IRS Preparer Penalties: 6694, 6695, Due Diligence, and PTIN Risks

A preparer can do the interview, complete Form 8867, and still walk into an exam with more exposure than expected.

That is the part small offices miss. §6695(g) is the penalty everyone remembers because due diligence gets the spotlight. It is not the only class on the table. A single refundable-credit return can also carry procedural §6695 failures, a refund-check handling issue, and a §6694 understatement penalty if the position itself was unreasonable, willful, or reckless.

The safer way to think about this is not "did we sign 8867?" It is "which penalty class would this file trigger if someone opened it two years from now?"

Below is the practical stack, using the current 2026 adjusted figures in Rev. Proc. 2025-32 for returns filed in 2027, plus the statutory §6694 floors.

The five classes on one return

Start with §6695(a) through (e). These are the boring failures that become expensive when they repeat: no taxpayer copy, no preparer signature, missing PTIN, no retained copy or list, or incorrect preparer information returns. For the 2027 filing season figures in Rev. Proc. 2025-32, each is $65 per failure, with a $33,000 annual cap per category.

Then add §6695(f), negotiation of a taxpayer refund check. That figure is also listed at $665 per check in the same revenue procedure. It is easy to avoid, but it belongs in the workflow because the trigger is operational, not technical tax law.

Then comes §6695(g), due diligence. The same table lists $665 per failure for determining eligibility for head of household, child tax credit and related dependent credits, American Opportunity Tax Credit, and Earned Income Tax Credit. The important phrase is per failure. A single return with several covered benefits can create several failures.

The last two classes live in §6694. §6694(a) applies when an understatement comes from an unreasonable position the preparer knew, or reasonably should have known, about. The penalty is the greater of $1,000 or 50% of the income derived from the return. §6694(b) is the aggravated version: willful or reckless conduct. The penalty is the greater of $5,000 or 75% of the income derived from the return, reduced by any §6694(a) amount.

Why "I asked" is not enough

Most due-diligence exams do not start with a preparer admitting they never asked the question. They start with a file that does not show the answer.

The client told you where the child lived. The staff member remembers asking. The tax software has boxes checked. But if the workpaper does not connect the question, the answer, the supporting fact, and Form 8867, the file is thin. Thin files invite the examiner to say the inquiry was not documented.

This is why a document checklist matters. It is not decoration. It is the evidence trail: what was requested, what the client gave, what was missing, and what the preparer relied on before signing.

What the stack can look like

Take a return with EITC, CTC, AOTC, and head of household. The preparer collected a $1,500 fee. The file has one procedural miss, thin due-diligence notes across the covered benefits, and a position the preparer should have flagged.

The floor version is already painful: $65 for the procedural miss, $2,660 for four §6695(g) failures, and $1,000 under §6694(a). That is $3,725 on one return.

If the same facts rise to willful or reckless conduct, the §6694 floor becomes $5,000. The same file moves to $7,725 before any separate practice consequences, time cost, client fallout, or appeal work.

The point is not to scare the office with a worst-case story. The point is to price the risk honestly. "The 8867 penalty" is not the whole number.

The 30-minute sign-off

Build a one-page sign-off for every refundable-credit or HOH file. Five rows are enough.

• Procedural: taxpayer copy, preparer signature, PTIN, retention, and preparer information return requirements checked.
• Check handling: no preparer endorsement, negotiation, or deposit of a taxpayer refund check.
• Due diligence: each covered benefit has inquiry, documented answer, Form 8867 consistency, and retained records.
• Unreasonable position: material positions have support, disclosure, or a clear stop flag.
• Willful or reckless red flags: no ignored contradiction, no stale prior-year carryforward, no pattern that should have forced a deeper review.

This is not a legal shield. It is a working file map. When an examiner points at a class, you can point at the control tied to that class.

What to do this week

Pull ten refundable-credit returns from last season. Do not fix them first. Read them as if you were the examiner.

For each file, mark the five classes. Which ones are clean? Which ones depend on memory? Which ones have a note but no supporting document? Which ones would force you to explain a position instead of showing the support?

Then model the exposure in the preparer penalty calculator. Use your real fee, your real benefit mix, and the miss pattern you found. If the number would hurt, fix the workflow before the next intake season, not after a notice arrives.