IRC 6694 and IRC 6695: Tax Preparer Penalties and Due Diligence Obligations -- Practitioner Guide

IRC 6694 and IRC 6695 are the statutory framework for holding income tax return preparers directly accountable for their professional conduct. When a return position fails to meet the applicable standard of legal support, or when a preparer's conduct in preparing or supervising a return crosses from reasonable disagreement into willful or reckless disregard, the IRS can assess a monetary penalty against the preparer as a separate matter from any tax adjustment imposed on the taxpayer. For enrolled agents, CPAs, and tax attorneys who prepare returns, supervise preparers, or represent colleagues facing preparer-level examinations, understanding how these two statutes operate, where they differ, and what defenses are available is essential to risk management and client representation.

The One Big Beautiful Budget Act (OBBBA), enacted in 2025 and effective across multiple dates through 2026, expanded the terrain where both statutes create exposure. OBBBA amended IRC 24 to increase Child Tax Credit and Additional Child Tax Credit amounts and add a Social Security number requirement, which directly expands the per-return, per-credit penalty exposure under IRC 6695(g) for any CTC or ACTC claim where the preparer did not apply the updated eligibility rules. OBBBA also introduced novel provisions -- vehicle loan interest under the new IRC 163(h)(4), Trump Accounts under IRC 530A (effective July 4, 2026), and domestic R&E expensing under IRC 174A -- where implementation guidance from the IRS was not final as of July 2026, creating IRC 6694(a) risk zones for preparers who take aggressive positions without substantiation documentation.

This guide covers the full IRC 6694 penalty framework (the unreasonable position penalty, the willful or reckless conduct penalty, and the reasonable cause exception), the IRC 6695 administrative penalty subsections including the IRC 6695(g) due diligence obligation, PTIN requirements, the OBBBA penalty exposure areas specific to return preparers, listed and reportable transaction cross-references, five open questions as of July 2026, a ten-item practitioner defense checklist, and a claims verification notice. All statutory citations and regulatory references: verify at IRS.gov and in the applicable provisions before use in any client engagement.

Section 1: Overview -- The Preparer Penalty Framework

IRC 6694 and IRC 6695: separate statutes, separate targets

IRC 6694 and IRC 6695 are the two principal federal statutes imposing penalties on income tax return preparers. They differ in what conduct they address. IRC 6694 applies to the substantive legal positions taken on a return: it penalizes a preparer when a return reflects an understatement of tax attributable to a position that fails to meet the applicable standard of legal support. IRC 6695 applies to procedural and administrative obligations: it penalizes a preparer for specific failures such as not signing the return, not furnishing a copy to the taxpayer, not retaining records, and failing to satisfy due diligence requirements for certain credits, regardless of whether the return position itself is correct or produces any underpayment.

Both statutes are assessed against the preparer, not the taxpayer. A preparer penalty assessment under IRC 6694 or IRC 6695 does not affect the taxpayer's separate liability under IRC 6662 or any other provision. The two systems operate in parallel, and payment or abatement on one side has no legal effect on the other.

Circular 230: a distinct framework

Circular 230 (31 C.F.R. Part 10) governs the practice of attorneys, CPAs, enrolled agents, and other practitioners before the IRS. Its standards cover competence (Section 10.35), diligence (Section 10.22), reliance on client information (Section 10.34(d)), and written advice (Section 10.37). Circular 230 sanctions include reprimand, suspension from practice before the IRS, and disbarment.

Circular 230 and IRC 6694/6695 are separate legal frameworks. The standards are similar in spirit but different in scope, mechanics, and consequence. A Circular 230 sanction does not discharge or reduce an IRC 6694 or IRC 6695 monetary penalty, and an IRC 6694 or IRC 6695 penalty assessment does not automatically constitute a Circular 230 violation or trigger a Circular 230 proceeding. Practitioners must be aware of both frameworks: a single set of facts can independently trigger liability under either or both. Verify all applicable Circular 230 requirements in 31 C.F.R. Part 10 and at IRS.gov.

OBBBA context: new provisions, new risk areas

The OBBBA amended multiple IRC provisions that directly affect preparer penalty exposure. The IRC 24 amendments (increased CTC and ACTC amounts, new SSN requirement) are effective for returns filed for tax years to which the amendments apply; verify the effective date and all eligibility requirements at IRS.gov and in IRC 24 as amended. Preparers who prepared CTC or ACTC claims without applying the OBBBA-compliant requirements face IRC 6695(g) per-return, per-credit exposure even if the underlying return was filed in good faith under the prior rules.

