1. Overview: IRC 6700 and IRC 6701 in the Promoter-Penalty Framework
The Employee Retention Credit enforcement environment created by the OBBBA (P.L. 119-21, signed July 4, 2025; verify all provisions at IRS.gov) has placed the two oldest promoter-penalty statutes at the center of tax practice risk. IRC 6700 and IRC 6701 (verify at IRS.gov and in current IRC text) have existed since the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA), originally designed to deter abusive tax shelter promoters. For decades they operated at the margins of mainstream practice. The OBBBA changed that: it attached a new and dramatically higher penalty structure to IRC 6701 specifically for "COVID-ERTC Promoters" -- retroactive to March 12, 2020 -- and designated certain ERC claims as "listed transactions," triggering a separate layer of Material Advisor obligations.
The result is that any enrolled agent, CPA, or tax attorney who assisted clients with ERC claims -- from the broadest multi-client promoter to the solo practitioner who helped one or two small-business clients calculate their ERC -- must assess their exposure under this framework. This guide covers the statutory structure of IRC 6700 and IRC 6701 (baseline and OBBBA-expanded), the procedural rules under IRC 6703, the injunction authority under IRC 7408, the Material Advisor obligations triggered by the ERC listed-transaction designation, and the representation strategy for practitioners facing promoter-penalty investigations. Every claim in this guide must be verified at IRS.gov and with qualified legal counsel before application to any specific client situation.
Context: Why the OBBBA Changed Everything for ERC Practitioners
Before the OBBBA, an ERC practitioner's worst-case statutory exposure for assisting with an ERC claim that turned out to be improper was the baseline IRC 6701 penalty: $1,000 per document ($10,000 for documents involving corporations), assessed without deficiency procedures. The OBBBA expanded that exposure to the greater of $200,000 or 75% of gross income from the ERC advice or document -- for conduct retroactive to March 12, 2020. A practitioner who earned $300,000 assisting clients with ERC claims could face a penalty exceeding $225,000 for a single pattern of conduct. Add the Material Advisor penalties under IRC 6707/6708 for failure to register the ERC listed transaction and maintain a client list, and the total exposure can be material. Verify all current penalty amounts, definitions, and effective dates at IRS.gov before assessing any specific situation.
2. IRC 6700 Baseline: Promoter Definition, Abusive Tax Shelter, and Penalty Calculation
IRC 6700 (verify at IRS.gov and in current IRC text) imposes a penalty on any person who: (1) organizes or assists in the organization of a partnership or other plan or arrangement, or participates in the sale of any interest in an entity or plan or arrangement; and (2) makes a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity, which the person knows or has reason to know is false or fraudulent as to any material matter.
2.1 Who Is a "Promoter" Under IRC 6700?
The statute covers persons who "organize," "assist in organizing," or "participate in the sale of" a plan or arrangement. Courts have interpreted this broadly to cover not only the architects of the shelter but also persons who played supporting roles -- preparing offering documents, providing legal or accounting opinions used in the promotion, or selling or marketing interests to clients. Not every person who gives advice about a tax position is a promoter; the critical element is participation in the organizational or sale activity, coupled with a false or fraudulent statement about the tax benefit (verify the current definitional standards in your circuit at IRS.gov and through current case law).
2.2 The Baseline Penalty Under IRC 6700
The baseline IRC 6700 penalty (verify at IRS.gov) is the greater of $1,000 or 100% of the gross income the person derived or is expected to derive from the activity. The penalty applies per organization or participation in a sale -- each client or transaction is a separate potential assessment. A promoter who sold interests in an abusive arrangement to 50 clients and derived $500,000 in gross income faces a penalty of 100% of that income ($500,000), not the $1,000 floor. The penalty is assessed without deficiency procedures; the pay-first-contest-later framework under IRC 6703 (see Section 8 below) applies. Verify all current IRC 6700 penalty amounts and application rules at IRS.gov before advising a client.
3. IRC 6701 Baseline: Aiding and Abetting, Understatement Element, and the $1,000/$10,000 Penalty
IRC 6701 (verify at IRS.gov and in current IRC text) is distinct from IRC 6700 in two important ways: (1) it does not require the existence of a "tax shelter" -- it applies to any person who aids or assists in the preparation of any document used in connection with any tax matter; and (2) it requires that the person know (or have reason to believe) that the document will be used in connection with a matter affecting a material understatement of another person's tax liability. IRC 6701 is thus broader in scope (no shelter requirement) but narrower in its knowledge element (requires knowledge of the understatement effect).
