Temporary Regs Expand Preparer Due Diligence Requirements to Child Tax Credits

(Parker Tax Publishing December 2016)

The IRS has issued temporary regulations on the tax return preparer due diligence requirements of Code Sec. 6695(g). The temporary regulations implement changes made by the PATH Act that expand the application of the earned income credit (EITC) due diligence penalty to also apply to the child tax credit (CTC), the additional child tax credit (ACTC), and the American Opportunity Tax Credit (AOTC). The regulations are effective on December 5, 2016. T.D. 9799 (12/05/16)

As originally enacted, Code Sec. 6695(g) imposed a penalty on an income tax return preparer who failed to meet the EITC due diligence requirements set forth in Reg. Sec. 1.6695-2(b). Under those requirements, a tax return preparer must:

(1) complete and submit Form 8867, Paid Preparer's Earned Income Credit Checklist;

(2) complete the Earned Income Credit Worksheet (Worksheet), as contained in the Form 1040 instructions or record the preparer's computation of the credit, including the method and information used to make the computation;

(3) not know or have reason to know that any information used by the preparer in determining eligibility for, and the amount of, the EITC is incorrect and make reasonable inquiries when required, documenting those inquiries and responses contemporaneously (knowledge requirement); and

(4) retain, for three years from the applicable date, the Form 8867, the Worksheet (or alternative records), and the record of how and when the information used to determine eligibility for, and the amount of, the EITC was obtained by the preparer, including the identity of any person furnishing information and a copy of any document relied on by the preparer.

The IRS has now issued temporary regulations which reflect the rules for applying the due diligence penalty to the CTC, ACTC, and AOTC due diligence requirements.

Observation: For the 2016 and 2017 tax years, the penalty is $510 per failure to meet the due diligence requirements.

One return or claim for refund may contain claims for more than one credit subject to the due diligence requirements; each failure to comply with the due diligence requirements results in a penalty. The Code Sec. 6695(g) requirements apply to each credit claimed, meaning more than one penalty could apply to a single return or claim for refund.

In addition, Form 8867 has been revised for the 2016 tax year and is a single checklist to be used for all applicable credits (EITC, CTC, ACTC, and/or AOTC) on the return or claim for refund subject to the due diligence requirements. According to the IRS, these changes are intended to increase the utility of the Form 8867 as a checklist for tax return preparers to more accurately determine taxpayer eligibility for credits. The temporary regulations also amend Reg. Sec. 1.6695-2(b)(1)(ii) to illustrate that the completion of Form 8867 can be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained or previously known by the preparer.

For a discussion of the penalty for failing to meet the tax return preparer due diligence requirements, see Parker Tax ¶276,535.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com