Our paid preparer due diligence compliance program has expanded. It now includes the earned income tax credit (EITC), the child/additional tax credit (CTC/ACTC), the other dependents (ODC), and the American opportunity tax credit (AOTC) and/or the head of household (HOH) filing status.
|We look at the characteristics of returns claiming EITC, CTC/ACTC/ODC, AOTC and/or HOH completed by the same preparer and concentrate on questionable returns. We focus on a combination of characteristics that we know indicates the returns have a high likelihood of error and assign a risk level.|
We assign an appropriate compliance treatment in line with the preparer’s risk level. We consider what may be the cause of the errors:
The paid preparer due diligence compliance program takes a tiered approach depending on what category best fits the preparer. Our tiered approach includes educational letters, phone calls, visits, audits and, penalties. Some preparers may be barred from filing tax returns in extreme cases.
Why Have a Preparer Compliance Program?
We estimate around 24 percent of all EITC claims have some type of mistake which cost the government roughly $16 billion in 2017. We are completing a study for the ACTC and AOTC error rates and will have that information soon.
Some errors are caused by misinterpreting the law; some because the preparer accepted client-provided information at face value and others are outright fraud. You, as part of the tax preparation community, are crucial in reducing these errors since paid preparers complete the majority of returns claiming certain credits and/or the Head of Household filing status.
We know most paid preparers practice due diligence and prepare accurate credit and HOH returns for their clients. This preparer compliance program was developed to ensure you compete on a level playing field with your peers.
Where Do We Find Most Errors?
About 60 percent of EITC errors fall into three key categories:
- claiming a child who does not meet the relationship or residency tests,
- over-or under-reporting income or business expenses to maximize the credit, and
- filing as single or head of household when legally married.
The most common CTC/ACTC errors are:
- claiming the CTC/ACTC for a child who is over 16 years old at the end of the tax year,
- claiming the CTC/ACTC for a child who doesn't meet the dependent qualifying child requirements, and
- claiming the CTC/ACTC for a child who was not a U.S. citizen, U.S. national or a U.S. resident.
The most common AOTC errors are:
- claiming AOTC for a student who didn’t attend an eligible educational institution,
- claiming AOTC for a student who didn’t pay qualifying college expenses, and
- claiming AOTC for a student for too many years.
What are the Paid Preparer Compliance Treatments?
Preparers filing returns claiming questionable credits and HOH may receive any of the tiered treatments listed below:
- Reaching Out to Preparers
- Knock and Talk Visits
- Auditing for Due Diligence Compliance
- Barring Non-Compliant EITC Preparers from Completing Tax Returns
- Additional Forceful Actions Taken Against Return Preparers Filing False Refundable Credit Claims
The IRS can assess a $500* (indexed for inflation) penalty per credit and/or HOH filing status to preparers who do not submit the Form 8867, Paid Preparers Due Diligence Checklist, with all EITC, CTC/ACTC/ODC, AOTC and/or HOH returns. The penalty for returns filed beginning in 2019 is $520 per credit/HOH per return up to a maximum of $2,080 per return. The form must be submitted electronically or attached to each return you mail in or give directly to your clients for filing. Find out more about the Form 8867 and the consequences of not completing or submitting it.
Find out more about the Consequences of Failing to Meet Your Refundable Credit Due Diligence Requirements
Educational Opportunities for Avoiding Errors
We reach out to preparers to provide education and other resources to help avoid errors and practice due diligence. This Tax Preparer Toolkit has a wealth of resources:
- Take the online Due Diligence Training Module, to help you refresh your tax law and due diligence knowledge. The training is available in English and Spanish and may qualify you for one continuing education credit.
- Learn how to meet your due diligence requirements while preparing returns with self-employment income using our Schedule C and Record Reconstruction Training. Plus, get tips on helping your clients reconstruct their business records.
- View the popular Due Diligence Videos to help you avoid common error situations and improve your due diligence interview process.
- Attend our Due Diligence seminar via Webinars or at the annual Tax Forums. (View archived sessions from the Nationwide Tax Forums here).
- Visit the Frequently Asked Questions for guidance on similar questions you might have.
- Use the headings on the left navigation bar for more tips and tools to help you avoid errors.