3.1 The "Aids or Assists" Standard
The aiding-and-abetting standard under IRC 6701 is broad: courts have held that it covers not only persons who directly prepare or sign a document, but also persons who provide accounting analysis, tax opinions, or advice that another person uses in preparing a false or understated return or claim. A promoter who calculated ERC amounts for clients, prepared worksheets used in filing amended returns, or provided an ERC eligibility analysis that advisors or clients relied on in filing may qualify as an "aider or abetter" even if the promoter did not sign the return or claim. Verify the current "aids or assists" standard in your circuit at IRS.gov and through current legal research before assessing any specific client situation.
3.2 The Baseline Penalty Structure and Mutual Exclusion
The baseline IRC 6701 penalty (verify at IRS.gov) is $1,000 per document ($10,000 if the document involves the understatement of a corporation's tax liability). The mutual exclusion rule: a person who is subject to an IRC 6700 penalty for the same conduct is not subject to an IRC 6701 penalty, and vice versa. The IRS must choose one or the other -- the government cannot stack both penalties for the same act. However, each document is a separate act, so a promoter who prepared ERC worksheets for 40 clients faces up to 40 separate IRC 6701 assessments at $1,000 or $10,000 each (or the OBBBA-expanded amounts for COVID-ERTC Promoters). Verify the current mutual exclusion rule and per-document application at IRS.gov and with qualified legal counsel.
4. The OBBBA Expansion: COVID-ERTC Promoters and the Greater-of-$200,000-or-75% Penalty
The OBBBA's most significant change to the IRC 6700/6701 framework is the creation of a new penalty category for "COVID-ERTC Promoters" within IRC 6701 (verify the exact statutory text, definitions, and effective dates at IRS.gov and in the OBBBA P.L. 119-21 Section 70605 and related provisions). The heightened penalty applies to any person who qualifies as a COVID-ERTC Promoter and falls within the conduct standards of IRC 6701.
4.1 COVID-ERTC Promoter: Proposed Definition
Under the OBBBA framework (verify the current regulatory definition at IRS.gov and in IRS guidance issued under the OBBBA), a COVID-ERTC Promoter is a person who aided or assisted in the preparation of a document claiming an Employee Retention Credit that the promoter knew or had reason to know was not allowable -- retroactive to March 12, 2020. The definition is designed to capture promoters who assisted with improper ERC claims during the COVID-era credit period, regardless of whether the claims were filed before the OBBBA's enactment. Verify the current regulatory definition and any safe harbors or exclusions at IRS.gov before applying this definition to any specific client situation.
4.2 The Penalty Amount
For a person who qualifies as a COVID-ERTC Promoter, the IRC 6701 penalty is the greater of (verify at IRS.gov and in current IRC text): (1) $200,000 ($10,000 for an individual); or (2) 75% of the gross income the person derived from the COVID-ERTC-related advice, document, or assistance. The 75%-of-gross-income calculation applies to all ERC-related income the promoter received from the covered conduct, not just income from improper claims. A practitioner who earned $400,000 in total ERC-related fees faces a potential penalty of $300,000 (75% of $400,000) if the IRS asserts that all of that income involved COVID-ERTC Promoter conduct. Verify the calculation methodology, the definition of "gross income derived," and any available offsets or exclusions at IRS.gov and with qualified legal counsel.
Warning: The OBBBA ERC Promoter Penalty Is Retroactive to March 12, 2020 -- Past ERC Work Is Now at Issue
The OBBBA's expanded IRC 6701 penalty for COVID-ERTC Promoters applies retroactively to conduct occurring on or after March 12, 2020 (verify the exact effective date and any transition rules at IRS.gov). This means that a practitioner who assisted clients with ERC claims during 2020, 2021, 2022, 2023, or 2024 -- before the OBBBA was enacted on July 4, 2025 -- may now face the heightened $200,000 / 75%-of-income penalty for that past conduct. The retroactivity of the heightened penalty amount raises constitutional questions that may be litigated; verify the current legal status of the retroactivity provision with qualified legal counsel and at IRS.gov before relying on any assertion that it does not apply. Do not assume that pre-OBBBA ERC work is insulated from the new penalty structure. Assess your exposure and engage counsel now if you assisted clients with ERC claims and have not done so already.
