Willful or Reckless Conduct
A tax return preparer who prepares a return or refund claim for which any part of a tax liability understatement is due to an “unreasonable position” (defined below) must pay a penalty for each return or claim equal to the greater of:
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$5,000 or
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75% of the income derived (or to be derived) by the tax return preparer for preparing the return or claim (Code Sec. 6694(a)(1)). The 75% component of the penalty calculation was increased from 50%, the rate in effect for returns prepared for years before December 18, 2015.
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If the unreasonable position penalty was also imposed, the willful or reckless conduct penalty is reduced by the unreasonable position penalty.
“Willful or reckless conduct” is conduct by the tax return preparer which is a:
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Willful attempt to understate the tax liability on the return or claim, or
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Reckless or intentional disregard of rules or regulations. (Code Sec. 6694(b)(2))
Limitation Periods for Assessing & Refunding Sec 6694 Penalties
In Chief Counsel Advice Memorandum 201514008, the IRS said:
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The limitation period for making an assessment of the return preparer penalty under Sec 6694 for preparing a return or claim for refund with an understatement of tax liability must be within 3 years of the date the underlying tax return or claim for refund is filed.
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Any claim for refund of an overpayment of a penalty assessed under Sec 6694(a) must be filed within 3 years of the date the penalty was paid to the IRS.
Sec 6694 Penalties When Return Not Signed, Not Filed or Filed Late
For purposes of the penalties under Code Sec. 6694, a return or claim for refund is deemed prepared on the date it is signed by the tax return preparer, but if a signing tax return preparer (as defined in Reg. § 301.7701-15(b)(1)) fails to sign the return, the return or claim for refund is deemed prepared on the date the return or claim is filed. Chief Counsel Advice 201519029 concludes that Sec 6694 penalties apply where an amended return was signed by the preparer and never filed, and if an amended return was filed but IRS disallowed the refund. On the other hand, the Chief Counsel ruled that this penalty, as well as the penalties for understatement of tax and aiding or abetting an understatement of tax, is not to be assessed if the preparer made and filed a claim for refund after the period for claiming a refund had expired.