Due Diligence Requirements

Preparer Due Diligence Requirement Expansion Reminder

This is a reminder that the preparer due diligence requirements were expanded by the PATH Act last year to include the child tax credit and the American Opportunity education credit as well as the earned income tax credit.  This means that under IRS Code section 6695(g) the IRS has the authority to penalize a tax preparer $510 for each return (and for each credit on that return) for which the preparer fails to comply with the due diligence requirements related to these three credits.

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 credit 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.

It is important to note that preparers need to pay particular attention to meeting the knowledge requirement and be sure that they are asking enough questions to ensure they have enough information to be sure each of these credits is correctly claimed.  Lack of meeting the knowledge requirement is the area where a due diligence penalty is assessed is most cases when the IRS performs a due diligence audit.

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 child tax credit and the American Opportunity education credit
• 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.