Regulations Implement New Due-Diligence Requirements for Tax Return Preparers

Temporary and proposed regulations issued by the IRS on Monday implement new due-diligence requirements that tax return preparers must follow when they prepare returns that claim a child tax credit, additional child tax credit, or American opportunity tax credit (T.D. 9799; REG-102952-16).

The Protecting Americans From Tax Hikes Act, P.L. 114-113, amended Sec. 6695, the preparer penalties provision, to apply to tax return preparers who fail to exercise due diligence when preparing a taxpayer’s return with a claim for the child tax credit or additional child tax credit under Sec. 24, or the American opportunity tax credit under Sec. 25A. Before these changes, the due-diligence requirements and the penalties for noncompliance applied only to claims for the earned income tax credit (EITC). These new rules apply for returns or claims for refund prepared on or after Dec. 5, 2016, for tax years beginning after Dec. 31, 2015.

In the temporary regulations, the IRS adapted the current due-diligence requirements that apply to the EITC for those other credits. The IRS has also revised Form 8867, Paid Preparer’s Due Diligence Checklist, to include all of the credits. The form was previously called the Paid Preparer’s Earned Income Credit Checklist.

To comply with the due-diligence requirements, besides submitting Form 8867, the preparer must complete the worksheet in Form 1040, 1040A, 1040EZ, or any other form the IRS may prescribe for each credit, including how each credit was computed and the information used to make the computation. The preparer must not know or have reason to know that any information the preparer used to determine eligibility for, and the amount of, each credit is incorrect. The preparer also must make reasonable inquiries when required, documenting those inquiries and responses contemporaneously.

Finally, the preparer must retain for three years the Form 8867, the worksheet (or alternative records), and the record of how and when the information that was used to determine eligibility for, and the amount of, each credit was obtained by the preparer, including the identity of any person furnishing information and a copy of any document the preparer relied on in preparing the return. The regulations contain numerous examples illustrating how the penalties are to apply.

The regulations were also amended to reflect other legislative changes that subject the penalty amount to an inflation adjustment. The $500 penalty for each breach of the rules, which applies separately to each credit, is adjusted for inflation. For 2016 and 2017, the inflation-adjusted penalty is $510.

The text of the proposed regulations cross-references the temporary regulations; the IRS is asking that comments on the proposed regulations be received by March 6, 2017.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.