On the IRC 6694(a) side, the OBBBA introduced several provisions where IRS implementation guidance was not final as of July 2026: vehicle loan interest under the new IRC 163(h)(4), Trump Accounts under the new IRC 530A (effective July 4, 2026), and domestic R&E expensing under IRC 174A (with the election window closing July 6, 2026). For any of these provisions, a preparer who takes a position that proves incorrect is exposed to an IRC 6694(a) penalty on the resulting understatement unless the position met the applicable standard of legal support at the time the return was filed. The uncertainty in IRS guidance is not itself a defense; the question is whether there was substantial authority or, for a disclosed position, at least a reasonable basis, at the time of filing.

Section 2: IRC 6694(a) -- The Unreasonable Position Penalty

Elements of an IRC 6694(a) penalty

Three elements must be present for an IRC 6694(a) penalty to apply:

1. The person is an income tax return preparer: that is, a person who prepared, or who employed or engaged one or more persons to prepare, all or a substantial portion of a tax return or claim for refund for compensation.
2. The return or claim for refund reflects an understatement of tax liability attributable to a specific position on that return.
3. That position was "unreasonable" as defined in IRC 6694(a)(2).

Each return is analyzed separately: a preparer who prepared multiple returns with problematic positions faces a separate potential penalty on each return.

The "unreasonable position" standard

Under IRC 6694(a)(2), a position is unreasonable unless one of the following conditions is met:

IRC 6694(a) penalty amount

The IRC 6694(a) penalty is the greater of the two amounts stated in IRC 6694(a)(1): a floor amount per return, and a percentage of the income derived (or to be derived) by the preparer from preparing the return or claim for refund. Both the floor amount and the income percentage formula are stated in IRC 6694(a)(1); verify both at IRS.gov and in IRC 6694(a)(1) before use in any representation. Do not state either figure as an authoritative bare dollar amount or percentage without that hedge.

Section 3: IRC 6694(b) -- Willful or Reckless Conduct

Elements of IRC 6694(b)

IRC 6694(b) imposes a penalty when the understatement of tax liability is attributable to either:

• Willful attempt to understate tax liability: a deliberate act by the preparer to reduce the tax shown on the return below what the preparer knew or should have known was owed.
• Reckless or intentional disregard of rules or regulations: "reckless" means conscious disregard of a known or obvious risk that the position violated a rule or regulation; "intentional disregard" includes knowing violations of Treasury regulations or IRS revenue rulings.

IRC 6694(b) penalty amount

The IRC 6694(b) penalty is the greater of the two amounts stated in IRC 6694(b)(1): a floor amount per return (higher than the IRC 6694(a) floor), and a percentage of the income derived or to be derived by the preparer from preparing the return. Both the floor amount and the income percentage formula are stated in IRC 6694(b)(1); verify both at IRS.gov and in IRC 6694(b)(1) before use in any representation. Do not state either figure as an authoritative bare dollar amount or percentage without that hedge.

No reasonable cause defense; mutual exclusivity with IRC 6694(a)

The IRC 6694(c) reasonable cause and good faith exception does not apply to IRC 6694(b) violations. Willful or reckless conduct forecloses the defense that the preparer acted reasonably or in good faith. This is a categorical bar, not a weighing of circumstances.

IRC 6694(a) and IRC 6694(b) are mutually exclusive as applied to the same understatement. The IRS may assess under either subsection, but not both, with respect to the same underpayment on the same return. In practice, the IRS may initially assess under IRC 6694(a) and then upgrade the assessment to IRC 6694(b) if the examination develops evidence of willfulness or recklessness.

Relationship to criminal penalties

An IRC 6694(b) civil penalty assessment does not preclude a separate criminal referral. IRC 7206 (making or subscribing a false return) and IRC 7207 (fraudulent returns, statements, or other documents) impose criminal penalties that apply to preparers who engage in fraudulent conduct. Civil and criminal proceedings are separate: an IRC 6694(b) penalty does not satisfy, reduce, or constitute a disposition of any criminal liability. Verify the scope of IRC 7206, IRC 7207, and the referral process at IRS.gov.

Section 4: IRC 6694(c) -- Reasonable Cause Exception

The reasonable cause defense under IRC 6694(c)

IRC 6694(c) provides that no penalty applies under IRC 6694(a) if it is shown that there is reasonable cause for the understatement and the preparer acted in good faith. This defense is available only for IRC 6694(a) unreasonable position penalties; it does not apply to IRC 6694(b) willful or reckless conduct.

