Due Diligence for Tax Preparers are Finalized

Recently the IRS finalized proposed regulations imposing a penalty on tax return preparers who do not follow certain due-diligence requirements when preparing to file returns for taxpayers who are claiming to be head-of-household filing status, the earned income tax credit, the child tax credit and the additional child tax credit.

Before these changes, the due-diligence requirements and the penalties for noncompliance applied only to claims for the earned income tax credit. These new guidelines applied for returns or claims for refund prepared on or after Dec. 5, 2016, for tax years beginning after Dec. 31, 2015. Tax years beginning after Dec. 31, 2017, the law identified as the Tax Cuts and Jobs Act, added head-of-household filing status to the credits subject to the due-diligence conditions.

To conform with the due-diligence requirements, the preparer must submit Form 8867 (Paid Preparer’s Due Diligence Checklist) and must complete the due-diligence worksheet in Form 1040, 1040A, 1040EZ, or any other form the IRS may prescribe for each credit.

Finally, the preparer must hold onto the Form 8867 for three years and the record of how and when the information that was used to determine eligibility for head-or-household filing status and each credit. The regulations contain numerous examples illustrating how the penalties are to be applied. The penalty, which is adjusted for inflation, is currently at $520 for each failure to comply, possibly resulting in multiple penalties in a single return.