Due diligence regulations require paid preparers to complete and submit Form 8867, Paid Preparer’s Due Diligence Checklist, any time that they claim head of household (HOH) filing status, a child tax credit (CTC)/additional child tax credit (ACTC)/credit for other dependents (ODC), an earned income tax credit (EITC), and/or an American Opportunity tax credit (AOTC). The tax preparer fulfills the refundable credit due diligence requirement by completing and submitting Form 8867.
Within the Tax Relief Act is a provision for a penalty per return for preparers who fail to exercise due diligence. This penalty amount increased to $530 per each failure when the tax preparer fails to comply with the due diligence requirement.
Form 8867 must be submitted with each signed tax return, amended return, or a return claiming a refund where the taxpayer is claiming the Head of Household filing status, EIC, CTC/ACTC/ODC, and/or AOTC if a preparer was paid to complete the return. If the return is not being electronically filed, the paid preparer should give the taxpayer the completed form for filing.
Completing Form 8867 will satisfy the IRS requirements for due diligence.
Due Diligence for Head of Household, EIC, CTC/ACTC, and AOTC
Each attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, enrolled actuary, or registered tax return preparer shall exercise due diligence:
In preparing or assisting in the preparation of, approving and filing returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
In determining the correctness of oral or written representations made by him to the Department of the Treasury; and
In determining the correctness of oral or written representations made by him to clients with reference to any matter administered by the Internal Revenue Service.
The IRS has decided to extend the due diligence requirements to all tax preparers as it relates to the preparation of tax returns claiming the Head of Household filing status, EIC, CTC/ACTC/ODC, and/or AOTC. The IRS is examining these returns very closely with special emphasis on those who claim the Head of Household, Schedule C income, and EIC, CTC/ACTC/ODC, and AOTC.
Tax preparers must meet all the following requirements to comply with the due diligence requirements:
1. The preparer must complete Form 8867, Paid Preparer’s Earned Income Credit Checklist (follows) and submit it to the IRS with the taxpayer’s tax return. 2. The preparer must either:
Complete the “Earned Income Credit Worksheet,” CTC/ACTC/ODC worksheets, and/or “AOTC worksheet” in the Form 1040 instructions; or
Record in the preparer’s paper or electronic files the preparer’s EIC computation worksheet, CTC/ACTC/ODC worksheets, and/or AOTC worksheets, including the method and information used to make that computation. The information must be provided by the taxpayer or otherwise reasonably obtained by the preparer.
3. The preparer must not know or have reason to know that any information used is incorrect in determining the taxpayer’s eligibility for the Head of Household, EIC, CTC/ACTC/ODC, and/or AOTC, or in computing the EIC, CTC/ACTC/ODC, and/or AOTC. The preparer may not ignore the implications of information furnished to, or known by the preparer, and must make reasonable inquiries if the information furnished to, or known by, the preparer appears to be incorrect, inconsistent, or incomplete.
4. The preparer must retain:
A copy of the completed Form 8867, EIC worksheet, CTC/ACTC/ODC worksheets, and/or AOTC worksheet, and records indicating any additional questions the preparer asked the taxpayer to comply with the preparer’s due diligence requirements and the taxpayer’s answers to those questions.
Copies of any of the taxpayer’s documents that were used by the preparer to determine the eligibility of the HOH filing status, or the amount of the EIC, CTC/ACTC/ODC, and/or AOTC.
A record indicating how and when the preparer obtained information to include identification of any person furnishing such information. Retention of these items is required for three years after the June 30th following the date the return was presented to the taxpayer for signature.