Rule Atlas
IRC § 6694: Preparer Penalties: IRC §6694 & §6695
Under IRC § 6694 (IRS / Treasury Circular 230), preparer Penalties: IRC §6694 & §6695 establishes the authoritative rules tested on the IRS Enrolled Agent (EA). Master the critical penalties facing tax return preparers under IRC Sections 6694 and 6695. VoraPrep verifies every threshold, worked table, and practice question below against the current IRS Enrolled Agent (EA) blueprint.
Current Statutory Thresholds & Limits in Effect
Phase-out begins at $400,000 MAGI (MFJ) / $200,000 (all other filers).
IRC § 6694 — Key Statutory Scope & Exam Matrix
| Rule Dimension | Authoritative Standard | Practitioner & Exam Application |
|---|---|---|
| Primary Authority | IRC § 6694 | Enforced / tested under IRS / Treasury Circular 230 |
| Exam Blueprint Area | SEE3 (SEE3-2) | Tested on the IRS Enrolled Agent (EA) |
| Core Requirement 1 | IRC Section 6694 Understatement Penalties | Required rule boundary & scenario application |
| Core Requirement 2 | IRC Section 6695 Procedural Penalties | Required rule boundary & scenario application |
| Core Requirement 3 | Preparer Due Diligence Requirements | Required rule boundary & scenario application |
| Core Requirement 4 | Standards of Authority for Tax Positions | Required rule boundary & scenario application |
Chen & Associates, a tax firm, is preparing to represent a new client, Vista Healthcare LLC. To ensure clarity and avoid future disputes, which of the following BEST describes the necessary components of an engagement letter for tax representation?
Worked Example: Navigating a §6694 Preparer Penalty
Scenario. Javier, an EA, prepares a Schedule C for his client, a contractor. The client provides a summary of expenses that includes $15,000 for a 'business conference' in Hawaii, but the details strongly suggest it was a family vacation with minimal business activity. The client pressures Javier to deduct the full amount. Javier, knowing the position lacks a reasonable basis, deducts the full $15,000 without disclosure on Form 8275. His fee for the return preparation was $1,200. The IRS later disallows the deduction and investigates Javier's conduct.
- Step 1: Identify the Penalty Type. The issue is a substantive tax position that resulted in an understatement of the client's tax liability. This falls squarely under IRC §6694, not the procedural penalties of §6695.
- Step 2: Assess the Preparer's Conduct. Javier knew the position lacked a reasonable basis. He didn't make an honest mistake or take an aggressive but arguable position; he consciously disregarded the rules by deducting a personal vacation as a business expense. This action constitutes a willful attempt to understate tax liability, which is governed by §6694(b).
- Step 3: Calculate the Applicable Penalty. The penalty under IRC §6694(b) for willful or reckless conduct is the GREATER of: $5,000, or 75% of the income derived by the preparer for the return.
- Calculation: 75% of Javier's fee = 0.75 $1,200 = $900. Comparing the two amounts, $5,000 is greater than $900.
Common IRS Enrolled Agent (EA) Distractors on IRC § 6694
- 1Every preparer penalty question on the SEE follows the same underlying structure. Use this 5-step decision framework and you'll rarely miss one:
- 2Use the mnemonic H.E.A.D. to remember the four areas requiring strict due diligence under §6695(g):
- 3A - American Opportunity Tax Credit
- 4D - Dependent Credits (CTC/ACTC/ODC)
Frequently Asked Questions: IRC § 6694
What is the core rule under IRC § 6694 (Preparer Penalties: IRC §6694 & §6695)?
Under IRC § 6694 (IRS / Treasury Circular 230), preparer Penalties: IRC §6694 & §6695 establishes the authoritative rules tested on the IRS Enrolled Agent (EA). Master the critical penalties facing tax return preparers under IRC Sections 6694 and 6695. VoraPrep verifies every threshold, worked table, and practice question below against the current IRS Enrolled Agent (EA) blueprint.
How is IRC § 6694 tested on the IRS Enrolled Agent (EA)?
Every preparer penalty question on the SEE follows the same underlying structure. Use this 5-step decision framework and you'll rarely miss one: Use the mnemonic H.E.A.D. to remember the four areas requiring strict due diligence under §6695(g):
Where can I practice IRS Enrolled Agent (EA) questions on Preparer Penalties: IRC §6694 & §6695?
Test yourself instantly with the free playable IRS Enrolled Agent (EA) question on this page, or launch VoraPrep's full IRS Enrolled Agent (EA) adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/ea-prep.