Promoter penalties and injunctions (brief) | Research Credit Integrity Alliance

Key points

Preparers face a penalty of the greater of $1,000 or 50 percent of their income from a return or claim with an unreasonable position, rising to the greater of $5,000 or 75 percent for willful or reckless conduct.1
Promoters and anyone who knowingly aids an understatement face separate penalties, and federal courts can enjoin preparers and promoters.2345
Every one of these tools requires proof of a defined level of fault and acts after a claim has been filed.134
The IRS Data Book does not report preparer, promoter or aiding and abetting penalties separately, and no official source found reports them by type of credit.6
The business still repays the disallowed credit and bears its own penalties, whatever happens to the preparer.78

The tools

Civil penalties

Section 6694 applies to a tax return preparer whose return or refund claim contains an understatement due to an unreasonable position that the preparer knew or reasonably should have known of. The penalty is the greater of $1,000 or 50 percent of the income derived from the return or claim, or the greater of $5,000 or 75 percent for willful or reckless conduct.1 An understatement includes an overstatement of an amount creditable or refundable, so an overstated research credit can qualify.1 There is a reasonable cause and good faith exception.1

Section 6700 applies to a person who organizes or sells a plan or arrangement and makes a statement about a tax benefit that the person knows or has reason to know is false or fraudulent as to a material matter, or a gross valuation overstatement.2

Section 6701 applies to anyone who aids, assists, procures or advises on a document knowing that it would result in an understatement of another person's tax. The penalty is $1,000 per document, or $10,000 for a corporation's document.3

Injunctions

Under Section 7407, a court may enjoin a tax return preparer who has engaged in conduct subject to the Section 6694 or 6695 penalties, misrepresented eligibility or experience, "guaranteed the payment of any tax refund or the allowance of any tax credit", or engaged in other fraudulent or deceptive conduct. A preparer who has repeatedly engaged in such conduct may be barred from preparing returns.4 Under Section 7408, a court may enjoin "specified conduct", which includes conduct subject to the Section 6700 and 6701 penalties and violations of the regulations that make up Circular 230.5

Professional sanctions

Treasury may censure, suspend or disbar a Circular 230 practitioner, or impose a monetary penalty up to the gross income derived from the conduct, after notice and an opportunity for a proceeding.9 Circular 230 also bars practitioners from charging contingent fees for most matters before the IRS.10 A federal court held in 2014 that the IRS lacks authority to regulate the preparation of ordinary refund claims, those filed after the original return but before an audit, and noted that Congress had enacted a "comprehensive scheme of penalties" for abuse in returns and refund claims.11

What the record shows

In 2006 the Commissioner of Internal Revenue told the Senate Finance Committee that research credit refund claims were "often marketed to them on a contingency fee basis" and were "frequently based on unsupportable amounts, nonqualified expenditures, or estimates" without contemporaneous documentation.12 He said the accuracy penalties gave no disincentive to negligent refund claims.12 In May 2007 Congress enacted Section 6676, a 20 percent penalty on excessive claims for refund or credit of income tax.7

The IRS Data Book for fiscal year 2025 places preparer and aiding and abetting penalties in a broad category of "nonreturn penalties" that also includes information return, frivolous filing and trust fund recovery penalties.6 No official source found for this brief reports how often these tools have been used for research credit claims.

The limits

After the event. Each tool applies to a claim already filed, usually after examination.149

Fault must be proved. The standards range from "knew or reasonably should have known" to knowledge that a document would understate tax.13 In our view, these standards protect good faith work on difficult questions.

The business still pays. Sections 6676 and 6662 penalize the business, and nothing in Section 6694 moves the business's tax, interest or penalties to the preparer.178

The fee is not addressed. No Internal Revenue Code penalty described here depends on how the preparer was paid.123

The case for relying on penalties

Supporters of relying on penalties argue that penalties target conduct rather than a business model, that the law already contains many tools, that contingent fees widen access to expertise, and that fault standards protect good faith claims. Nothing in this brief suggests that advisers who charge contingent fees act improperly. Swanson Reed's answer is that penalties can punish some consequences of an incentive where fault is proved, but cannot remove the incentive, and the government publishes no data showing how often they are used for research credit claims.

Our position

Congress should prohibit contingent fees, commonly called success fees, in federal research and development tax credit engagements under Section 41, so that advisers are paid for the work they perform rather than for the size of the claim they produce. Penalties and injunctions deal with conduct after the event; a prohibition would remove the incentive at the start. Swanson Reed, which publishes this brief, is a fixed-fee R&D tax adviser with a direct commercial interest: it does not charge success fees, and a ban would remove a pricing model it competes against.

References

Office of the Law Revision Counsel, 26 U.S.C. 6694, Understatement of taxpayer's liability by tax return preparer, subsections (a), (b) and (e), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6694.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6700, Promoting abusive tax shelters, etc., subsection (a), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6700.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6701, Penalties for aiding and abetting understatement of tax liability, subsections (a) and (b), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6701.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 7407, Action to enjoin tax return preparers, subsection (b), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap76-subchapA-sec7407.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 7408, Actions to enjoin specified conduct related to tax shelters and reportable transactions, subsections (b) and (c), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap76-subchapA-sec7408.htm (accessed 11 October 2026). Back
Internal Revenue Service, Internal Revenue Service Data Book, 2025 (Publication 55-B), Table 4-2 and footnote 13. https://www.irs.gov/pub/irs-pdf/p55b.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6676, Erroneous claim for refund or credit, subsection (a) and source credit, United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6676.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6662, Imposition of accuracy-related penalty on underpayments, subsections (a) and (b), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapA-partII-sec6662.htm (accessed 11 October 2026). Back
Treasury Department, Regulations Governing Practice before the Internal Revenue Service (Circular 230), 31 CFR 10.50, Sanctions, paragraphs (a) and (c). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/section-10.50 (accessed 11 October 2026). Back
Treasury Department, Regulations Governing Practice before the Internal Revenue Service (Circular 230), 31 CFR 10.27, Fees, paragraph (b). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/section-10.27 (accessed 11 October 2026). Back
US District Court for the District of Columbia, Ridgely v. Lew, Civil Action No. 1:12-cv-00565 (CRC), Memorandum Opinion, 16 July 2014, pages 1 to 2 and 11. https://www.govinfo.gov/content/pkg/USCOURTS-dcd-1_12-cv-00565/pdf/USCOURTS-dcd-1_12-cv-00565-1.pdf (accessed 11 October 2026). Back
Internal Revenue Service, IRS Commissioner Testifies before Senate Committee on Finance on Compliance Concerns Relative to Large and Mid-Size Businesses, IR-2006-94 (13 June 2006), written testimony, sections "Research & Experimentation (R&E) Credit Claims" and "Penalties are Needed for Improper Refund Claims". https://www.irs.gov/pub/irs-news/ir-06-094.pdf (accessed 11 October 2026). Back