5. ERC Listed-Transaction Designation: Material Advisor Status, Form 8918, and IRC 6707A Penalties
The OBBBA (Section 70605 and related provisions; verify at IRS.gov) designated certain ERC claims as "listed transactions" under IRC 6011 (verify the exact scope of the designation and any exclusions at IRS.gov). A listed transaction is a reportable transaction that the IRS has determined to be a tax avoidance transaction; its designation triggers disclosure and registration obligations for both participants and Material Advisors. The ERC listed-transaction designation is the source of the Material Advisor obligations that operate parallel to (and independently of) the IRC 6700/6701 penalty exposure.
5.1 Material Advisor Status Under IRC 6111
A "material advisor" (IRC 6111; verify at IRS.gov and in current IRC text) is any person who provides material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and who derives gross income above the threshold amount. The threshold for listed transactions is $10,000 for transactions with individual participants and $25,000 for transactions with entity participants (verify current thresholds at IRS.gov). For ERC purposes, a practitioner who assisted a business entity client with an ERC claim and derived $25,000 or more in gross income from that advice has potentially crossed the Material Advisor threshold. Verify the current definition, thresholds, and application to ERC claims at IRS.gov before making any determination.
5.2 Registration and Client List Requirements
A Material Advisor for the ERC listed transaction must: (1) register the transaction with the IRS on Form 8918 (Material Advisor Disclosure Statement) within the applicable deadline (verify current deadline at IRS.gov -- the standard deadline for a listed transaction is the later of the person becoming a Material Advisor or the transaction becoming listed); and (2) maintain a list of all clients who participated in the ERC listed transaction and make that list available to the IRS upon written request (IRC 6112; verify at IRS.gov). The list must include the client's identity, the amount of ERC claimed, and such other information as the IRS requires. Failure to register triggers a penalty under IRC 6707 (verify at IRS.gov); failure to maintain or furnish the list triggers a penalty under IRC 6708. Verify all current Form 8918 requirements, list maintenance obligations, and applicable deadlines at IRS.gov and with qualified legal counsel before filing or failing to file.
Caution: The ERC Listed-Transaction Designation Triggers Disclosure That May Be Used in the Penalty Investigation
Filing Form 8918 as a Material Advisor is a legal obligation if the threshold is met, but it also discloses the practitioner's identity and ERC activity to the IRS, which may use that disclosure to identify clients for examination and to support a promoter-penalty investigation. The decision about whether and how to file Form 8918 -- including whether the practitioner qualifies as a Material Advisor, which transactions are covered by the ERC listed-transaction designation, and what information the form requires -- should be made with qualified legal counsel who is familiar with both the Material Advisor disclosure framework and the concurrent IRC 6700/6701 penalty exposure. Do not assume that filing Form 8918 is either automatically safe (it discloses information) or that failing to file is acceptable (it triggers IRC 6707 penalties). Get counsel before proceeding. Verify all requirements at IRS.gov.
6. Due Diligence Requirements for ERC Promoters Under the OBBBA
The OBBBA imposed a separate due diligence obligation on ERC promoters, modeled on the existing IRC 6695(g) due diligence requirement that applies to return preparers who claim EITC, CTC, AOTC, and head-of-household status for clients (verify all OBBBA due diligence requirements at IRS.gov and in IRS guidance implementing the OBBBA). The due diligence obligation operates independently of the IRC 6700/6701 penalty exposure and of the Material Advisor registration requirements.
6.1 What the Due Diligence Standard Requires
Under the OBBBA-imposed standard (verify current IRS regulations and guidance at IRS.gov), an ERC promoter must: (1) apply the knowledge and judgment of a reasonable and well-informed tax practitioner in assessing the client's ERC eligibility; (2) complete and retain a due diligence checklist for each client whose ERC claim the promoter assisted with; (3) obtain documentation of the client's claimed eligibility basis -- specifically the government order relied on (for the government-order test) or the gross receipts data (for the significant-decline-in-gross-receipts test); and (4) obtain a written client representation as to the accuracy of the eligibility information. The $1,000 per-failure penalty applies to each client for whom the due diligence requirement is not met (verify current penalty amount and application at IRS.gov).
