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Federal Refundable Credits – Preparer Due Diligence and Other Things You Need to Know About Refundable Credits


The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) expanded the preparer due diligence requirements to include additional refundable credits and made other changes that will have an impact on individuals and preparers that claim the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Education Credit. This page is to keep you informed about these changes and to give details on what the due diligence requirements are for EITC and other refundable credits.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), in addition to extending expired provisions, also included what are called “program integrity” provisions which will affect tax preparers and taxpayers who claim the Earned Income Tax Credit, the Child Tax Credit, and/or the American Opportunity Education Credit as follows:

Refunds for Federal Returns with EITC and/or Additional Child Tax Credit Will Not be Released Until February 15

The PATH Act included a provision that requires the IRS (beginning with the 2017 filing season) to not release the refund on federal returns that claim the Earned Income Tax Credit or additional Child Tax Credit until February 15.

Therefore, any return that claims one of these credits that is prepared in the early part of the filing season will not be released for up to 4 weeks (depending on when the return is filed) instead of the standard 21 days or less timeframe.

Expansion of EITC Due Diligence Requirements to Other Refundable Credits

Congress expanded the EITC due diligence requirements under Code Section 6695 (including the $500 penalty) to include the Child Tax Credit and the American Opportunity Education Credit beginning with Tax Year 2016 individual federal returns.

As a result of this change the Form 8867 will be modified as follows:

  • Form has been renamed to be “Paid Preparers Due Diligence Checklist”.
  • The questions related to qualifying children have been removed from Form 8867 and are included on a worksheet.
  • The questions have been completely rewritten to include questions for not only EITC but also the Child Tax Credit and the American Opportunity Education Credit.

For more details on these changes see the draft of the 2016 Form 8867 on the IRS website.

The IRS is in the process of modifying the due diligence regulations for the addition of the Child Tax Credit and the American Opportunity Education Credit. As the details of the new regulations become known this page will be updated to let you know what these new diligence requirements will be for the upcoming 2017 filing season.

Additional EITC Changes

The PATH Act made the following changes that may affect individuals who claim EITC on their returns:

  • Individuals cannot retroactively claim the credit for any year the qualifying child did not have a Social Security Number. This provision went into effect as of the date of enactment which was December 18, 2015.
  • The IRS can bar an individual from claiming EITC for 10 years if the IRS finds they have fraudulently claimed the credit.
  • EITC is now subject to the penalty for erroneous claim for refunds and credits.
  • From now on, all incorrectly claimed refundable credits will be taken into consideration when determining the underpayment penalty.

Changes for Child Tax Credit and the American Opportunity Education Credit

The PATH Act made the following changes for returns that claim the Child Tax Credit or the American Opportunity Education Credit:

  • If the IRS determines that an individual has intentionally disregarded the rules for claiming the Child Tax Credit and/or the American Opportunity Education Credit, the IRS can bar them for two years from claiming either or both of these credits.
  • Individuals cannot retroactively claim either credit for any year the qualifying child did not have a Social Security Number or ITIN in the case of the Child Tax Credit.
  • Beginning with Tax Year 2016, the EIN of the educational institution will be required to be reported on Form 8863. The IRS will reject the return if the EIN is missing.
  • Beginning with Tax Year 2016, Form 1098-T is required to be received in order to claim the American Opportunity Education Credit or the Lifetime Learning Education Credit.

For more information on these changes, see the Joint Committee on Taxation’s Technical Explanation of the Protecting Americans from Tax Hikes Act of 2015 – the program integrity provisions begin on page 118.

Due Diligence Requirements for Return Preparers

IRS code section 6695(g) gives the IRS authority to penalize a tax preparer $500 for each return for which the preparer fails to comply with the due diligence requirements imposed by the Treasury Secretary by regulation with respect to determining the eligibility for, or the amount of credit allowance for the Earned Income Tax Credit, Child Tax Credit or the American Opportunity Education Credit.

The Due Diligence Requirements for preparers are all of the following:

  • Complete and submit the eligibility checklist.
  • Calculate the credit.
  • Knowledge - Make additional inquiries and document any additional questions that you ask and your client’s answer at the time of the interview. These additional questions are to be asked when the information the client gives you seems incorrect, inconsistent, or incomplete.
  • Keep records for three years from the date the return was accepted.

See the EITC Due Diligence Law and Regulation page on the EITC Central website for more information. At the present time, the Law portion of this website has not been updated for the expansion of due diligence to the Child Tax Credit and American Opportunity Credit as stated in the PATH Act because it does not apply to Tax Year 2015 federal returns.

For more information on other aspects of due diligence and refundable credits, see the following pages on the EITC Central website:

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