26 U.S.C. § 6694 — Understatement of taxpayer’s liability by

Page 3797 TITLE 26—INTERNAL REVENUE CODE § 6694 due date for which (determined without regard to ex- tensions) is after Dec. 31, 1996, see section 1455(e) of Pub. L. 104–188, set out as a note under section 408 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to contribu- tions and distributions for taxable years beginning after Dec. 31, 1986, see section 1102(g) of Pub. L. 99–514, set out as a note under section 219 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to failures occurring after July 18, 1984, see section 147(d)(2) of Pub. L. 98–369, set out as a note under section 219 of this title. EFFECTIVE DATE OF 1980 AMENDMENT Pub. L. 96–222, title I, § 101(b)(1)(F), Apr. 1, 1980, 94 Stat. 205, provided that: ‘‘The amendment made by sub- paragraph (I) of subsection (a)(10) [probably means sub- par. (H) of subsec. (a)(10), which amended this section] shall apply with respect to failures occuring [sic] after the date of the enactment of this Act [Apr. 1, 1980].’’ EFFECTIVE DATE Section effective Jan. 1, 1975, see section 2002(i)(2) of Pub. L. 93–406, set out as a note under section 4973 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1998 For provisions directing that if any amendments made by subtitle D [§§ 1401–1465] of title I of Pub. L. 104–188 require an amendment to any plan or annuity contract, such amendment shall not be required to be made before the first day of the first plan year begin- ning on or after Jan. 1, 1998, see section 1465 of Pub. L. 104–188, set out as a note under section 401 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. § 6694. Understatement of taxpayer’s liability by tax return preparer (a) Understatement due to unreasonable posi- tions (1) In general If a tax return preparer— (A) prepares any return or claim of refund with respect to which any part of an under- statement of liability is due to a position de- scribed 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 de- rived) by the tax return preparer with respect to the return or claim. (2) Unreasonable position (A) In general Except as otherwise provided in this para- graph, a position is described in this para- graph unless there is or was substantial au- thority 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 posi- tion to which subparagraph (C) applies, the position is described in this paragraph un- less there is a reasonable basis for the posi- tion. (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 be- lieve that the position would more likely than not be sustained on its merits. (3) Reasonable cause exception No penalty shall be imposed under this sub- section if it is shown that there is reasonable cause for the understatement and the tax re- turn 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 liabil- ity 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) 75 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 con- duct by the tax return preparer which is— (A) a willful attempt in any manner to un- derstate 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 re- turn or claim for refund 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 pre- parer pays 15 percent of penalty (1) In general If, within 30 days after the day on which no- tice and demand of any penalty under sub- section (a) or (b) is made against any person who is a 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 Page 3798 TITLE 26—INTERNAL REVENUE CODE § 6694 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. 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). (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 expira- tion of 6 months after the day on which he filed the claim for refund), the tax return pre- parer fails to begin a proceeding in the appro- priate United States district court for the de- termination 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 30-day period re- ferred to in this paragraph. (3) Suspension of running of period of limita- tions on collection The running of the period of limitations pro- vided 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 sus- pended for the period during which the Sec- retary is prohibited from collecting by levy or a proceeding in court. (d) Abatement of penalty where taxpayer’s liabil- ity 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 re- spect 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 pe- riod of limitations which, but for this sub- section, would apply to the making of such re- fund. (e) Understatement of liability defined For purposes of this section, the term ‘‘under- statement of liability’’ means any understate- ment of the net amount payable with respect to any tax imposed by this title or any overstate- ment of the net amount creditable or refundable with respect to any such tax. Except as other- wise provided in subsection (d), the determina- tion of whether or not there is an understate- ment of liability shall be made without regard to any administrative or judicial action involv- ing the taxpayer. (f) Cross reference For definition of tax return preparer, see section 7701(a)(36). (Added Pub. L. 94–455, title XII, § 1203(b)(1), Oct. 4, 1976, 90 Stat. 1689; amended Pub. L. 101–239, title VII, §§ 7732(a), 7737(a), Dec. 19, 1989, 103 Stat. 2402, 2404; Pub. L. 110–28, title VIII, § 8246(a)(2)(F)(i), (b), May 25, 2007, 121 Stat. 201, 203; Pub. L. 110–343, div. C, title V, § 506(a), Oct. 3, 2008, 122 Stat. 3880; Pub. L. 114–113, div. Q, title II, § 210(a), Dec. 18, 2015, 129 Stat. 3085.) Editorial Notes CODIFICATION Another section 6694, relating to failure to file infor- mation with respect to carryover basis property, which was added by Pub. L. 94–455, § 2005(d)(2), was renumbered section 6698 by Pub. L. 95–600, renumbered section 6698A by Pub. L. 96–222, and repealed by Pub. L. 96–223. AMENDMENTS 2015—Subsec. (b)(1)(B). Pub. L. 114–113 substituted ‘‘75 percent’’ for ‘‘50 percent’’. 2008—Subsec. (a). Pub. L. 110–343 amended subsec. (a) generally. Prior to amendment, subsec. (a) provided penalty for understatement due to unreasonable posi- tions. 2007—Pub. L. 110–28, § 8246(a)(2)(F)(i)(I), substituted ‘‘tax return preparer’’ for ‘‘income tax return preparer’’ in section catchline. 