Marquez signs a 2025 Form 1040 taking a $48,000 deduction with no substantial authority, no disclosure on Form 8275, and a back-of-the-envelope calculation he never bothered to document. The return understates tax by $11,500. The IRS audits, disallows the deduction, and turns to Marquez. Three subsections of IRC §6694 and §6695 are about to decide whether his exposure is $65, $5,750, or $8,625.
A tax return preparer is any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or claim for refund. Compensation triggers the definition. Volunteers, VITA workers, and family members preparing each other's returns without pay are not preparers.
A signing preparer is the individual who has primary responsibility for the overall substantive accuracy of the return. A nonsigning preparer is someone who prepares a substantial portion of the return (typically more than $10,000 of items, or $400,000 if exceeding 20% of gross income) without signing. Both can be hit with §6694 penalties.
Common mistakes
- Computing §6694(a) as a flat $1,000. The penalty is the greater of $1,000 or 50% of fee. A $10,000 fee yields a $5,000 penalty, not $1,000. Trap answer: "preparer owes $1,000."
- Treating §6695(g) due diligence as one penalty per return. It is $650 per credit per return. A single return claiming EITC + CTC + AOTC = three $650 penalties = $1,950, not $650.
- Applying the §6695 annual cap to subsections (f) and (g). The $32,500 cap applies to subsections (a) through (e) only. §6695(f) refund-check negotiation and §6695(g) due diligence have no cap.
Bottom line
- §6694(a) unreasonable position: greater of $1,000 or 50% of income derived. §6694(b) willful or reckless: greater of $5,000 or 75% of income derived (offset by any §6694(a) already imposed).
- §6695 paperwork penalties (returns filed in 2026): $65 per failure, $32,500 annual cap each, for failing to furnish a copy, sign, supply PTIN, retain a copy/list, or file the §6060 employee return.
- §6695(g) due diligence: $650 per credit per return for EITC, CTC/ACTC, ODC, AOTC, and HoH filing status. Form 8867 is mandatory. §6695(f) and (g) carry no annual cap.
- §6695 signing rules: the preparer must sign before presenting the return to the taxpayer, include the PTIN on every return, and furnish the complete copy no later than presentation for signature.
Exam shortcut
"50/75/15" captures §6694: 50% of fee minimum for §6694(a), 75% of fee for §6694(b), 15% prepayment to halt collection under §6696(c). "$65 capped, $650 uncapped." Five §6695 paperwork failures = $65 each with a $32,500 cap. The two big ones (refund-check negotiation $650, due diligence $650 per credit per return) have no annual cap. "June 30, three years." §6060 employee record period ends June 30.
The full lesson (about 3,394 words, 23 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 2
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