MODIFICATIONS TO PENALTIES ON RETURN PREPARERS FOR CERTAIN UNDERSTATEMENTS.

SEC. 7732. MODIFICATIONS TO PENALTIES ON RETURN PREPARERS FOR CERTAIN UNDERSTATEMENTS. (a) General Rule.—Subsections (a) and (b) of section 6694 (relating to understatement of taxpayer’s liability by income tax return preparer) are amended to read as follows: “(a) Understatements Due to Unrealistic Positions.—If— “(1) any part of any understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits, “(2) any person who is an income tax return preparer with respect to such return or claim knew (or reasonably should have known) of such position, and “(3) such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was frivolous, such person shall pay a penalty of $250 with respect to such return or claim unless it is shown that there is reasonable cause for the understatement and such person acted in good faith. “(b) Willful or Reckless Conduct.—If any part of any understatement of liability with respect to any return or claim for refund is due— “(1) to a willful attempt in any manner to understate the liability for tax by a person who is an income tax return preparer with respect to such return or claim, or “(2) to any reckless or intentional disregard of rules or regulations by any such person, such person shall pay a penalty of $1,000 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).” (b) Effective Date.—The amendment made by subsection (a) shall apply with respect to documents prepared after December 31, 1989.