§ 6694. Understatement of taxpayer’s liability by tax return preparer

Legislative history

Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.

1. 1976

   Pub. L. 94–455 title XII § 1203(b)(1) · 90 Stat. 1520

   Enacted · 26 U.S.C. § 6694

   Added Pub. L. 94–455, title XII, § 1203(b)(1), Oct. 4, 1976, 90 Stat. 1689

   Source evidence

   Code source credit
   Added Pub. L. 94–455, title XII, § 1203(b)(1), Oct. 4, 1976, 90 Stat. 1689

   Enacted provision · exact public law section
   (1) In general.— Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end thereof the following new section: “SEC. 6694, UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY INCOME TAX RETURN PREPARER. “(a) Negligent or Intentional Disregard of Rules and Regulations.— If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim. “(b) Willful Understatement of Liability.— If any part of any understatement of liability with respect to any return or claim for refund is due to a willful attempt in any manner to understate the liability for a tax by a person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $500 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a). “(c) Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty.— “(1) In general.— If, within 30 days after the day on which notice and demand of any penalty under subsection (a) or (b) is made against any person who is an income tax return preparer, such person pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421 (a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. “(2) Preparer must bring suit in district court to determine his liability for penalty.— If, within 30 days after the day on which his claim for refund of any partial payment of any penalty under subsection (a) or (b) is denied (or, if earlier, within 30 days after the expiration of 6 months after the day on which he filed the claim for refund), the income tax return preparer fails to begin a proceeding in the appropriate United States district court for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the applicable 30day period referred to in this paragraph. “(3) Suspension of running of period of limitations on collection.— The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court. “(d) Abatement of Penalty Where Taxpayer’s Liability Not Understated.— If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under subsection (a) or (b) has been assessed, such assessment shall be abated, and if any portion of such penalty has been paid the amount so paid shall be refunded to the person who made such payment as an overpayment of tax without regard to any period of limitations which, but for this subsection, would apply to the mailing of such refund. “(e) Understatement of Liability Defined.— For purposes of this section, the term ‘understatement of liability’ means any understatement of the net amount payable with respect to any tax imposed by 26 USC 1. subtitle A or any overstatement of the net amount creditable or refundable with respect to any such tax. Except as otherwise provided in subsection (d), the determination of whether or not there is an understatement of liability shall be made without regard to any administrative or judicial action involving the taxpayer. “(f) Cross Reference.— Ante, p. 1688. “For definition of income tax return preparer, see section 7701 (a)(36).”

2. 1989

   Improved Penalty Administration and Compliance Tax Act

   Pub. L. 101–239 § 7732(a) · 103 Stat. 2106

   1. Substituted · 26 U.S.C. § 6694(a)

      Pub. L. 101–239, § 7732(a), substituted “Understatements due to unrealistic positions” for “Negligent or intentional disregard of rules and regulations” in heading

   2. Amended · 26 U.S.C. § 6694(a)

      Pub. L. 101–239, § 7732(a), amended text generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim.”

   Source evidence

   Code amendment note
   Subsec. (a). Pub. L. 101–239, § 7732(a), substituted “Understatements due to unrealistic positions” for “Negligent or intentional disregard of rules and regulations” in heading and amended text generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim.”

   Enacted provision · exact public law section
   (a) General Rule.— Subsections (a) and (b) of section 6694 (relating to understatement of taxpayer’s liability by income tax return preparer) are amended to read as follows: “(a) Understatements Due to Unrealistic Positions.— If— “(1) any part of any understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits, “(2) any person who is an income tax return preparer with respect to such return or claim knew (or reasonably should have known) of such position, and “(3) such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was frivolous, such person shall pay a penalty of $250 with respect to such return or claim unless it is shown that there is reasonable cause for the understatement and such person acted in good faith. “(b) Willful or Reckless Conduct.— If any part of any understatement of liability with respect to any return or claim for refund is due— “(1) to a willful attempt in any manner to understate the liability for tax by a person who is an income tax return preparer with respect to such return or claim, or “(2) to any reckless or intentional disregard of rules or regulations by any such person, such person shall pay a penalty of $1,000 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).”