The regulatory framework for the reasonable cause defense is found in Treas. Reg. 1.6694-2(d) (for IRC 6694(a)) and Treas. Reg. 1.6694-3(e) (for IRC 6694(b), though the defense is unavailable there). Practitioners defending against an IRC 6694(a) assessment must anchor their argument in the specific factors enumerated in Treas. Reg. 1.6694-2(d) and should verify all elements of the defense at IRS.gov and in those regulations.

Key elements of the reasonable cause defense

Documentation is the key

In any IRC 6694(a) examination, the preparer's documentation is the primary evidence of reasonable cause. Practitioners should maintain and be able to produce the following for each potentially at-risk return:

• Written engagement letter identifying the scope of services and the reliance on client-furnished information
• Client intake questionnaire or interview notes supporting the factual basis for the position
• Factual worksheets and computation schedules
• Legal research memoranda analyzing the applicable statute, regulations, and published guidance
• Partner or supervisor review notes evidencing supervisory review before filing
• Any Form 8275 or Form 8275-R filed with the return

Documentation created contemporaneously, before any audit, is substantially more persuasive than documentation assembled after the IRS issues a preparer penalty notice. Verify all reasonable cause documentation requirements in Treas. Reg. 1.6694-2(d) and at IRS.gov.

Section 5: IRC 6695 -- Administrative Preparer Penalties

IRC 6695 imposes a series of per-incident penalties on return preparers for failures in administrative process. Unlike IRC 6694, which requires an understatement of tax, the IRC 6695 penalties apply regardless of whether the underlying return position is correct or produces any underpayment. Each subsection carries its own penalty amount; verify all current amounts at IRS.gov and in the applicable IRC 6695 subsection before use in any representation.

Section 6: PTIN Registration and the Return Preparer Program

PTIN requirement under IRC 6695(c)

Under IRC 6695(c), a penalty is imposed for each prepared return or claim for refund that does not bear the preparer's identifying number. IRS regulations implementing the return preparer program require that this identifying number be a valid, current PTIN issued through the IRS PTIN system. The PTIN must be obtained before the preparer's first paid preparation activity in any registration year and renewed annually before the start of each subsequent year. Current registration requirements, renewal windows, and applicable fees: verify at IRS.gov. Prior to each filing season, confirm that every preparer in the firm who signs returns has a valid PTIN on file.

Unauthorized practice and IRC 7407

IRC 7407 authorizes the IRS to seek injunctive relief in federal district court against any person who engages in conduct subject to penalty under IRC 6694 or IRC 6695, engages in fraudulent or deceptive practices, or misrepresents their experience or education as a return preparer. An injunction under IRC 7407 can range from a prohibition against engaging in specific conduct to a complete bar from preparing federal tax returns for compensation. The referral process and the grounds for IRC 7407 proceedings: verify at IRS.gov.

Section 7: OBBBA Penalty Exposure Areas for Preparers (2025-2026 Returns)

The following OBBBA provisions create heightened IRC 6694(a) and/or IRC 6695(g) exposure for preparers of 2025 and 2026 returns. For each provision, the guidance status is noted as of July 2026; verify all developments at IRS.gov before filing any return that implicates these provisions.

IRC 163(h)(4): Vehicle Loan Interest Deduction

OBBBA amended IRC 163(h)(4) to permit deduction of interest on certain vehicle loans. As of July 2026, final IRS guidance on the scope, limitations, and documentation requirements for this deduction was not yet issued. Preparers who take aggressive positions on vehicle loan interest deductibility without documentation of a reasonable basis face IRC 6694(a) exposure if the positions are subsequently disallowed. Best practice: complete a written analysis of the available authorities, document the factual and legal basis for the position, and consider filing Form 8275 to disclose the position if the analysis does not clearly establish substantial authority. Verify guidance developments at IRS.gov.

IRC 530A: Trump Accounts

OBBBA created the new IRC 530A, establishing Trump Accounts, which became effective July 4, 2026. Proposed regulations implementing IRC 530A had not been finalized as of July 2026. For returns for any period in which IRC 530A is effective, preparers must document a reasonable basis for positions taken under this provision and should consider Form 8275 or Form 8275-R disclosure where the legal analysis is not conclusive. Verify the current status of IRC 530A regulations and IRS guidance at IRS.gov before preparing any return implicating this provision.

