A CPA signs a client return that takes a position with a 30% chance of being sustained. No disclosure, no Form 8275. The IRS audits, the position fails, and a $5,000 preparer penalty lands on the CPA's desk before the deficiency notice even reaches the client.
Why the preparer rules exist. Congress enacted §6694 and §6695 because the IRS audits maybe 0.5% of returns, but ~60% of individual returns are professionally prepared. Putting penalties directly on preparers (separate from the taxpayer's own penalties) polices return quality at scale. The AICPA SSTSs do the same job from the profession's side. Circular 230 (Treasury practice rules) is a separate Learning Objective and is not repeated here.
HIGH-FREQUENCY: A tax return preparer under IRC §7701(a)(36) is any person who prepares for compensation, or employs others to prepare for compensation, all or a substantial portion of any return of tax or claim for refund.
Two categories: a signing preparer has primary responsibility and signs as paid preparer. A non-signing preparer (e.g., a tax attorney who advises on one complex schedule) doesn't sign but is...
Common mistakes
- Stacking §6694(a) and §6694(b) on the same conduct. The §6694(b) penalty is reduced by any §6694(a) amount already paid. The trap adds them: "$1,000 + $5,000 = $6,000." The correct answer is $5,000 net.
- Confusing SSTS thresholds with IRC standards. SSTS No. 1 ≈ 33%. IRC reasonable basis ≈ 20%. Substantial authority ≈ 40%. Tax shelter MLTN >50%. The trap treats them as the same.
- Treating data-entry clerks as preparers. §7701(a)(36) excludes clerical staff who only input data. The trap says the bookkeeper who typed the numbers is a preparer. They aren't, until they exercise judgment over a substantial portion.
Bottom line
- A tax return preparer under §7701(a)(36) is anyone who prepares for compensation all or a substantial portion of a return, signing or non-signing; clerical data-entry-only staff are excluded
- §6694(a) penalty for an undisclosed position lacking substantial authority is the greater of $1,000 or 50% of fee income from the position
- §6694(b) penalty for willful or reckless conduct is the greater of $5,000 or 75% of fee income, and is reduced by any §6694(a) amount already paid (not stacked)
- §6695 procedural penalties: failure to sign $60, failure to furnish a copy $60, EITC due diligence $635 (each per return, 2026 indexed)
Exam shortcut
When a §6694 question gives you a fee, do the math twice: $1,000 floor vs 50% of fee for (a), $5,000 floor vs 75% of fee for (b). The greater wins. If the fact pattern says "willful" or "reckless disregard," it's (b); otherwise (a). For SSTS questions, match the number to the situation: errors → No. 6, estimates → No. 4, return positions → No.
The full lesson (about 2,544 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.A2
Browse all free CPA REG lessons or jump into free CPA REG practice questions.