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 possi- bility of being sustained on its merits, ‘‘(2) any person who is an income tax return pre- parer 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 per- son acted in good faith.’’ 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 understate- ment of liability with respect to any return or claim for refund is due— ‘‘(1) to a willful attempt in any manner to under- state the liability for tax by a person who is an in- come 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 per- son by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).’’ Subsec. (c)(1). Pub. L. 110–28, § 8246(a)(2)(F)(i)(II), sub- stituted ‘‘a tax return preparer’’ for ‘‘an income tax re- turn preparer’’. Subsec. (c)(2). Pub. L. 110–28, § 8246(a)(2)(F)(i)(III), sub- stituted ‘‘the tax return preparer’’ for ‘‘the income tax return preparer’’. Subsec. (e). Pub. L. 110–28, § 8246(a)(2)(F)(i)(IV), sub- stituted ‘‘this title’’ for ‘‘subtitle A’’. Subsec. (f). Pub. L. 110–28, § 8246(a)(2)(F)(i)(V), sub- stituted ‘‘tax return preparer’’ for ‘‘income tax return preparer’’. 1989—Subsec. (a). Pub. L. 101–239, § 7732(a), substituted ‘‘Understatements due to unrealistic positions’’ for ‘‘Negligent or intentional disregard of rules and regula- tions’’ 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 inten- tional disregard of rules and regulations by any person Page 3799 TITLE 26—INTERNAL REVENUE CODE § 6695 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.’’ Subsec. (b). Pub. L. 101–239, § 7732(a), substituted ‘‘Willful or reckless conduct’’ for ‘‘Willful understate- ment of liability’’ in heading and amended text gen- erally. Prior to amendment, text read as follows: ‘‘If any part of any understatement of liability with re- spect to any return or claim for refund is due to a will- ful attempt in any manner to understate the liability for a tax by a person who is an income tax return pre- parer 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).’’ Subsec. (c)(1). Pub. L. 101–239, § 7737(a), inserted at end ‘‘Nothing in this paragraph shall be construed to pro- hibit any counterclaim for the remainder of such pen- alty in a proceeding begun as provided in paragraph (2).’’ Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2015 AMENDMENT 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 re- turns prepared for taxable years ending after the date of the enactment of this Act [Dec. 18, 2015].’’ EFFECTIVE DATE OF 2008 AMENDMENT Pub. L. 110–343, div. C, title V, § 506(b), Oct. 3, 2008, 122 Stat. 3880, provided that: ‘‘The amendment made by this section [amending this section] shall apply— ‘‘(1) in the case of a position other than a position described in subparagraph (C) of section 6694(a)(2) of the Internal Revenue Code of 1986 (as amended by this section), to returns prepared after May 25, 2007, and ‘‘(2) in the case of a position described in such sub- paragraph (C), to returns prepared for taxable years ending after the date of the enactment of this Act [Oct. 3, 2008].’’ EFFECTIVE DATE OF 2007 AMENDMENT Amendment by Pub. L. 110–28 applicable to returns prepared after May 25, 2007, see section 8246(c) of Pub. L. 110–28, set out as a note under section 6060 of this title. EFFECTIVE DATE OF 1989 AMENDMENT Pub. L. 101–239, title VII, § 7732(b), Dec. 19, 1989, 103 Stat. 2402, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply with respect to documents prepared after December 31, 1989.’’ § 6695. Other assessable penalties with respect to the preparation of tax returns for other per- sons (a) Failure to furnish copy to taxpayer Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with section 6107(a) with respect to such return or claim shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $25,000. (b) Failure to sign return Any person who is a tax return preparer with respect to any return or claim for refund, who is required by regulations prescribed by the Sec- retary to sign such return or claim, and who fails to comply with such regulations with re- spect to such return or claim shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any cal- endar year shall not exceed $25,000. (c) Failure to furnish identifying number Any person who is a tax return preparer with respect to any return or claim for refund and who fails to comply with section 6109(a)(4) with respect to such return or claim shall pay a pen- alty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum pen- alty imposed under this subsection on any per- son with respect to documents filed during any calendar year shall not exceed $25,000. (d) Failure to retain copy or list Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with section 6107(b) with respect to such return or claim shall pay a penalty of $50 for each such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to any return period shall not ex- ceed $25,000. (e) Failure to file correct information returns Any person required to make a return under section 6060 who fails to comply with the re- quirements of such section shall pay a penalty of $50 for— (1) each failure to file a return as required under such section, and (2) each failure to set forth an item in the return as required under section, unless it is shown that such failure is due to rea- sonable cause and not due to willful neglect. The maximum penalty imposed under this sub- section on any person with respect to any return period shall not exceed $25,000. (f) Negotiation of check Any person who is a tax return preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect of the taxes imposed by this title which is issued to a taxpayer (other than the tax return pre- parer) shall pay a penalty of $500 with respect to each such check. The preceding sentence shall not apply with respect to the deposit by a bank (within the meaning of section 581) of the full amount of the check in the taxpayer’s account in such bank for the benefit of the taxpayer. (g) Failure to be diligent in determining eligi- bility for certain tax benefits Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining— (1) eligibility to file as a head of household (as defined in section 2(b)) on the return, or