2011 SWDG Recommendation Summary


Due Diligence and Schedule C Income Reporting

The group developed the Schedule C and Records Reconstruction training module that introduces the due diligence responsibilities involved with preparing EITC returns with a Schedule C. The module also includes recordkeeping guidelines, recommendations on reconstructing records, and examples of how to comply with EITC due diligence in common Schedule C situations. The group also suggested making the training module qualify for continuing education credit.

EITC Due Diligence Audit Case Studies

To understand return preparers' due diligence responsibilities better, specifically the Knowledge requirement, group members prepared case studies based on the prior year Due Diligence Audits of their software users. They included cases with both penalty and non-penalty results. They analyzed the documentation reviewed by the examiner as well as the examiner's conclusions. The group's review identified some inconsistencies. To address the inconsistencies, the group recommended that IRS should:

  1. Address the examiner inconsistencies of penalty assertion 
  2. Improve the due diligence penalty explanation with the use of more consistent language
  3. Develop a more comprehensive list of scenarios that require additional inquiries to meet the knowledge requirement

Annual Reports

Recommendation Summaries


The Software Developers Working Group would like to hear from you. Send any suggestions for improving tax preparation software or the administration of EITC and other refundable credits to:


IRS is addressing the first two issues by having the same training delivered to all due diligence audit examiners. It is also recorded and available for all review by all examiners. IRS also developed a template for the Due Diligence Audit Explanation which included details surrounding any assessed penalty. The explanation will provide valuable insight into understanding how the examiners made the determination. This information is helpful in understanding what additional questions should be asked to meet due diligence.

The group agreed to address the third recommendation and develop the scenarios during 2012.

Form 8867, Paid Preparer's Earned Income Credit Checklist

The group recommended modifications to the Form 8867 that provides additional guidance on documentation to substantiate eligibility and prepared two versions of Form 8867 for IRS's consideration.

First-Time Home Buyer Credit Recommendations

The group recommended IRS develop a FTHBC Web Look-up Tool to replace mailing reminder notices. IRS developed the tool. The tool provides information for all FTHBC recipients and helps taxpayers accurately determine their repayment amount.

Adoption Credit Recommendations

Early in the 2011 filing season, IRS recognized that a high percentage of taxpayers were not attaching adequate supporting documentation to the paper return claiming the Adoption Credit. The group helped IRS develop and execute a communication effort which included a Tax Tip, email blasts to adoption organizations, e-News to Tax Professionals, a YouTube video, and an updated FAQ on Adoption Credit for documentation requirements for special need adoptions. The group also helped IRS revise the Form 886-H-Adopt. Also, IRS leveraged its relationship with some of the Working Group members to request immediate software changes to support Adoption Credit documentation requirements. These software updates resulted in improved processing of returns claiming the Adoption Credit.

Other Refundable Credit Recommendations

The group again expanded its scope to address issues of more refundable credits, the American Opportunity Tax Credit (AOTC) and the Additional Child Tax Credit (ACTC). Each has unique challenges when addressing compliance for both preparers and taxpayers, but the population claiming the two credits frequently intersects with the population claiming EITC.

AOTC Recommendations

Several factors serve as barriers to reducing improper claims for the AOTC. The lack of sufficient Math Error Authority and inaccurate third party data (1098-T) led IRS to:

  • Redesign the Form 8863
  • Send out information notices to claimants or to preparers addressing either lack of a 1098-T or box 8 not indicating the student is at least half-time


The group suggested the following enhancements to these IRS initiatives:

  1. Establish an AOTC landing page on IRS.gov that provides preparers with information about who is eligible to claim the credit and what expenses are eligible for reimbursement
  2. Create a decision tree for AOTC to help the preparer easily navigate to a determination on whether or not the credit is allowable
  3. Provide links to the Department of Education's accredited institutions enabling the preparer to easily verify if the educational institution is a valid institution

ACTC Recommendations

IRS identified two main risk areas with ACTC:

  • Children not meeting the Residency Test
  • False or unverifiable earned income


As part of its ACTC strategy, IRS will educate the taxpayers and preparers on the CTC/ACTC eligibility requirements in forms, publications and software by improving both written instructions and software features/prompts regarding eligibility for the CTC/ACTC. To help IRS with its ACTC strategy, the group proposed that IRS:

  1. Research the subset of returns where both EITC and ACTC were claimed to identify any fraud trends
  2. Train preparers to ask if a disabled dependent is receiving SSI benefits when determining CTC/ACTC eligibility


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