
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC6694]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                Subtitle F--Procedure and Administration
 
  CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
                                PENALTIES
 
                   Subchapter B--Assessable Penalties
 
                       PART I--GENERAL PROVISIONS
 
Sec. 6694. Understatement of taxpayer's liability by income tax 
        return preparer
        

(a) Understatements due to unrealistic positions

    If--
        (1) any part of any understatement of liability with respect to 
    any return or claim for refund is due to a position for which there 
    was not a realistic possibility of being sustained on its merits,
        (2) any person who is an income tax return preparer with respect 
    to such return or claim knew (or reasonably should have known) of 
    such position, and
        (3) such position was not disclosed as provided in section 
    6662(d)(2)(B)(ii) or was frivolous,

such person shall pay a penalty of $250 with respect to such return or 
claim unless it is shown that there is reasonable cause for the 
understatement and such person acted in good faith.

(b) Willful or reckless conduct

    If any part of any understatement of liability with respect to any 
return or claim for refund is due--
        (1) to a willful attempt in any manner to understate the 
    liability for tax by a person who is an income tax return preparer 
    with respect to such return or claim, or
        (2) to any reckless or intentional disregard of rules or 
    regulations by any such person,

such person shall pay a penalty of $1,000 with respect to such return or 
claim. With respect to any return or claim, the amount of the penalty 
payable by any person by reason of this subsection shall be reduced by 
the amount of the penalty paid by such person by reason of subsection 
(a).

(c) Extension of period of collection where preparer pays 15 percent of 
        penalty

                           (1) In general

        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 an income 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).

    (2) Preparer must bring suit in district court to determine 
                          his liability for penalty

        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 
    income 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.

       (3) Suspension of running of period of limitations on 
                                 collection

        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.

(d) Abatement of penalty where taxpayer's liability not understated

    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.

(e) Understatement of liability defined

    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 subtitle A 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.

(f) Cross reference

            For definition of income tax return preparer, see section 
        7701(a)(36).

(Added Pub. L. 94-455, title XII, Sec. 1203(b)(1), Oct. 4, 1976, 90 
Stat. 1689; amended Pub. L. 101-239, title VII, Secs. 7732(a), 7737(a), 
Dec. 19, 1989, 103 Stat. 2402, 2404.)

                          Codification

    Another section 6694, relating to failure to file information with 
respect to carryover basis property, which was added by Pub. L. 94-455, 
Sec. 2005(d)(2), was renumbered section 6698 by Pub. L. 95-600, 
renumbered section 6698A by Pub. L. 96-222, and repealed by Pub. L. 96-
223.


                               Amendments

    1989--Subsec. (a). Pub. L. 101-239, Sec. 7732(a), substituted 
``Understatements due to unrealistic positions'' for ``Negligent or 
intentional disregard of rules and regulations'' in heading and amended 
text generally. Prior to amendment, text read as follows: ``If any part 
of any understatement of liability with respect to any return or claim 
for refund is due to the negligent or intentional disregard of rules and 
regulations by any person who is an income tax return preparer with 
respect to such return or claim, such person shall pay a penalty of $100 
with respect to such return or claim.''
    Subsec. (b). Pub. L. 101-239, Sec. 7732(a), substituted ``Willful or 
reckless conduct'' for ``Willful understatement of liability'' in 
heading and amended text generally. Prior to amendment, text read as 
follows: ``If any part of any understatement of liability with respect 
to any return or claim for refund is due to a willful attempt in any 
manner to understate the liability for a tax by a person who is an 
income tax return preparer with respect to such return or claim, such 
person shall pay a penalty of $500 with respect to such return or claim. 
With respect to any return or claim, the amount of the penalty payable 
by any person by reason of this subsection shall be reduced by the 
amount of the penalty paid by such person by reason of subsection (a).''
    Subsec. (c)(1). Pub. L. 101-239, Sec. 7737(a), inserted at end 
``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).''


                    Effective Date of 1989 Amendment

    Section 7732(b) of Pub. L. 101-239 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply with respect 
to documents prepared after December 31, 1989.''

                  Section Referred to in Other Sections

    This section is referred to in sections 6103, 6503, 6511, 6696, 
6701, 7407, 7421 of this title.