6.2 Effective Date and Retroactivity
The due diligence requirements (as opposed to the heightened penalty amounts) apply to assistance provided after July 4, 2025 (verify the exact effective date and any transition rules at IRS.gov). They are not retroactive. However, the substantive IRC 6701 penalty analysis for pre-OBBBA ERC work will assess the promoter's actual diligence (or lack thereof) as relevant to knowledge and intent -- whether or not the formal OBBBA due diligence requirements were in effect at the time. Practitioners who assisted with ERC claims before July 4, 2025 should retain and organize all documentation they created or collected during that engagement (eligibility analysis, government orders, gross receipts data, client representations) as this documentation will be central to any promoter-penalty defense. Verify all current requirements at IRS.gov.
7. The IRC 6700/6701 Mutual Exclusion Rule and the IRC 6676 Erroneous-Claim Penalty
IRC 6703(c) (verify at IRS.gov and in current IRC text) provides that if a person is subject to an IRC 6700 penalty, that person is not subject to an IRC 6701 penalty for the same conduct. This mutual exclusion rule prevents the IRS from stacking both penalties on a single promoter for the same act. In practice, the IRS typically asserts IRC 6701 (rather than IRC 6700) against ERC promoters because IRC 6701's understatement-of-another's-tax-liability element maps more directly to ERC overclaims, and the OBBBA expansion of IRC 6701 creates the more severe COVID-ERTC Promoter penalty. However, practitioners facing a promoter-penalty investigation should assess both statutes, as the applicable one will depend on the specific conduct and how the IRS characterizes the promoter's role (verifying at IRS.gov and with counsel).
IRC 6676 (verify at IRS.gov and in current IRC text) imposes a 20% penalty on the excessive amount of a claim for refund or credit that lacks a reasonable basis -- and the OBBBA extended it to employment taxes (directly capturing ERC overclaims). The IRC 6676 penalty applies to the taxpayer (the employer who claimed the ERC), not the promoter. A promoter faces IRC 6700 or 6701; the client faces IRC 6676 on the overclaim amount. The IRS may pursue both simultaneously -- the employer for IRC 6676 on the erroneous ERC refund, and the practitioner for IRC 6701 on the aiding-and-abetting conduct. Verify the current scope of IRC 6676 for employment taxes, the reasonable-basis standard for ERC claims, and the interaction between client and promoter penalties at IRS.gov and with qualified legal counsel before advising any client.
8. The IRC 6703 Procedural Framework: No Deficiency Procedures and the 15-Day Refund Right
IRC 6703 (verify at IRS.gov and in current IRC text) sets the rules for how IRC 6700 and IRC 6701 penalties are assessed and contested. The procedural framework is fundamentally different from both preparer-penalty procedures under IRC 6694/6695 and from the ordinary deficiency procedures under IRC 6212/6213. Understanding this difference is essential for any practitioner or counsel responding to a promoter-penalty investigation.
8.1 No Deficiency Procedures: Assessment Without Pre-Payment Review
Unlike income tax deficiencies, IRC 6700 and IRC 6701 penalties are not subject to deficiency procedures. The IRS may assess the penalty summarily -- without first sending a notice of deficiency, without a 90-day waiting period, and without the assessed person having any right to petition the Tax Court for pre-payment review. The first notice the assessed person may receive of the assessment itself is a notice of assessment and demand for payment. The IRS can then begin collection actions once the penalty is assessed and unpaid. This procedural structure places the full financial risk of a penalty assessment on the practitioner before any judicial review -- unlike an income tax deficiency, which can be contested in the Tax Court without prepayment (verify all current assessment and collection procedures at IRS.gov).
8.2 The 15-Day Refund Right Under IRC 6703(b)
IRC 6703(b) (verify at IRS.gov and in current IRC text) provides a procedural right to contest the penalty through a refund action: within 15 days of paying the penalty (or a divisible portion of it), the assessed person may file a claim for refund. If the IRS denies the refund claim (or does not act within 6 months), the person may bring a suit for refund in federal district court or the Court of Federal Claims. This pay-first-contest-later mechanism is the primary (and for some penalties, exclusive) route to judicial review. The 15-day deadline is measured from the date of payment, not from the date of assessment or the notice of assessment. Missing the 15-day window to file a refund claim may affect the right to judicial review (verify the current jurisdictional requirements and any partial-payment rules at IRS.gov and with qualified legal counsel before making any payment).
