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 EITC claims, you must meet EITC due diligence requirements. Refer to our EITC Due Diligence Law and Regulation page for more information.
Incorrect EITC Returns Affect Your Clients, You and Your Employer
If we examine your client's return and deny all or a part of EITC, your client:
- must pay back the amount in error with interest;
- may need to file the Form 8862, Information to Claim Earned Income Credit after Disallowance;
- may be banned from claiming EITC 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 EITC for the next ten years if we find the error is because of fraud.
If we examine the EITC claims you prepared and we find you did not meet all four due diligence requirements, you can get:
- a penalty* for each failure to comply with EITC 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 EITC 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 was $500 per return. We adjusted the penalty for taxable year returns beginning in 2015 for cost of living, the amount is now $505.
If you receive a return-related penalty, you can also face:
- Suspension or expulsion of you or your firm from IRS e-file
- Other disciplinary action by the IRS Office of Professional Responsibility
- Injunctions barring you from preparing tax returns or imposing conditions on the tax returns you may prepare
Additional Due Diligence Topics
Return to Main Due Diligence Page
Page Last Reviewed or Updated: 29-Jan-2016