Tax return preparers must take reasonable positions on returns. A position is reasonable only when supported by substantial authority, or—if disclosed—a reasonable basis. Preparers may not take frivolous positions, which have no legal validity or have been deemed frivolous by federal courts. (“Return preparers are responsible for taking a reasonable position… return cannot contain frivolous positions…”)
The IRS generally has three years from the filing date to assess penalties. Fraudulent returns have no statute of limitations.
Standards for Return Positions
Substantial Authority
An objective standard requiring a meaningful weight of supporting authorities compared to contrary authorities. It is:
- Less strict than “more likely than not”
- More strict than “reasonable basis” (“There is substantial authority… only if the weight of the authorities supporting the treatment is substantial…”)
Reasonable Basis
A relatively high reporting standard, significantly above “not frivolous.” A position must rely on recognized authorities under §1.6662‑4(d)(3)(iii). (“Reasonable basis is a relatively high standard… not satisfied by a position that is merely arguable.”)
Tax Shelters
Tax shelters require a more likely than not confidence level (>50%) for significant issues. (“Tax shelters have a higher standard… more likely than not…”)
Disclosure to Avoid Penalties
Taxpayers and preparers may use:
- Form 8275 (Disclosure Statement)
- Form 8275‑R (Regulation Disclosure Statement)
These forms disclose positions not otherwise adequately disclosed. Form 8275‑R is used when taking a position contrary to a regulation. (“Form 8275 is filed… to avoid… accuracy‑related penalty… Form 8275‑R… contrary to a regulation.”)
Annual IRS revenue procedures identify items considered adequately disclosed without filing Form 8275.
Disclosure cannot avoid penalties for:
- Negligence
- Disregard of regulations
- Tax shelter understatements
- Valuation misstatements
- Economic substance violations
- Undisclosed foreign asset understatements
- Inconsistent estate basis (“The portion… cannot be avoided by disclosure… negligence… disregard… tax shelter item…”)
Avoidance vs. Evasion
Avoidance
Legal tax reduction through planning.
Evasion
Illegal acts involving deceit, concealment, or misrepresentation. Examples include:
- Omitting income
- False deductions
- Improper credits
- Concealing assets (“Evasion involves some affirmative act… deceit, subterfuge, concealment…”)
Fraud and Indicators of Fraud
Fraud is a willful attempt to evade tax. Indicators include:
- Omitted income
- Unexplained net worth increases
- Concealed accounts
- False documents
- Multiple sets of books
- Fictitious deductions
- False dependency claims
- Destruction of records
- Bribery attempts
- False ITIN applications (“Signs of fraud… omitting income… false documents… concealment…”)
These “badges of fraud” guide IRS examiners.
Preparer Fraud Penalties (§7206 and §7207)
- 7206 — Fraud and False Statements (Felony)
Penalties include:
- Up to $250,000 fine ($500,000 for corporations)
- Up to 3 years imprisonment
- Costs of prosecution
Applies to willful acts such as:
- Signing returns not believed to be true
- Assisting in fraudulent documents
- Concealing property
- Destroying records (“A preparer who willfully performs… is guilty of a felony…”)
- 7207 — Fraudulent Returns or Documents (Misdemeanor)
Penalties include:
- Up to $10,000 fine ($50,000 for corporations)
- Up to 1 year imprisonment (“A preparer who willfully gives information… known to be fraudulent…”)
Understatement Penalties (§6694)
Unreasonable Positions
Penalty: greater of $1,000 or 50% of income from the return. A position is unreasonable when:
- Undisclosed: lacks substantial authority
- Disclosed: lacks reasonable basis
- Tax shelter: not more likely than not (“Penalty… greater of $1,000 or 50%…”)
Willful or Reckless Conduct
Penalty: greater of $5,000 or 75% of income from the return. (“Willful or reckless conduct… penalty… greater of $5,000 or 75%…”)
Reasonable cause and good faith may remove penalties for unreasonable positions, but not for willful or reckless conduct.
Aiding and Abetting Understatement (§6701)
Penalty:
- $1,000 per document
- $10,000 if related to a corporation
Applies when a person:
- Assists or advises on a document
- Knows it will be used for a tax matter
- Knows it will understate tax (“Penalty is $1,000… $10,000… aids or assists…”)
No statute of limitations applies.
Preparer Failures (§6695)
Penalty amounts for 2025: $60 per failure, up to $31,500 per year, unless due to reasonable cause.
Failures include:
- §6695(a) Not giving taxpayer a copy
- §6695(b) Not signing the return
- §6695(c) Not using a PTIN
- §6695(d) Not retaining copies or lists
- §6695(e) Not filing correct information returns
- §6695(f) Negotiating a taxpayer’s refund check (penalty: $635 per check, no limit)
- §6695(g) Due diligence failures for EITC, CTC, AOTC, ODC, and Head of Household (“Penalty of $60… penalty of $635 per check… due diligence requirements…”)
Due diligence requires:
- Interviewing the taxpayer
- Asking required and follow‑up questions
- Completing Form 8867
- Keeping all required records for three years
Disclosure and Use of Taxpayer Information (§6713 and §7216)
- 6713 — Civil Penalty
- $250 per disclosure, up to $10,000 per year
- $1,000 per disclosure for identity‑theft‑related misuse, up to $50,000 (“Shall pay a penalty of $250… $1,000… identity theft…”)
- 7216 — Criminal Penalty
- Up to $1,000 fine ($100,000 for identity‑theft‑related cases)
- Up to 1 year imprisonment (“Shall be guilty of a misdemeanor… fined… imprisoned…”)
Written consent is required for most uses of taxpayer information.
Payment of Penalties
Preparers have 30 days to pay after receiving a demand. They may pay 15% and file a refund claim. If denied or unresolved after six months, they have 30 days to file suit in district court. (“The tax preparer has 30 days… may elect to pay at least 15%… file a claim for refund…”)