRM 4.25.7 Estate and Gift Tax Penalty and Fraud Procedures
17 One Big Beautiful Bill Act Sec. 70421. Permanent renewal and enhancement of opportunity zones

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What are the preparer penalties for 2025?