EITC Due-Diligence Final Regs. Issued

Regulations

The IRS issued final regulations (T.D. 9570) governing the due-diligence requirements imposed on tax return preparers who prepare tax returns on which taxpayers claim the earned income tax credit (EITC). Former rules required preparers to complete Form 8867, Paid Preparer’s Earned Income Credit Checklist, or to otherwise record the information it required for each return claiming the EITC and keep it in the preparer’s records. The new due-diligence rules require tax return preparers to submit Form 8867 to the IRS.

The final regulations contain slightly different filing requirements for Form 8867 depending on the preparer’s role in the preparation of the tax return. A signing tax return preparer who is electronically filing the tax return or refund claim must file the completed Form 8867 with the return or claim. A signing tax return preparer who is not filing the return or claim must provide the taxpayer with a completed form to include when the taxpayer files the return. And a nonsigning tax return preparer must provide the signing preparer with a completed electronic or paper form.

Return preparers are required to keep a copy of Form 8867 and of any document that the taxpayer supplied and that the preparer relied on to complete the form for three years from whichever of the following dates is the latest, as applicable:

• The return due date (without regard to any extension);
• For a signing tax return preparer who is filing the return electronically, the filing date;
• For a signing tax return preparer who is not filing the return electronically, the date the return or claim was presented to the taxpayer for signature; or
• For a nonsigning tax return preparer, the date the preparer submitted to the signing preparer the portion of the return or claim that the nonsigning preparer was responsible for.

The regulations subject firms to the same penalty as their preparers if:

1. One or more members of the principal management or principal officers of the firm or its branch office participated in or, prior to the time the return was filed, knew of the failure to comply with due diligence;
2. The firm failed to establish reasonable and appropriate procedures to ensure compliance; or
3. The firm had such procedures but disregarded them through willfulness, recklessness, or gross indifference.

A return preparer can avoid the penalty if the preparer can demonstrate to the IRS’s satisfaction that his or her normal office procedures are reasonably designed and routinely followed to ensure compliance with the EITC due-diligence requirements and that any failure to meet the due-diligence requirements was “isolated and inadvertent.” However, this defense is not available to a firm.

T.D. 9570 finalizes with amendments regulations that were proposed in October. The AICPA commented on the proposed regulations in a letter from Patricia Thompson, chair of the AICPA’s Tax Executive Committee, submitted November 10. In the letter, Thompson expressed the AICPA’s concern that the proposed regulations put in place firm liability standards that vary significantly from the requirements found in Circular 230, Section 10.36. The final regulations adopt a different standard for firm liability from the standard that had been proposed.

The final regulations were effective December 20, 2011, and apply for returns filed for tax years ending on or after December 31, 2011. For more on this topic, see McGowan and Seetharaman, “EITC Due-Diligence Requirements: IRS Ramps Up Enforcement and Education Efforts,” 43 The Tax Adviser 34 (January 2012).