§6694 — Understatement of taxpayer’s liability by tax return preparer
17 cases·3 followed·3 distinguished·11 cited—18% support
Statute Text — 26 U.S.C. §6694
If a tax return preparer—
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
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.
Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position.
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.
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.
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.
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—
$5,000, or
75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.
Conduct described in this paragraph is conduct by the tax return preparer which is—
a willful attempt in any manner to understate the liability for tax on the return or claim, or
a reckless or intentional disregard of rules or regulations.
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).
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 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 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).
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 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 30-day period referred to in this paragraph.
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.
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 making of such refund.
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 this title 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.
For definition of tax return preparer, see section 7701(a)(36).
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.6694-0 Table of contents
- Treas. Reg. §Treas. Reg. §1.6694-0(a) In general.
- Treas. Reg. §Treas. Reg. §1.6694-0(b) Tax return preparer must bring suit in district court to determine liability for penalty.
- Treas. Reg. §Treas. Reg. §1.6694-0(c) Suspension of running of period of limitations on collection.
- Treas. Reg. §Treas. Reg. §1.6694-0(d) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.6694-0(e) Rules or regulations.
- Treas. Reg. §Treas. Reg. §1.6694-0(f) Section 6694(b) penalty reduced by section 6694(a) penalty.
- Treas. Reg. §Treas. Reg. §1.6694-0(g) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.6694-0(i) Signing tax return preparers.
- Treas. Reg. §Treas. Reg. §1.6694-0(v) Examples.
- Treas. Reg. §Treas. Reg. §1.6694-1 Section 6694 penalties applicable to tax return preparers
- Treas. Reg. §Treas. Reg. §1.6694-1(a) Overview—(1) In general.
- Treas. Reg. §Treas. Reg. §1.6694-1(b) Tax return preparer—(1) In general.
- Treas. Reg. §Treas. Reg. §1.6694-1(c) Understatement of liability.
- Treas. Reg. §Treas. Reg. §1.6694-1(d) Abatement of penalty where taxpayer's liability not understated.
- Treas. Reg. §Treas. Reg. §1.6694-1(e) Verification of information furnished by taxpayer or other party—(1) In general.
- Treas. Reg. §Treas. Reg. §1.6694-1(f) Income derived (or to be derived) with respect to the return or claim for refund—(1) In general.
- Treas. Reg. §Treas. Reg. §1.6694-1(g) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.6694-2 Penalty for understatement due to an unreasonable position
- Treas. Reg. §Treas. Reg. §1.6694-2(a) In general—(1) Proscribed conduct.
- Treas. Reg. §Treas. Reg. §1.6694-2(b) Reasonable to believe that the position would more likely than not be sustained on its merits—(1) In general.
- Treas. Reg. §Treas. Reg. §1.6694-2(c) §1.6694-2(c)
- Treas. Reg. §Treas. Reg. §1.6694-2(d) Exception for adequate disclosure of positions with a reasonable basis—(1) In general.
- Treas. Reg. §Treas. Reg. §1.6694-2(e) Exception for reasonable cause and good faith.
- Treas. Reg. §Treas. Reg. §1.6694-2(f) Effective/applicability date.
17 Citing Cases
Congress has clearly distinguished the scienter requirement ofsection 6701 from that in other statutes, e.g., section 6694(b) and section 7206(2).
Congress has clearly distinguished the scienter requirement ofsection 6701 from that in other statutes, e.g., section 6694(b) and section 7206(2).
3 Unlike the computation of a deficiency under sec. 6211 or the computation of an understatement for purposes of sec. 6694, the earned income credit claimed on petitioners’ 1997 return (and disallowed in the notice of deficiency) is not taken into account in the computation of the understatement of income tax for purposes of sec.
Accordingly, we hold that the Court has jurisdiction to review respondent's determination to sustain the levy and to determine whether respondent may collect the unpaid section 6694 penalties by levy .
- 2 - This matter is before the Court on respondent’s motion to dismiss for lack of jurisdiction as to income tax preparer penalties assessed pursuant to section 6694.
2015-136, at *3–4, *9 (holding that a taxpayer could not challenge the underlying liability in a CDP hearing after a preassessment hearing relating to a section 6694 penalty).
Petitioner timely requested a CDP hearing, contending that the section 6694 penalties had been "improperly assessed or not assessed at all." He did not dispute his individual income tax liabilities or indicate that he sought a collection alternative.
Deficiency procedures do not apply to the assessment or collection ofsection 6694 penalties, see sec.
Likewise, in the preparer penalty ofsection 6694, Congress made it clear that refunded amounts like the refundable credits at issue here should be taken into account for purposes of determining an underpayment.
Likewise, in the preparer penalty of section 6694, Congress made it clear that refunded amounts like the refundable credits at issue here should be taken into account for purposes of determining an underpayment.
A different penalty provision in section 6694, enacted in 1976, sheds a helpful light in this regard.
A different penalty provision in section 6694, enacted in 1976, sheds a helpful light in this regard.
Respondent’s regulations applicable to Indeck’s return for the taxable year ended in 1994 do not provide a definition of reasonable basis, but provide that it is a standard that is significantly higher than the “not frivolous” standard applicable under section 6694 and defined in section 1.6694- - 57 - 2(c)(2), Income Tax Regs.22 Sec.