Friday, January 13, 2017

This is a page from the IRS’ EITC & Other Refundable Credits webpage.

Consequences of Not Meeting Your Due Diligence Requirements

People who come to you, a tax return preparer, expect you to know the tax law and prepare an accurate return. Also, if you are paid to prepare  earned income tax credit (EITC), child tax credit (CTC) or  American opportunity tax credit (AOTC) claims, you must meet your due diligence requirements. Refer to our Refundable Credit Due Diligence Law and Regulation page for more information. on the requirements. There are consequences of not meeting your due diligence for you, for your client, and if you are an employee, your employer.

Incorrect Refundable Credits Returns Affect Your Clients, You and Your Employer

If we examine your client's return and deny all or a part of the EITC, the CTC, or the AOTC, your client:

·         must pay back any amount in error with interest;
·         may be subject to the 20 percent accuracy-related penalty and the 75 percent fraud penalty
·         may need to file the Form 8862, Information To Claim Earned Income Credit;
·         may be banned from claiming one or more of the refundable credits for the next two years if we find the error is because of reckless or intentional disregard of the rules; or
·         may be banned from claiming one or more of the refundable credits for the next ten years if we find the error is because of fraud.

If we examine the EITC, the CTC or the AOTC claims you prepared and we find you did not meet all four due diligence requirements, the consequences for you are:

·         a $510 penalty (indexed for inflation) for each failure to comply with your due diligence requirements (reference: IRC section 6695(g) and (h))
·         A minimum penalty of $1,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to an unreasonable position (reference: IRC section 6694(a))
·         A minimum penalty of $5,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to your reckless or intentional disregard of rules or regulations (reference: IRC 6694(b))

IRS can also penalize an employer or employing firm if an employee fails to comply with the due diligence requirements. There are only specific circumstances when an employer is subject to the due diligence penalty (reference: Treasury Regulations 1.6695.2(c)). See our Due Diligence FAQs for the circumstances and ways an employer can prevent penalties.

*The penalty is $500 for each credit claimed on a return. This could mean up to three due diligence penalties per return when the return has claims for the EITC, the CTC and the AOTC or for a tax year 2016 tax return a penalty of $,530.

The penalty for the 2015 tax year is $500. The penalty for tax year 2016 and 2017 returns is $510.

If you receive a return-related penalty, you can also face:

·         Suspension or expulsion of you or your firm from IRS e-file
·         Disciplinary action by the IRS Office of Professional Responsibility
·         Criminal penalties for filing fraudulent returns
·         Injunctions barring you from preparing tax returns or imposing conditions on the tax returns you may prepare




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