Warning: Payment of a Promoter Penalty Triggers a 15-Day Clock for Judicial Review -- Get Counsel Before Paying
A practitioner who receives a notice of IRC 6700 or 6701 penalty assessment and pays it without consulting counsel may inadvertently start a 15-day clock for filing a refund claim and simultaneously give up leverage in any settlement discussion. Courts have addressed whether partial payment of a divisible penalty can trigger jurisdiction for a refund suit without requiring full payment; the rules are circuit-specific and can be outcome-determinative (verify current partial-payment and jurisdiction rules in your circuit at IRS.gov and with qualified counsel). The strategic question of whether to pay, how much to pay, and when to pay is a legal decision that should not be made without counsel experienced in promoter-penalty litigation. Verify all current payment, refund claim, and judicial review procedures at IRS.gov and with qualified legal counsel before making any payment or filing any claim.
9. IRC 7408 Injunctions: IRS Authority to Seek Court Orders Against Promoters
IRC 7408 (verify at IRS.gov and in current IRC text) authorizes the IRS to petition a federal district court for an injunction against any person who has engaged in conduct subject to penalty under IRC 6700 or 6701, when injunctive relief is necessary to prevent the occurrence or recurrence of such conduct. An IRC 7408 injunction action is a separate civil proceeding in federal district court -- it is not a penalty assessment, and it is not subject to the IRC 6703 procedural framework. The injunction and the penalty assessment can proceed simultaneously.
An IRC 7408 injunction can: (1) prohibit the respondent from organizing or promoting any plan or arrangement that violates IRC 6700; (2) prohibit the respondent from assisting in the preparation or promotion of any document that violates IRC 6701; (3) require the respondent to disclose the identities of all clients who participated in the enjoined conduct; and (4) prohibit the respondent from engaging in any conduct that the court finds is substantially similar to the enjoined conduct. The IRS has used IRC 7408 injunctions extensively in prior enforcement waves (syndicated conservation easements, micro-captive insurance, other listed transactions) and has used the same authority in ERC enforcement actions. Verify current IRC 7408 injunction standards, applicable precedents in your circuit, and the IRS's current ERC injunction posture at IRS.gov and with qualified legal counsel.
Caution: An IRC 7408 Injunction Is a Public Court Filing That Can Have Business and Licensing Consequences
An IRC 7408 injunction action in federal district court is a matter of public record. A judgment granting an injunction will typically be publicized by the Department of Justice Tax Division, which posts civil tax enforcement press releases on its website. State licensing boards for CPAs, enrolled agents, and attorneys may treat an IRC 7408 injunction as an independent disciplinary matter or a basis for license review. An IRS Office of Professional Responsibility (OPR) investigation may follow simultaneously with or after an injunction action. A practitioner who receives notice of an IRC 7408 injunction complaint should engage qualified legal counsel immediately and assess the full range of regulatory and licensing consequences, not just the penalty exposure. Verify current OPR investigation procedures and licensing board notification requirements in your state at IRS.gov and with counsel.
10. Representation Strategy: Responding to a Promoter-Penalty Investigation
A promoter-penalty investigation can arrive in several forms: an IRS letter from the Promoter Investigation Coordinator at the IRS, an IDR directed to the practitioner in connection with an audit of one of the practitioner's ERC clients, an IRS-CI agent contact, or a Department of Justice civil summons enforcement action or injunction complaint. Each form of contact requires a different initial response. The following guidance is structural and must be verified with qualified legal counsel for any specific situation.
10.1 Immediate Steps on Receipt of IRS Contact
Upon receipt of any IRS contact that raises promoter-penalty, ERC-enforcement, or Material Advisor issues: (1) preserve all documents -- do not destroy, delete, or alter any records related to ERC advice, client communications, worksheets, eligibility analyses, government order documentation, or gross-receipts data; (2) identify qualified legal counsel -- this is a task for an attorney with experience in promoter-penalty defense, not a CPA or enrolled agent acting without counsel (the complexity of the IRC 6703 procedural framework, the litigation risk, and the attorney-client privilege implications require attorney-level counsel); (3) do not make voluntary statements to IRS agents without counsel present -- any statement can be used against the practitioner in penalty, injunction, or criminal proceedings; and (4) assess the scope of the investigation -- is this a civil promoter-penalty matter, a criminal referral to IRS-CI, or an OPR investigation? Each requires different strategy. Verify all current IRS investigation procedures at IRS.gov.