IRC 174A: Domestic R&E Expensing

OBBBA enacted IRC 174A, providing for domestic research and experimentation expensing. The election window under IRC 174A closed July 6, 2026. For returns on which preparers made or advised on IRC 174A elections, the timing and mechanics of the election must be verified carefully. Any IRC 174A election made outside the permitted window, or applied incorrectly, could produce an understatement of tax and IRC 6694(a) exposure for the preparer. Verify the election timing requirements and mechanics at IRS.gov and in IRC 174A before filing.

IRC 24: CTC/ACTC Post-OBBBA

OBBBA amended IRC 24 to increase the CTC and ACTC amounts and add a new Social Security number requirement as a condition of eligibility. For any return filed for a tax year to which the OBBBA amendments apply, preparers must apply the updated eligibility rules and complete Form 8867 under the updated requirements. A preparer who claims CTC or ACTC without applying the OBBBA-compliant eligibility criteria faces IRC 6695(g) due diligence penalty exposure on each affected return, regardless of whether the taxpayer would otherwise have been eligible under prior law. Verify the current IRC 24 requirements and the applicable Form 8867 version at IRS.gov.

OBBBA Novel Positions Generally

As a general matter, any return position taken on a provision introduced or substantially amended by OBBBA where final IRS guidance had not been issued as of the filing date should be assessed for IRC 6694(a) exposure before the return is filed. The assessment should address three questions: (1) Is there substantial authority (Treas. Reg. 1.6662-4(d); verify at IRS.gov) for the position as written? (2) If not, is there at least a reasonable basis (Treas. Reg. 1.6662-3(b)(3); verify at IRS.gov) that would support a Form 8275 or Form 8275-R disclosure? (3) Is the position for a tax shelter or reportable transaction, triggering the more likely than not standard (IRC 6694(a)(2)(B)(ii); verify at IRS.gov)? Document the analysis contemporaneously, note the guidance available as of the date of the analysis, and file the appropriate disclosure form if the analysis does not clearly establish substantial authority. Reliance on the reasonable cause defense under Treas. Reg. 1.6694-2(d) is stronger when the contemporaneous documentation is complete.

Section 8: Listed Transaction and Reportable Transaction Cross-Reference

IRC 6707A and Form 8886

A return preparer who is involved in a listed transaction or a reportable transaction faces penalty exposure under both IRC 6694 and IRC 6707A. IRC 6707A imposes a separate penalty for failure to file Form 8886 (Reportable Transaction Disclosure Statement), which is required to be filed by any taxpayer who participates in a reportable transaction. The IRC 6707A penalty is separate from and in addition to any IRC 6694 penalty. Verify the IRC 6707A penalty structure, the definition of reportable and listed transactions, and the Form 8886 filing requirements at IRS.gov and in the IRC 6707A guide on this site.

Material advisor obligations: IRC 6111 and IRC 6112

A return preparer who qualifies as a "material advisor" under IRC 6111 with respect to a reportable transaction faces separate disclosure and list-maintenance obligations under IRC 6111 and IRC 6112. IRC 6111 requires material advisors to file Form 8918 (Material Advisor Disclosure Statement) with the IRS. IRC 6112 requires material advisors to maintain lists of investors and other parties to whom they provided material advice. Failure to satisfy either requirement carries its own penalty exposure. The definition of "material advisor," the thresholds for that classification, and the form and timing requirements: verify at IRS.gov and in the IRC 6707A guide on this site.

Elevated IRC 6694(a) standard for reportable transactions

For any position involving a tax shelter or a reportable transaction to which IRC 6662A applies, the standard for avoiding the IRC 6694(a) penalty is elevated from "substantial authority" to the "more likely than not" standard stated in IRC 6694(a)(2)(B)(ii). This is a materially higher threshold. A preparer who assists in preparing a return reflecting a reportable transaction position without a documented reasonable belief that the position would more likely than not be sustained faces IRC 6694(a) exposure even if substantial authority exists for the position. Verify this standard and the definition of "reportable transaction" in IRC 6694(a)(2)(B)(ii) and at IRS.gov.

Section 9: Open Questions as of July 2026

The following questions represent areas where applicable law or IRS guidance was unsettled or unpublished as of the date this guide was reviewed. Practitioners should monitor IRS.gov and the Federal Register for developments on each.

