Due Diligence Requirements is Now in Place for Tax Preparers

The IRS recently finalized regulations that impose a penalty on tax return preparers who do not follow due-diligence requirements when preparing returns for taxpayers claiming any of the 

following:

l  Head of Household filing status

l  The American Opportunity Tax Credit

l  The Earned Income Tax Credit

l  The Additional Child Tax Credit

l  The Child Tax Credit

While the proposed regulations, according to the IRS, have only been altered slightly, the organization did remove the temporary regulations issued with the proposed regulations back in 2016.

Though the changes are slight, before them, the due diligence requirements and penalties were only in affect for claims related to the Earned Income Tax Credit. Now, however, the other items in the above list are now affected as well.

How to Comply

Many tax preparers are concerned about how they will be affected by the new rules and how to ensure they are in compliance. Fortunately, reaching compliance is simple.

Taxpayers must submit Form 8867, which is a due diligence checklist. They also have to complete the due diligence worksheet for IRS forms related to the credit in question. On this form, they will need to show how the credit was computed.

Also, in order to determine that the taxpayer is being honest, the preparer is required to make and document any inquiries related to validation of the credit and eligibility for it.

Preparers are also required to retain all forms and records for a minimum of three years.

Failing to meet compliance can result in a penalty of $520 for each failure to comply. The penalty can be assessed multiple times for a single return, making it all the more important for tax preparers to “cross their t’s and dot their i’s” when it comes to compliance!