3. 1989

   Improved Penalty Administration and Compliance Tax Act

   Pub. L. 101–239 § 7732(a) · 103 Stat. 2106

   1. Substituted · 26 U.S.C. § 6694(b)

      Pub. L. 101–239, § 7732(a), substituted “Willful or reckless conduct” for “Willful understatement of liability” in heading

   2. Amended · 26 U.S.C. § 6694(b)

      Pub. L. 101–239, § 7732(a), amended text generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due to a willful attempt in any manner to understate the liability for a tax by a person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $500 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).”

   Source evidence

   Code amendment note
   Subsec. (b). Pub. L. 101–239, § 7732(a), substituted “Willful or reckless conduct” for “Willful understatement of liability” in heading and amended text generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due to a willful attempt in any manner to understate the liability for a tax by a person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $500 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).”

   Enacted provision · exact public law section
   (a) General Rule.— Subsections (a) and (b) of section 6694 (relating to understatement of taxpayer’s liability by income tax return preparer) are amended to read as follows: “(a) Understatements Due to Unrealistic Positions.— If— “(1) any part of any understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits, “(2) any person who is an income tax return preparer with respect to such return or claim knew (or reasonably should have known) of such position, and “(3) such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was frivolous, such person shall pay a penalty of $250 with respect to such return or claim unless it is shown that there is reasonable cause for the understatement and such person acted in good faith. “(b) Willful or Reckless Conduct.— If any part of any understatement of liability with respect to any return or claim for refund is due— “(1) to a willful attempt in any manner to understate the liability for tax by a person who is an income tax return preparer with respect to such return or claim, or “(2) to any reckless or intentional disregard of rules or regulations by any such person, such person shall pay a penalty of $1,000 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).”

4. 1989

   Improved Penalty Administration and Compliance Tax Act

   Pub. L. 101–239 § 7737(a) · 103 Stat. 2106

   Inserted · 26 U.S.C. § 6694(c)(1)

   Pub. L. 101–239, § 7737(a), inserted at end “Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).”

   Source evidence

   Code amendment note
   Subsec. (c)(1). Pub. L. 101–239, § 7737(a), inserted at end “Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).”

   Enacted provision · exact public law section
   (a) General Rule.— Sections 6672(b)(1), 6694(c)(1), and 6703(c)(1) are each amended by adding at the end thereof the following new sentence: “Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).”

5. 2007

   Small Business and Work Opportunity Tax Act of 2007

   Pub. L. 110–28 § 8246(a)(2)(F)(i)(I) · 121 Stat. 112

   Substituted · 26 U.S.C. § 6694

   Pub. L. 110–28, § 8246(a)(2)(F)(i)(I), substituted “tax return preparer” for “income tax return preparer” in section catchline

   Source evidence

   Code amendment note
   Pub. L. 110–28, § 8246(a)(2)(F)(i)(I), substituted “tax return preparer” for “income tax return preparer” in section catchline.

   Enacted provision · exact public law section
   (I) by striking “income tax return preparer” in the heading and inserting “tax return preparer”,

6. 2007

   Small Business and Work Opportunity Tax Act of 2007

   Pub. L. 110–28 § 8246(b) · 121 Stat. 112

   Amended · 26 U.S.C. § 6694(a)

   Pub. L. 110–28, § 8246(b), amended heading and text of subsec. (a) generally. Prior to amendment, text read as follows: “If—

   Source evidence

   Code amendment note
   Subsec. (a). Pub. L. 110–28, § 8246(b), amended heading and text of subsec. (a) generally. Prior to amendment, text read as follows: “If—

   “(1) any part of any understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits, “(2) any person who is an income tax return preparer with respect to such return or claim knew (or reasonably should have known) of such position, and “(3) such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was frivolous, such person shall pay a penalty of $250 with respect to such return or claim unless it is shown that there is reasonable cause for the understatement and such person acted in good faith.”

