Paid Preparer Due Diligence Requirements

By Mark Castro, CPA

Paid Preparer Due Diligence Requirements for Federal Refundable Credits and Head of Household Filing Status

This page is designed to give preparers a overview of their due diligence requirements which include the earned income tax credit, child tax credit, the American Opportunity education credit and now the head of household filing status and the new credit for other dependents.

Preparer Due Diligence Requirements Have Been Expanded to the Head of Household Filing Status and the Credit for Other Dependents
At the end of 2017 the Tax Cuts and Jobs Act expanded preparer due diligence requirements under Code Section 6695 (including the $520 penalty) to include not only the earned income tax credit, the child tax credit and the American Opportunity education credit but also the Head of Household filing status. Also, since the new Credit for Other Dependents falls under the Child Tax Credit code section, the preparer due diligence requirements also apply to this new nonrefundable credit.

As a result of these two changes the Form 8867 (Paid Preparers Due Diligence Checklist) will be modified as follows:

• New checkbox for Head of Household has been added to Part I which covers due diligence questions 1 - 8 that apply to the four credits and the head of household filing status.
• The new credit for other dependents has been added as part of the child tax credit checkbox on Part I and Part III.
• New Part V has been added that includes a question related to Head of Household filing status.

For more details see the draft of the 2018 Form 8867 on the IRS website.

Due Diligence Requirements for Return Preparers
IRS code section 6695(g) gives the IRS authority to penalize a tax preparer $510 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 Four Due Diligence Requirements can be summed up as follows:

• Complete and submit the Form 8867 (Paid Preparers Due Diligence Checklist) whenever the earned income tax credit, child tax credit and/or the American Opportunity Education credit is claimed on a federal return.
• Complete all necessary worksheets or similar documents showing how each of the credits was calculated.
• Knowledge — Know the tax law and ask questions until you have all the information you need to determine eligibility and the correct amount for each of the credits. This means the preparer when evaluating the information provided by the taxpayer should ask additional questions if that information seems incorrect, inconsistent or incomplete. Any additional questions, and the taxpayer’s answers, should be documented and kept with the taxpayer file at the time they are asked.
• Keep a copy of all of the above, along with a record of how and when you obtained the information to determine eligibility for, and the amount of, the credits. You must also keep a copy of all the documents you reviewed and used to determine eligibility for and the amount of the credits.

For more information, see the Refundable Credit Preparer Due Diligence Law page on the EITC Central website.

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

• Due Diligence Training Module
• Other Refundable Credits Toolkit — Links and information related to other refundable credits
• Refundable Credit Frequently Asked Questions
• Child Related Tax Benefits Comparison
• Common EITC Questions and Answers
• What You Need to Know About CTC and ACTC — Information on Child Tax Credit and Additional Child Tax Credit
• What You Need to Know About AOTC and LLC — Information on the American Opportunity Education Credit and the Lifetime Learning Education Credit
• Avoiding Common American Opportunity Education credit Errors
• Preparer Compliance Program — How IRS determines which preparers to conduct a due diligence audit on.