Question

Matthew filed a tax return for Easter. During the interview conducted by Matthew, Easter stated that she had made a charitable contribution of artwork in the amount of $20,000 during the tax year, when in fact she had not made this charitable contribution. Matthew did not inquire about the existence of a qualified appraisal or complete a Form 8283, Noncash Charitable Contributions. Matthew reported the deduction on the return, signed the return as the paid preparer, and charged $500 for the tax preparation. The IRS audited the taxpayer and disallowed the contribution. What is the penalty Matthew could face for understatement of a taxpayer’s tax liability?

Answer 1

Matthew would be subject to the tax‑return preparer understatement penalty under IRC §6694.

- If the IRS treats his conduct as negligent/unreasonable (6694(a)): the penalty is the greater of $1,000 or 50% of the income derived from preparing that return. He earned $500 for the job, 50% = $250, so the penalty = $1,000.

- If the IRS finds his conduct was willful or reckless (6694(b)): a larger penalty applies — generally $5,000 (the statutory higher penalty for willful/reckless conduct).

So, at minimum $1,000; up to $5,000 if willful or reckless.