   Enacted provision · exact public law section
   (b) Modification of Penalty for Understatement of Taxpayer’s Liability by Tax Return Preparer.— Subsections (a) and (b) of section 6694 26 USC 6694. are amended to read as follows: “(a) Understatement Due to Unreasonable Positions.— “(1) In general.— Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of— “(A) $1,000, or “(B) 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. “(2) Unreasonable position.— A position is described in this paragraph if— “(A) the tax return preparer knew (or reasonably should have known) of the position, “(B) there was not a reasonable belief that the position would more likely than not be sustained on its merits, and “(C) (i) the position was not disclosed as provided in section 6662(d)(2)(B)(ii), or “(ii) there was no reasonable basis for the position. “(3) Reasonable cause exception.— No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith. “(b) Understatement Due to Willful or Reckless Conduct.— “(1) In general.— Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of— “(A) $5,000, or “(B) 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. “(2) Willful or reckless conduct.— Conduct described in this paragraph is conduct by the tax return preparer which is— “(A) a willful attempt in any manner to understate the liability for tax on the return or claim, or “(B) a reckless or intentional disregard of rules or regulations. “(3) Reduction in penalty.— The amount of any penalty payable by any person by reason of this subsection for any return or claim for refund shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).” .

7. 2007

   Small Business and Work Opportunity Tax Act of 2007

   Pub. L. 110–28 § 8246(b) · 121 Stat. 112

   Amended · 26 U.S.C. § 6694(b)

   Pub. L. 110–28, § 8246(b), amended heading and text of subsec. (b) generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due—

   Source evidence

   Code amendment note
   Subsec. (b). Pub. L. 110–28, § 8246(b), amended heading and text of subsec. (b) generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due—

   “(1) to a willful attempt in any manner to understate the liability for tax by a person who is an income tax return preparer with respect to such return or claim, or “(2) to any reckless or intentional disregard of rules or regulations by any such person, such person shall pay a penalty of $1,000 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).”

   Enacted provision · exact public law section
   (b) Modification of Penalty for Understatement of Taxpayer’s Liability by Tax Return Preparer.— Subsections (a) and (b) of section 6694 26 USC 6694. are amended to read as follows: “(a) Understatement Due to Unreasonable Positions.— “(1) In general.— Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of— “(A) $1,000, or “(B) 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. “(2) Unreasonable position.— A position is described in this paragraph if— “(A) the tax return preparer knew (or reasonably should have known) of the position, “(B) there was not a reasonable belief that the position would more likely than not be sustained on its merits, and “(C) (i) the position was not disclosed as provided in section 6662(d)(2)(B)(ii), or “(ii) there was no reasonable basis for the position. “(3) Reasonable cause exception.— No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith. “(b) Understatement Due to Willful or Reckless Conduct.— “(1) In general.— Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of— “(A) $5,000, or “(B) 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. “(2) Willful or reckless conduct.— Conduct described in this paragraph is conduct by the tax return preparer which is— “(A) a willful attempt in any manner to understate the liability for tax on the return or claim, or “(B) a reckless or intentional disregard of rules or regulations. “(3) Reduction in penalty.— The amount of any penalty payable by any person by reason of this subsection for any return or claim for refund shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).” .

8. 2007

   Small Business and Work Opportunity Tax Act of 2007

   Pub. L. 110–28 § 8246(a)(2)(F)(i)(II) · 121 Stat. 112

   Substituted · 26 U.S.C. § 6694(c)(1)

   Pub. L. 110–28, § 8246(a)(2)(F)(i)(II), substituted “a tax return preparer” for “an income tax return preparer”

   Source evidence

   Code amendment note
   Subsec. (c)(1). Pub. L. 110–28, § 8246(a)(2)(F)(i)(II), substituted “a tax return preparer” for “an income tax return preparer”.

   Enacted provision · exact public law section
   (II) by striking “an income tax return preparer” each place it appears and inserting “a tax return preparer”,

9. 2007

   Small Business and Work Opportunity Tax Act of 2007

   Pub. L. 110–28 § 8246(a)(2)(F)(i)(III) · 121 Stat. 112

   Substituted · 26 U.S.C. § 6694(c)(2)

   Pub. L. 110–28, § 8246(a)(2)(F)(i)(III), substituted “the tax return preparer” for “the income tax return preparer”

   Source evidence

   Code amendment note
   Subsec. (c)(2). Pub. L. 110–28, § 8246(a)(2)(F)(i)(III), substituted “the tax return preparer” for “the income tax return preparer”.