10.2 Document Preservation and Privilege
The practitioner's own work files (ERC eligibility analyses, worksheets, client communications) are generally not protected by attorney-client privilege if the practitioner is an EA or CPA acting without attorney supervision. Documents created in the course of providing accounting or tax compliance services are generally not work product. However, documents created after legal counsel is engaged, at the direction of counsel, and in anticipation of litigation may be protected by the work product doctrine. Engaging counsel before organizing or memorializing the practitioner's ERC engagement history is therefore strategically important -- any post-engagement documentation should be created under counsel's direction to maximize the chance of work product protection. Verify all current privilege and work product rules applicable to promoter-penalty investigations with qualified legal counsel.
10.3 Settlement Pathways
IRC 6700 and 6701 promoter penalties may be settled through IRS Appeals (via the IRM 8.11.7 appeals track for promoter and preparer penalties; verify current IRS Appeals procedures at IRS.gov). Settlement in Appeals requires demonstrating doubt as to liability (factual disputes about whether the conduct meets the penalty standard) or doubt as to collectibility (financial inability to pay the assessed amount). An offer in compromise based on doubt as to liability may be available in some circumstances (verify at IRS.gov). In injunction actions, consent decrees -- which can impose future conduct restrictions in lieu of litigation -- are a common settlement outcome. Verify all current settlement mechanisms and IRM procedures at IRS.gov and with qualified legal counsel before entering any discussions with the IRS or DOJ on penalty resolution.
11. Distinguishing IRC 6700/6701 from IRC 6694/6695: Which Regime Applies
| Feature | IRC 6700/6701 (Promoter Penalties) | IRC 6694/6695 (Preparer Penalties) |
|---|---|---|
| Who is covered | Any person who promotes a shelter (6700) or aids/abets an understatement (6701); includes non-preparers | Any person who prepares or assists in preparing a return or claim for refund for compensation |
| Key conduct | Organizing/selling a shelter with false/fraudulent statements (6700); aiding understatement in any document (6701) | Return/claim contains unreasonable position (6694(a)) or willful/reckless understatement (6694(b)); various administrative failures (6695) |
| Baseline penalty amount | 6700: greater of $1,000 or 100% of income. 6701: $1,000/$10,000 per document. OBBBA-expanded 6701 COVID-ERTC Promoter: greater of $200,000 ($10,000 individual) or 75% of gross income | 6694(a): greater of $1,000 or 50% of income from the return. 6694(b): greater of $5,000 or 75% of income from the return |
| Pre-payment Tax Court review | Not available. Pay-first-contest-later via IRC 6703 refund claim procedure | Available for 6694 penalties under IRC 6703(a) in some circumstances; verify current rules at IRS.gov |
| Injunction authority | IRC 7408: broad IRS authority to seek district court injunction | IRC 7407: IRS authority to seek injunction against return preparers for pattern of conduct |
| Mutual exclusion | 6700 and 6701 are mutually exclusive for the same conduct (IRC 6703(c)). Both may apply in different transactions. | No mutual exclusion rule; 6694(a) and 6694(b) are mutually exclusive for the same document, but 6695 penalties may stack |
Verify all penalty amounts, penalty regime applicability, and procedural rules at IRS.gov and with qualified legal counsel before applying to any specific client situation. This table reflects the statutory framework as of July 2026 and may not reflect subsequent IRS guidance or judicial interpretations.
