EITC Due Diligence Law and Regulation

Internal Revenue Code §6695 and related regulations set out the EITC Due Diligence requirements and the penalties for failure to comply with them.

Law

IRC §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.

Treasury Regulation Information

There are four due diligence requirements. Generally, if you prepare EITC claims, you must ask all the questions required on Form 8867, Paid Preparers' Earned Income Credit Checklist, as well as, ask additional questions when the information your client gives you seems incorrect, inconsistent or incomplete. Complete and submit the Form 8867 for all paper and electronic tax returns and for all other EITC claims. It is required for all EITC claims, the ones with a qualifying child and the ones with no qualifying child. Also, keep a copy of the completed form. Prepare and keep the worksheet showing how you computed the credit. The table below provides more information on your record-keeping requirements. 

You could be penalized $500 for each time you fail to meet all four due diligence requirements for each EITC claim.

You can find the tax preparer due diligence regulations, (Treas. Reg. §1.6695-2), on the Government Printing Office site.

The Four Due Diligence Requirements

Requirement The Tax Returns Preparer Must:
1. Complete and Submit Eligibility Checklist

 

  • Complete Form 8867, Paid Preparer's Earned Income Credit Checklist, to make sure you consider all EITC eligibility criteria for each claim you prepare.
  • Complete checklist based on information provided by your client(s).
  • For EITC EITC returns or claims for refund filed electronically, submit Form 8867 to the IRS electronically with the return.
  • For EITC returns or claims for refund not filed electronically, attach the completed form to any paper return you prepare and send to the IRS.
  • For EITC returns or claims for refund you prepare but do not submit directly to the IRS, provide the completed Form 8867 to your client to send with the filed tax return or claim for refund.

 

Requirement: The Tax Return Preparer Must:
2. Compute the Credit

 

  • Complete the EIC worksheet from the Form 1040 instructions, or Publication 596, Earned Income Credit, or a form with the same information.  The worksheet shows what is included in the computation, that is, self-employment income, total earned income, investment income and adjusted gross income. Most professional tax preparation software includes the computation worksheet.

 

Requirement: The Tax Return Preparer Must:
3. Knowledge

 

  • Not know or have reason to know any information used to determine your client's eligibility for, or the amount of EITC is incorrect, inconsistent or incomplete.
  • Make additional inquiries if a reasonable and well-informed tax return preparer would know the information is incomplete, inconsistent or incorrect
  • Know the law and use your knowledge of the law to ensure you are asking your client the right questions to get all relevant facts.
  • Document any additional questions you ask and your client's answer at the time of the interview.

 

The Treasury Regulations give examples of when to apply the knowledge requirement. Find the regulations for tax return preparer due diligence requirements on the Government Printing Office site.

 

Requirement: The Tax Return Preparer Must:
4. Keep Records

 

  • Keep a copy of the Form 8867 and the EIC worksheet.
  • Keep a record of all additional questions you asked your client to comply with your due diligence requirements and your client's answers to those questions.
  • Keep copies of any documents your client gives you that you relied on to determine eligibility for, or the amount of the EITC.
  • Verify the identity of the person giving you the return information and keep a record of who provided the information and when you got it.
  • Keep your records in either paper or electronic format but make sure you can produce them if the IRS asks for them.
  • Keep these records for 3 years from the latest date of the following that apply:
    • The original due date of the tax return (this does not include any extension of time for filing.), or
    • If you electronically file the return or claim for refund and sign it as the return preparer, the date the tax return or claim for refund is filed, or
    • If the return or claim for refund is not filed electronically and you sign it as the return preparer, the date you present the tax return or claim for refund to your client for signature, or
    • If you prepare part of the return or claim for refund and another preparer completes and signs the return or claim for refund, you must keep the part of the return you were responsible to complete for 3 years from the date you submit it to the signing tax return preparer. 

 

 Additional Due Diligence Topics

 

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Page Last Reviewed or Updated: 06-Oct-2014