Shared responsibility for overclaims | Research Credit Integrity Alliance

The problem

When a research credit claim does not hold, the federal consequences for the business are measured against the size of the error. A claim for refund or credit of income tax made for an excessive amount carries a penalty of 20 percent of the excessive amount, unless the business shows reasonable cause.1 The excessive amount is the amount by which the claim exceeds what is allowable.1 An underpayment attributable to negligence or disregard of rules or regulations carries an accuracy-related penalty of 20 percent of that portion of the underpayment.2 Where tax is not paid by its due date, interest runs at the underpayment rate.3

The Internal Revenue Code already provides two penalties that can reach the person who prepared or advised on the claim. They are the existing baseline:

Section 6694. A tax return preparer who prepares a return or claim for refund with an understatement due to an unreasonable position, and who knew or reasonably should have known of the position, is liable for the greater of $1,000 or 50 percent of the income derived, or to be derived, by the preparer from that return or claim. No penalty applies if there was reasonable cause and the preparer acted in good faith.4 For understatements due to willful or reckless conduct, the penalty is the greater of $5,000 or 75 percent of that income.4
Section 6701. Any person who aids, assists in or advises on a portion of a return or claim, knowing or having reason to believe it will be used in a material tax matter, and knowing that it would result in an understatement of another person's tax, is liable for a penalty of $1,000 per document, or $10,000 where the document relates to a corporation's tax liability. Only one such penalty applies per person per taxpayer for each period.5

The two sides are measured differently. The business's exposure grows with the size of the overclaim. The preparer's exposure under section 6694 is tied to the preparer's income from the claim, and under section 6701 is a fixed amount that also requires actual knowledge that the claim would understate tax.

As an illustration only, with round numbers: suppose a research credit claim exceeds the allowable amount by $200,000 and the business has no reasonable cause defense. The business repays the $200,000, pays a penalty of $40,000 under section 6676, and pays interest. If the preparer's fee for that claim was $30,000 and section 6694(a) applies, the preparer's penalty is $15,000.

The proposal

Our position

Congress should add a research credit specific measure to the preparer penalty. Where a tax return preparer prepares a research credit claim that is excessive, and the preparer knew or reasonably should have known that the position was unreasonable, the preparer's penalty should be the greater of the current section 6694 amount or a stated percentage of the excessive amount of credit.

The proposal keeps the existing standards in section 6694: the knew or reasonably should have known test, the reasonable cause and good faith defense, and the substantial authority and reasonable basis thresholds. It does not penalize a preparer for a claim reduced on a reasonable position taken in good faith. It changes only how the penalty is measured when those standards are already met.

The percentage is a matter for Congress. We suggest that Congress set it so that, in a typical case, a preparer's exposure for a knowing or careless overclaim is not smaller than the fee that overclaim generated.

Who would act

Congress, because the amount of the section 6694 penalty is set by statute.4 Treasury and the IRS would apply it through the existing preparer penalty procedures and could issue guidance on how the excessive amount of credit is measured.

Expected effect

Our position

Preparers who take reasonable, well documented positions would see no change. For a preparer considering whether to include a weak position, the downside would rise with the size of the claim, in the same way the upside does under a percentage fee. Businesses would gain a measure of protection that does not depend on the terms of an engagement letter. This complements our central position: if Congress prohibits contingent fees in Section 41 engagements, this proposal would still apply to overclaims prepared under any fee basis.

Objections and response

"Higher penalties will make advisers cautious and deter legitimate claims." If preparers fear large penalties, they may advise businesses against claiming credits to which they are entitled.

Our position

The proposal applies only where the existing standard is already met: an unreasonable position the preparer knew or reasonably should have known about, with no reasonable cause and good faith.4 A preparer who takes a position with substantial authority is unaffected. Legitimate claims are not deterred by a penalty they cannot attract.

"The taxpayer signs the return and is responsible for it." The business makes the claim and benefits from it.

Our position

We agree that the business remains responsible. The proposal does not reduce the business's liability. It asks that the preparer, who prepared the claim and was paid for it, carry a share of the consequences that reflects the size of what went wrong.

"Section 6701 already covers serious cases." It does apply where a person knows a document would understate tax.5

Our position

Section 6701 requires knowledge, and its amount is fixed regardless of the size of the overclaim.5 For a large corporate claim, the fixed amount can be small compared with the excessive amount. The proposal addresses the wider ground covered by section 6694, where the preparer knew or reasonably should have known.

Sources

U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6676, Erroneous claim for refund or credit, § 6676(a) and (b). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6676.htm (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6662, Imposition of accuracy-related penalty on underpayments, § 6662(a) and (b)(1). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapA-partII-sec6662.htm (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6601, Interest on underpayment, nonpayment, or extensions of time for payment, of tax, § 6601(a). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap67-subchapA-sec6601.htm (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6694, Understatement of taxpayer's liability by tax return preparer, § 6694(a)(1) to (3) and (b)(1) and (2). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6694.htm (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6701, Penalties for aiding and abetting understatement of tax liability, § 6701(a) and (b). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6701.htm (accessed 11 October 2026). Back

The problem

The proposal

Who would act

Expected effect

Objections and response

Sources

The other proposals