12. Regulated Claims, Required Verifications, and Limitations of This Guide
| Claim or Statement | Required Verification |
|---|---|
| OBBBA IRC 6701 COVID-ERTC Promoter penalty: greater of $200,000/$10,000 or 75% of gross income | OBBBA P.L. 119-21 Section 70605 and related IRC 6701 amendment; verify current penalty amounts, definitions, and effective dates at IRS.gov before advising any client. |
| Retroactivity of OBBBA IRC 6701 penalty to March 12, 2020 | Verify the exact retroactivity provision, effective date, and any constitutional challenges in litigation at IRS.gov and with qualified legal counsel; the retroactivity provision may be contested. |
| IRC 6700 baseline penalty: greater of $1,000 or 100% of gross income per organization/sale | IRC 6700; verify current penalty amounts and application rules at IRS.gov and in current IRC text. |
| IRC 6701 baseline penalty: $1,000/$10,000 per document | IRC 6701; verify current penalty amounts and corporation/individual distinction at IRS.gov and in current IRC text. |
| IRC 6703(b) 15-day refund claim window after payment | IRC 6703(b); verify current deadline, calculation from payment date, and partial-payment jurisdictional rules in your circuit at IRS.gov and with qualified legal counsel. |
| Material Advisor thresholds: $10,000 (individual participants) / $25,000 (entity participants) | IRC 6111 and applicable regulations; verify current threshold amounts, applicable transaction categories, and ERC listed-transaction scope at IRS.gov and with qualified legal counsel. |
| ERC listed-transaction designation and Material Advisor obligations | OBBBA Section 70605; IRC 6011, 6111, 6112; verify current scope of designation, Form 8918 requirements, list maintenance obligations, and applicable deadlines at IRS.gov. |
| OBBBA IRC 6676 expansion to employment taxes | OBBBA amendment to IRC 6676; verify current scope, reasonable-basis standard for ERC claims, and penalty application at IRS.gov and in current IRC text. |
| OBBBA due diligence standard for ERC promoters (IRC 6695(g) model) | OBBBA provisions and IRS implementing guidance; verify current checklist requirements, documentation standards, and effective date at IRS.gov before relying on any due diligence compliance program. |
| IRC 7408 injunction authority and standards | IRC 7408 and applicable circuit precedents; verify current standards for injunctive relief in your district and circuit at IRS.gov and with qualified legal counsel. |
This guide is written for licensed tax practitioners with professional training. It is not legal advice and does not create an attorney-client or practitioner-client relationship. The OBBBA provisions affecting ERC promoter penalties are recent, and IRS guidance, regulations, and litigation outcomes may alter the analysis materially after this guide's review date. Every statement of law in this guide must be verified at IRS.gov, in the current text of the Internal Revenue Code, and through current legal research before application to any specific client situation. Engage qualified legal counsel -- not a CPA or enrolled agent acting alone -- before responding to any IRS promoter-penalty contact, making any payment of a promoter penalty, or advising a client on Material Advisor compliance obligations.
Not Legal Advice
Americas Tax provides educational content for licensed tax professionals. Nothing in this guide constitutes legal advice, tax advice, or a representation regarding the outcome of any specific matter. Consult qualified legal counsel for advice on specific client situations, particularly those involving promoter-penalty investigations, Material Advisor obligations, or ERC enforcement matters.
Frequently Asked Questions
What is the difference between an IRC 6700 penalty and an IRC 6701 penalty?
IRC 6700 (verify at IRS.gov and in current IRC text) targets persons who organize or assist in organizing a tax shelter and make a false or fraudulent statement about the tax benefit -- penalty is the greater of $1,000 or 100% of gross income per organization or sale. IRC 6701 targets persons who aid or abet an understatement of any taxpayer's liability in any document -- penalty is $1,000/$10,000 per document (OBBBA-expanded to greater of $200,000 or 75% of gross income for COVID-ERTC Promoters). Key distinction: 6700 requires a "tax shelter" and false/fraudulent statement; 6701 does not require a shelter but requires knowledge of an understatement effect. They are mutually exclusive -- a person cannot face both for the same conduct. Verify current definitions, amounts, and mutual-exclusion rules at IRS.gov and with qualified legal counsel.
How does the OBBBA change the IRC 6701 penalty for ERC promoters?
The OBBBA (P.L. 119-21, July 4, 2025; verify all amounts and definitions at IRS.gov) created a new "COVID-ERTC Promoter" category within IRC 6701 with a dramatically higher penalty: the greater of $200,000 ($10,000 for an individual) or 75% of gross income derived from the ERC-related advice or document -- retroactive to March 12, 2020 (verify effective dates and retroactivity at IRS.gov). The OBBBA also designated certain ERC claims as listed transactions, making ERC promoters Material Advisors subject to registration and disclosure obligations. The combined exposure for a practitioner who assisted clients with ERC claims can be substantial. Verify all current OBBBA ERC penalty amounts, definitions, and effective dates at IRS.gov before advising any client.
Am I a Material Advisor for ERC purposes and what does that mean?
A Material Advisor (IRC 6111; verify at IRS.gov) is a person who provides material aid, assistance, or advice in connection with the ERC listed transaction and derives gross income above the applicable threshold ($10,000 for transactions with individual participants; $25,000 for entity participants; verify current thresholds at IRS.gov). A Material Advisor must register on Form 8918 and maintain a list of clients who participated. Failure to register triggers IRC 6707 penalties; failure to maintain or furnish the list triggers IRC 6708 penalties. Practitioners who assisted business clients with ERC claims and earned $25,000 or more from that work should assess their Material Advisor status immediately. Verify all current Material Advisor requirements, thresholds, and deadlines at IRS.gov and with qualified legal counsel.
