- Preparers face penalties up to five thousand dollars for willful tax understatement or reckless disregard.
- Administrative failures in twenty twenty-six trigger sixty-five dollar penalties per return, capped at thirty-two thousand five hundred.
- Due diligence for credits like the Child Tax Credit requires six hundred fifty dollars per failure in twenty twenty-six.
A paid tax preparer who puts an unsupported deduction, credit, treaty claim or refund position on a return can face penalties even when the taxpayer requested it. Returns and refund claims submitted in 2026 can also trigger separate administrative penalties of $65 per return or claim, capped at $32,500 for each category.
The taxpayer remains exposed, too. Unpaid tax, interest, accuracy-related penalties, refund freezes, amended-return costs and audit risk can survive a penalty imposed on the preparer.
Cross-border filings create several pressure points. A return may require Form 1040 rather than Form 1040-NR, or the reverse, along with treaty analysis, foreign tax credits, U.S. rental deductions, FBAR, Form 8938, stock compensation, foreign pensions, crypto, state residency, ITIN claims and education or child credits.
The first question is support. The second is conduct.
Willful conduct can raise the preparer penalty to $5,000 or more
Under section 6694(a), an unreasonable position that understates tax can produce a penalty when the preparer knew, or reasonably should have known, about the position. The basic amount is the greater of $1,000 or 50% of the income the preparer received for preparing the return or refund claim.
A more serious case involves a willful attempt to understate tax or reckless or intentional disregard of rules or regulations. The penalty then rises to the greater of $5,000 or 75% of the income derived from the return or claim.
Examples include knowingly false deductions, fake dependents, fabricated business expenses, invented fuel credits, improper refundable credits, false Schedule C losses and deliberate omission of income. A promised refund before records are reviewed is another warning sign.
So is a request to sign blank forms or pay a fee based on the refund amount. The taxpayer may still owe the underlying tax.
Legal support changes the penalty analysis
An undisclosed non-tax-shelter position generally must meet the substantial authority standard. That requires weighing relevant legal authorities and applying them to the taxpayer’s facts, rather than relying on fairness or a prior return.
A properly disclosed non-tax-shelter position can use the lower reasonable basis standard. That threshold remains higher than a merely arguable, not frivolous or not patently improper claim.
The preparer should be able to identify the governing rule, explain which facts matter and point to records supporting the deduction, credit, loss, treaty position or reporting treatment. Disclosure can reduce exposure in qualifying circumstances. It cannot turn an unsupported claim into an acceptable one.
Tax shelters and reportable transactions face a stricter test. The preparer generally must reasonably believe the position would be sustained on the merits more likely than not, a greater-than-50% likelihood.
That category can include promoted transactions, aggressive conservation easement claims, questionable energy-credit structures, syndicated tax products, crypto-loss schemes, offshore arrangements and artificial business-loss strategies. Ordinary disclosure does not replace that higher standard.
The disclosure forms have defined limits
Form 8275 allows taxpayers and preparers to disclose items or positions that the return does not otherwise adequately disclose, except positions contrary to regulations. It may help avoid certain penalties involving substantial understatement or disregard of rules when the position has the required support.
It does not cure negligence, poor records or tax-shelter problems. IRS instructions also exclude penalty protection for disregard of regulations, valuation misstatements, pension liability overstatements, estate or gift valuation understatements, transactions lacking economic substance and undisclosed foreign financial asset understatements.
Inconsistent estate basis and other listed categories also remain outside the protection. The instructions separately state that a taxpayer cannot rely on disclosure after failing to keep proper books and records or substantiate the claimed item.
A position contrary to Treasury regulations generally requires Form 8275-R. That form can also address disclosures tied to certain preparer penalties and economic substance issues.
The taxpayer should ask the preparer to identify the conflicting regulation, the documented authority and the potential penalty exposure before signing. A disclosure form is not a substitute for evidence.
Annual guidance can also treat information already shown on the applicable return forms and instructions as adequate disclosure. Rev. Proc. 2026-12 covers certain items for section 6662 substantial-understatement purposes and section 6694(a) preparer penalties.
Its scope includes income tax returns filed on 2025 tax forms for tax years beginning in 2025, plus certain 2026 short-year returns filed on 2025 forms. For tax year 2025, filed in 2026, the preparer must determine whether the return itself provides the required information or whether a separate form is needed.
Administrative failures carry separate 2026 amounts
IRS inflation-adjustment guidance sets the following amounts for failures involving returns or refund claims filed in 2026:
| Administrative failure | Amount | Maximum |
|---|---|---|
| Not giving the taxpayer a copy | $65 per return or claim | $32,500 per category |
| Not signing the return | $65 per return or claim | $32,500 per category |
| Not furnishing the identifying number | $65 per return or claim | $32,500 per category |
| Not retaining a copy or list | $65 per return or claim | $32,500 per category |
| Not filing correct information returns | $65 per return or claim | $32,500 per category |
| Negotiating a taxpayer’s refund check | $650 per check | No maximum |
These rules protect basic safeguards: a signed return, a taxpayer copy, preparer identification, retained records and control over the refund.
Credit claims require questions, calculations and records
Paid preparers must perform due diligence when claiming the Earned Income Tax Credit, Child Tax Credit, Additional Child Tax Credit, Credit for Other Dependents, American Opportunity Tax Credit or head-of-household status.
The process requires completing Form 8867, calculating the credits, meeting knowledge requirements, asking additional reasonable questions when information appears incomplete or incorrect and retaining records.
For returns and refund claims submitted during 2026, the penalty is $650 per failure. It can reach $2,600 on one return or claim when the preparer fails in all four covered tax-benefit areas.
The rules can affect immigrant families, mixed-status households, students, separated spouses, parents claiming children abroad and people seeking education credits. Residency and documentation facts can change the result.
Cross-border facts can change the filing position
International returns require the preparer to examine both the tax rule and the taxpayer’s immigration or residency facts. Common risk areas include:
- claiming treaty benefits without satisfying treaty conditions;
- treating a resident filing as appropriate when
Form 1040-NRmay apply, or filing the reverse; - overlooking FBAR or
Form 8938reporting; - treating foreign income as nontaxable without supporting authority;
- claiming U.S. rental losses without proper deductions and elections;
- using unsupported foreign tax credits;
- claiming education credits when visa, residency or institution rules are unclear;
- claiming dependents without valid documentation;
- omitting foreign pension or investment income; and
- using disclosure forms to cover positions that lack records.
The preparer should connect each filing position to the facts and documents establishing it. A large refund does not answer those questions.
IRS assessment periods differ by penalty
The IRS generally has three years after the relevant return or refund claim was filed to assess section 6694(a) and section 6695 penalties. That period does not govern every category.
IRS guidance states that section 6694(b), section 6700, section 6701 and section 6713 penalties have no statute of limitations on assessment. Willful or reckless conduct can therefore remain exposed longer than ordinary administrative failures.
Taxpayers should retain the signed return, preparer communications and documents supporting material positions. Before signing, they can ask what law supports the claim, which records establish the facts, whether a disclosure is needed and whether the position conflicts with regulations.
They should also ask whether the position affects foreign reporting, refundable credits, rental losses, business deductions or treaty claims. A preparer who cannot explain those points may be asking the taxpayer to accept risk without understanding it.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
