A preparer who never signs a return, never keeps a copy, and never files the employee list still faces four separate penalties before the return's accuracy is ever examined.
A paid preparer can be penalized for two different kinds of failure. Conduct penalties look at how a position on the return was taken, such as claiming a deduction with weak support. Compliance penalties look at whether the preparer performed the mechanical duties that come with the job, such as signing returns and keeping copies. Both kinds can apply to one return.
The exam-tested preparer penalties sort into five groups:
These penalties apply to a "tax return preparer," so you need to know who fits the definition. A tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, all or a substantial portion of a return or refund claim.
- A signing tax return preparer is the individual with primary responsibility for the overall substantive accuracy of the return.
- A nonsigning tax return preparer doesn't sign the return but gives advice on a position that is a substantial portion of it.
Common mistakes
- Applying the annual cap across all of §6695. The $31,500 cap applies separately to each of subsections (a) through (e), not once to the combined total. A preparer with $31,500 of copy-failure penalties can still owe another $31,500 for signature failures.
- Capping the due diligence penalty. Section 6695(g) has no annual ceiling. A firm with 400 EITC returns and no Form 8867 owes 400 × $635 = $254,000, not $31,500.
- Petitioning the Tax Court. Preparer penalties are assessable without a deficiency notice, so the Tax Court route doesn't exist. To contest a §6694 penalty, pay 15% within 30 days, file a refund claim, then sue in district court. A Tax Court petition is a dead end for these penalties.
Bottom line
- Section 6694(a) costs the greater of $1,000 or 50% of income derived; 6694(b) willful conduct costs the greater of $5,000 or 75%, reduced by any 6694(a) already paid.
- Undisclosed positions need substantial authority; disclosed positions need reasonable basis; tax shelters and reportable transactions need more likely than not.
- For returns filed in 2025, each 6695(a) through (e) failure costs $60 with a $31,500 annual cap per subsection; 6695(f) and 6695(g) cost $635 each with no cap.
- Section 6662 runs 20% for negligence and substantial understatement, 40% for gross valuation misstatement at 200% of correct value, with a $5,000 underpayment floor on valuation.
Exam shortcut
Read the stem for a fee figure first. If the fee appears, the question is testing §6694 and you compare the percentage against the floor, never just multiply. Half the fee under $2,000 always loses to the $1,000 floor, and three-quarters of a fee under $6,667 always loses to the $5,000 floor. Count failures before you count returns.
The full lesson (about 4,417 words, 29 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 2
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