   Enacted provision · exact public law section
   (III) in subsection (c)(2), by striking “the income tax return preparer” and inserting “the tax return preparer”,

10. 2007

    Small Business and Work Opportunity Tax Act of 2007

    Pub. L. 110–28 § 8246(a)(2)(F)(i)(IV) · 121 Stat. 112

    Substituted · 26 U.S.C. § 6694(e)

    Pub. L. 110–28, § 8246(a)(2)(F)(i)(IV), substituted “this title” for “subtitle A”

    Source evidence

    Code amendment note
    Subsec. (e). Pub. L. 110–28, § 8246(a)(2)(F)(i)(IV), substituted “this title” for “subtitle A”.

    Enacted provision · exact public law section
    (IV) in subsection (e), by striking “subtitle A” and inserting “this title”, and

11. 2007

    Small Business and Work Opportunity Tax Act of 2007

    Pub. L. 110–28 § 8246(a)(2)(F)(i)(V) · 121 Stat. 112

    Substituted · 26 U.S.C. § 6694(f)

    Pub. L. 110–28, § 8246(a)(2)(F)(i)(V), substituted “tax return preparer” for “income tax return preparer”

    Source evidence

    Code amendment note
    Subsec. (f). Pub. L. 110–28, § 8246(a)(2)(F)(i)(V), substituted “tax return preparer” for “income tax return preparer”.

    Enacted provision · exact public law section
    (V) in subsection (f), by striking “income tax return preparer” and inserting “tax return preparer”.

12. 2008

    Tax Extenders and Alternative Minimum Tax Relief Act of 2008

    Pub. L. 110–343 div. C title V § 506(a) · 122 Stat. 3765

    Amended · 26 U.S.C. § 6694(a)

    Pub. L. 110–343 amended subsec. (a) generally. Prior to amendment, subsec. (a) provided penalty for understatement due to unreasonable positions

    Source evidence

    Code amendment note
    Subsec. (a). Pub. L. 110–343 amended subsec. (a) generally. Prior to amendment, subsec. (a) provided penalty for understatement due to unreasonable positions.

    Enacted provision · exact public law section
    (a) In General.— Subsection (a) of section 6694 26 USC 6694. is amended to read as follows: “(a) Understatement Due to Unreasonable Positions.— “(1) In general.— If a tax return preparer— “(A) prepares any return or claim of refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2), and “(B) knew (or reasonably should have known) of the position, such tax return preparer shall pay a penalty with respect to each such return or claim in an amount equal to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. “(2) Unreasonable position.— “(A) In general.— Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position. “(B) Disclosed positions.— If the position was disclosed as provided in section 6662(d)(2)(B)(ii)(I) and is not a position to which subparagraph (C) applies, the position is described in this paragraph unless there is a reasonable basis for the position. “(C) Tax shelters and reportable transactions.— If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is described in this paragraph unless it is reasonable to believe that the position would more likely than not be sustained on its merits. “(3) Reasonable cause exception.— No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.” .

13. 2015

    Department of Justice Appropriations Act, 2016

    Pub. L. 114–113 div. Q title II § 210(a) · 129 Stat. 2242

    Substituted · 26 U.S.C. § 6694(b)(1)(B)

    Pub. L. 114–113 substituted “75 percent” for “50 percent”

    Source evidence

    Code amendment note
    Subsec. (b)(1)(B). Pub. L. 114–113 substituted “75 percent” for “50 percent”.

    Enacted provision · exact public law section
    Sec. 210. The notification thresholds and procedures set forth in section 505 of this Act shall apply to deviations from the amounts designated for specific activities in this Act and in the explanatory statement described in section 4 (in the matter preceding division A of this consolidated Act), and to any use of deobligated balances of funds provided under this title in previous years.

    Effective date note
    Pub. L. 114–113, div. Q, title II, § 210(b), Dec. 18, 2015, 129 Stat. 3085, provided that: “The amendment made by this section [amending this section] shall apply to returns prepared for taxable years ending after the date of the enactment of this Act [Dec. 18, 2015].”

15 of 15 references resolved to an enrolled provision