Refundable Credit
Due Diligence Law
Section 6695 of the Internal Revenue Code and related
regulations set out the refundable credit due diligence requirements and the
penalties for failure to comply with them. The refundable credits subject to
due diligence are the earned income tax credit (EITC), the Child Tax Credit
(CTC) and the refundable part of the CTC, the Additional Child Tax Credit
(ACTC) and the American opportunity tax credit (AOTC).
Statute
Section 6695(g) states:
Any person who is a tax return preparer with respect to
any return or claim for refund who fails to comply with due diligence
requirements imposed by the Secretary by regulations with respect to
determining eligibility for, or the amount of, the credit allowable by section
32 shall pay a penalty of $500 for each such failure.
Section 6695(h) provides for an adjustment for inflation
to the amount of the penalty. The penalty for taxable years beginning in 2016
or in 2017 is $510.
Treasury
Regulations
Section 1.6695-2 of the regulations describes the due
diligence requirements. Generally, if you are paid to prepare a claim for the
EITC, the CTC/ACTC or the AOTC, you must:
·
Complete and submit the Form 8867, Paid
Preparer's Due Diligence Checklist, as directed for all paper and electronic
tax returns and all other claims for the EITC, the CTC/ACTC or the AOTC.
·
Complete all the necessary worksheets or similar
document showing how you computed each of the credits.
·
Know the tax law and ask questions until you
have all the information you need to determine eligibility for, and the amount
of, the credits. In evaluating
information provided by the taxpayer, the tax preparer is held to a
standard of making reasonable inquiries, if a reasonable and well-informed tax
preparer, knowledgeable in the law, would conclude that the information seems incorrect,
inconsistent, or incomplete,. Be sure to note the questions you asked and the
answers your client gave you at the time of the interview.
·
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.
You could be penalized for each time you fail to meet the
due diligence requirements for one of the credits claimed on the return. That
means if you are paid to prepare a return claiming all three credits and you
fail to meet the due diligence requirements for each of the credits, during
2016, the IRS could assess a penalty of $510 for the failure to meet the
requirements with respect to each of the credits or $1,530.
You can find the tax preparer due diligence regulations,
(Treas. Reg. §1.6695-2), on the Government Printing Office site. Watch our Hot
Topics for Return Preparers for news on the new regulations.
Remember the four
due diligence requirements:
·
Complete
and Submit Form 8867
·
Compute
the Credits
·
Knowledge
·
Keep
Records (3 years)
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