Section 10: Practitioner Defense Checklist

The following checklist is a starting framework for practitioners representing a preparer facing a proposed IRC 6694 or IRC 6695 penalty assessment. Each item requires independent verification at IRS.gov and in the applicable statute and regulations.

1. 1 Identify the asserted subsection. Confirm whether the IRS is asserting IRC 6694(a) (unreasonable position), IRC 6694(b) (willful or reckless), or an IRC 6695 administrative penalty, and under which specific IRC 6695 subsection. The applicable defense, the penalty amount formula, and the available relief differ across these provisions. Verify the applicable provision at IRS.gov.
2. 2 For IRC 6694(a): assess substantial authority. Identify all available authorities (statute, regulations, revenue rulings, court decisions) and determine whether, taken together, they satisfy the substantial authority standard defined in Treas. Reg. 1.6662-4(d). Verify that standard at IRS.gov and in Treas. Reg. 1.6662-4(d).
3. 3 For IRC 6694(a): assess disclosure plus reasonable basis. If substantial authority is not present, determine whether the position was disclosed on Form 8275 or Form 8275-R and whether there was at least a reasonable basis for it under Treas. Reg. 1.6662-3(b)(3). Verify that standard at IRS.gov and in Treas. Reg. 1.6662-3(b)(3).
4. 4 For tax shelter or reportable transaction positions under IRC 6694(a): assess the more likely than not standard. If the position involves a tax shelter or a reportable transaction to which IRC 6662A applies, evaluate whether the preparer had reasonable belief that the position would more likely than not be sustained on its merits. Verify this elevated standard in IRC 6694(a)(2)(B)(ii) and at IRS.gov.
5. 5 Preserve and organize all documentation. Collect and preserve the written engagement letter, client questionnaire or intake notes, factual worksheets, legal research memoranda, partner or supervisor review notes, and any Form 8275 or Form 8275-R filed with the return. Contemporaneous documentation is the primary evidence in any IRC 6694(a) reasonable cause defense. Verify the documentation requirements under Treas. Reg. 1.6694-2(d) and at IRS.gov.
6. 6 Assess the reasonable cause defense under IRC 6694(c). For IRC 6694(a) assessments only: evaluate whether the preparer can show reasonable cause and good faith under the factors in Treas. Reg. 1.6694-2(d). Review reliance on taxpayer-furnished information, reliance on other professional information or research, and whether an honest difference of opinion on settled or unsettled law is supportable. Verify all applicable factors at IRS.gov and in Treas. Reg. 1.6694-2(d).
7. 7 For IRC 6695(g): review Form 8867 compliance and the knowledge standard. Confirm that Form 8867 was completed and retained for each return claiming EITC, CTC/ACTC/ODC, AOTC, or Head of Household status. Review whether the preparer applied the knowledge standard correctly, including OBBBA-compliant eligibility requirements for CTC and ACTC claims. Verify Form 8867 requirements and the OBBBA amendments to IRC 24 at IRS.gov.
8. 8 Determine the applicable penalty amount. Apply the greater-of formula stated in IRC 6694(a)(1) or IRC 6694(b)(1), as applicable. For IRC 6695, apply the per-return, per-credit amount stated in the applicable IRC 6695 subsection. Verify all amounts at IRS.gov and in the applicable statute before use in any representation or settlement analysis.
9. 9 Evaluate whether IRC 6707A exposure also applies. If the return position involved a reportable or listed transaction, assess whether Form 8886 was filed, whether any material advisor obligations under IRC 6111 or IRC 6112 apply, and whether IRC 6707A penalties are also at issue. Cross-reference the IRC 6707A guide on this site for the complete reportable transaction and listed transaction framework.
10. 10 Evaluate the administrative appeals process and current IRS enforcement priorities. Preparer penalty assessments may be contested through the IRS administrative appeals process. Review the procedures for requesting appeals consideration and any IRS Examination Division guidance on preparer penalty settlements. Monitor IRS.gov for current OBBBA enforcement priorities and updated IRC 6695(g) due diligence requirements. Cross-reference the IRS penalty abatement guide on this site for additional administrative relief options.

Section 11: Practitioner Claims and Verification Notice

The following table lists every specific statutory or regulatory claim made in this guide, the authority for that claim, and the required verification source. No claim in this table should be used as a substitute for a primary source review of the applicable law. Verify all figures, formulas, and standards at IRS.gov and in the cited provision before use in any client engagement or representation.

Frequently Asked Questions