What We Are Seeing: IRS Preparer Penalties — When the Algorithm Comes for You
What We Are Seeing: IRS Preparer Penalties — When the Algorithm Comes for You
There is a pattern we are seeing with increasing frequency.
It usually starts the same way.
A tax preparer receives a letter from the IRS notifying them of a proposed penalty under IRC § 6695(g) for failure to meet due diligence requirements related to refundable credits — most commonly:
- Earned Income Tax Credit (EITC)
- Additional Child Tax Credit (ACTC)
- American Opportunity Credit (AOTC)
- Head of Household filing status
The preparer is confused. Or angry. Or both.
“I prepared those returns correctly.”
“I asked the questions.”
“The client signed the forms.”
And yet — the penalty notice arrives.
How These Cases Usually Begin
Most of these cases are not triggered by a random human review.
They are triggered by data.
When a preparer files a statistically high number of returns generating large refunds driven by refundable credits — particularly EITC — that preparer can be flagged by IRS analytics. The Service compares refund amounts, credit usage rates, and filing patterns against regional and national benchmarks.
Once the threshold is crossed, the machine turns on.
And shortly after that, something else often happens.
The “Education Meeting”
Frequently, a revenue agent or compliance officer will request what is described as an “education meeting.”
The tone is cooperative.
The purpose is framed as informational.
But this is not casual.
The IRS often arrives having already identified concerns. In many cases, they will request a sampling of 25 to 50 tax return files involving refundable credits.
That sampling becomes the basis for penalty determinations.
The meeting is used to:
- Assess your internal procedures
- Evaluate documentation practices
- Ask how you verify income and dependency claims
- Determine whether you are making “reasonable inquiries”
- Build a factual record
Anything said in that meeting can later appear in the examination file.
Many preparers attend alone, believing this is simply an educational outreach.
In reality, the case may already be well underway.
The Due Diligence Requirements Are Not Optional
Under § 6695(g) and the related regulations, preparers must:
- Complete Form 8867 (Paid Preparer’s Due Diligence Checklist).
- Compute the credit based on information provided.
- Make reasonable inquiries when information appears inconsistent, incorrect, or incomplete.
- Retain records for three years, including:
- Copies of worksheets
- Form 8867
- Documentation relied upon
- Notes of inquiries made to the client
The penalty is per return, per credit.
For 2026, the penalty amount is indexed for inflation and is over $600 per failure.
Do the Math
Now consider a typical sampling.
If the IRS reviews 25 returns and asserts two due diligence failures per return (for example, EITC and Head of Household), and the penalty is approximately $600 per failure:
25 returns × 2 credits × $600 = $30,000
If the sampling includes 50 returns:
50 returns × 2 credits × $600 = $60,000
And that assumes only two credits per return.
We routinely see preparers facing proposed penalties in the $20,000 to $75,000 range from a single compliance review.
And remember — this is based only on the sampled returns.
The Part No One Tells You
The IRS is not always fair in these cases.
We frequently see:
- Penalties asserted where inquiries were made but documentation was deemed “insufficient.”
- Retroactive second-guessing of reasonable reliance on client representations.
- Examiners applying a standard closer to perfection than “reasonable.”
- Multiple penalties stacked for what is effectively the same factual issue.
The government’s position is often:
“If it’s not documented, it didn’t happen.”
That is a difficult position for a preparer who operated in good faith but did not maintain detailed interview notes.
These Cases Add Up — Fast
Beyond the monetary exposure, there is also:
- Circular 230 implications
- Potential injunction risk in repeat cases
- PTIN monitoring
- Reputational damage
- Business disruption
- Significant stress
Many preparers attempt to respond on their own.
That is usually a mistake.
These are not routine correspondence matters. They are enforcement actions. How you respond to the sampling request, the document production, and the “education meeting” can determine whether the matter escalates.
What We Do
We frequently represent preparers facing:
- § 6695 due diligence penalties
- § 6694 preparer understatement penalties
- IRS compliance visits and “education meetings”
- Proposed injunction actions
Our approach is strategic.
We analyze:
- Whether the IRS properly applied the statute and regulations
- Whether penalties were improperly duplicated
- Whether procedural defenses exist
- Whether Appeals can resolve the matter
In many cases, penalties can be reduced or eliminated. In others, we negotiate resolutions that protect the preparer’s ability to continue operating.
But the key is this:
You do not want to attend that meeting alone.
If You Are a Preparer
If you are seeing:
- A request for 25–50 client files
- Letters referencing refundable credits
- A penalty notice citing § 6695(g)
- A call requesting an “education visit”
- A proposed penalty assessment
Do not ignore it.
Do not assume it will go away.
And do not assume the IRS is right.
These cases are technical, document-heavy, and highly fact-specific. They require careful handling.
We are seeing more of them.
If you find yourself in this situation, hire experienced counsel early.
Because once the algorithm flags you, the burden shifts — and you need someone who understands how to push back.