What is the IRC 6703 procedural framework and how does it affect how I respond to a promoter penalty?
IRC 6703 (verify at IRS.gov and in current IRC text) provides that IRC 6700 and 6701 penalties are not subject to deficiency procedures -- the IRS assesses them summarily, without a notice of deficiency or 90-day waiting period. There is no pre-payment Tax Court review. The only contest mechanism is to pay the penalty (or a divisible portion of it) and file a refund claim within 15 days of payment; if the IRS denies the claim, the person may sue for refund in federal district court or the Court of Federal Claims. This pay-first-contest-later structure means the practitioner bears the full financial risk before judicial review. The decision about whether and how much to pay is a strategic legal decision that should be made with qualified counsel. Verify all current IRC 6703 procedures and partial-payment rules at IRS.gov and with qualified legal counsel.
Can the IRS seek an injunction against an ERC promoter under IRC 7408?
Yes. IRC 7408 (verify at IRS.gov and in current IRC text) authorizes the IRS to petition a federal district court for an injunction against any person who has engaged in IRC 6700 or 6701 conduct, when necessary to prevent recurrence. An IRC 7408 injunction can prohibit the promoter from assisting with ERC claims, promoting listed transactions, or engaging in substantially similar conduct. The IRS's burden for IRC 7408 injunctive relief is lower than the traditional equity standard. Injunction actions are public federal court filings and may trigger OPR investigations or state licensing board reviews. A practitioner who receives notice of an IRC 7408 complaint should engage qualified legal counsel immediately. Verify current IRC 7408 standards and ERC enforcement posture at IRS.gov and with counsel.
How do IRC 6700/6701 penalties interact with IRC 6694/6695 preparer penalties?
IRC 6694/6695 (verify at IRS.gov) target return preparers who take unreasonable positions or fail to comply with preparer obligations. IRC 6700/6701 target persons who promote tax shelters or aid understatements -- a broader category that includes non-preparers. Both regimes may apply to the same ERC practitioner for different acts: IRC 6694 for unreasonable positions on specific returns; IRC 6701 for aiding understatements across the client base. The penalty amounts, procedural framework (deficiency vs. pay-first), and judicial review routes differ significantly. IRC 6700 and 6701 are mutually exclusive for the same conduct; IRC 6694 and 6701 are not mutually exclusive. Verify all current penalty interactions and procedural differences at IRS.gov and with qualified legal counsel before advising any client with ERC exposure.
What is the due diligence standard for ERC promoters under the OBBBA?
The OBBBA (verify all requirements at IRS.gov) imposed a due diligence obligation on ERC promoters modeled on IRC 6695(g) (the EITC/CTC due diligence standard for return preparers). A promoter must apply reasonable-and-well-informed-practitioner judgment to ERC eligibility, complete a due diligence checklist, obtain documentation of the client's eligibility basis (government order or gross receipts data), and obtain a written client representation. The $1,000-per-failure penalty applies to each client where due diligence requirements are not met (verify current amount at IRS.gov). These requirements apply to assistance provided after July 4, 2025 (verify effective date at IRS.gov). For pre-OBBBA ERC work, actual diligence (or lack thereof) remains relevant to the IRC 6701 knowledge element. Verify all current due diligence requirements with qualified legal counsel and at IRS.gov.
What is the IRC 6676 erroneous-claim penalty and how does it interact with IRC 6700/6701 in the ERC context?
IRC 6676 (verify at IRS.gov and in current IRC text) imposes a 20% penalty on the excessive amount of a claim for refund or credit lacking a reasonable basis. The OBBBA extended IRC 6676 to employment taxes, directly capturing ERC overclaims. IRC 6676 applies to the taxpayer (the employer), not the promoter; the mutual exclusion between IRC 6700 and 6701 applies only between those two statutes. A practitioner therefore faces IRC 6701 promoter penalties while the client simultaneously faces IRC 6676 on the erroneous ERC refund. An OPR investigation may also follow the penalty assessment. Verify the current scope of the OBBBA IRC 6676 expansion, the reasonable-basis standard for ERC claims, and the full range of penalties applicable to the employer at IRS.gov and with qualified legal counsel.