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For those familiar with the Earned Income Credit (EIC), you hopefully are familiar with the preparer’s due diligence checklist. This is a checklist that the preparer uses to help determine if the taxpayer’s circumstances are in keeping with the conditions that are required to be met in order to be eligible for the credit. The checklist is formally known as Form 8867, and is available at www.IRS.gov.
When it originally appeared, this checklist was been filled out by the preparer and kept in the preparer’s files. This fact has changed a bit over time – the IRS changed the requirements, such that now the due diligence checklist must be filed along with the return. This filing requirement is the only thing that has changed, the due diligence is the same as before.
Form 8867 is a multi-use checklist, as many of the due diligence requirements cross over between the various tax credits. This form is used for due diligence for the Earned Income Credit (EIC), American Opportunity Tax Credit (AOTC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and Credit for Other Dependents (ODC). It is also used for proof of due diligence in determining the Head of Household (HOH) tax filing status.
The checklist
You can refer to the actual form to see the actual questions that are asked regarding Earned Income Credit. These questions change from time to time. The general emphasis is on proving that the taxpayer is in fact eligible for the EIC based on the number of children claimed, or is claiming the EIC without a qualifying child. Additionally, the checklist requests information about the explanation of half-year residence of a child with the taxpayer, along with tiebreaker rules when the child could possibly be claimed as an eligible child by more than one taxpayer.
Tax Preparer Questions
The tax preparer has to answer a few questions to round out the due diligence. Again, the form itself has this checklist, which will be a much better place to view the questions. The gist of the tax preparer portion makes certain that the taxpayer has taken appropriate steps to ensure that the information collected regarding the EIC is based on facts received from the taxpayer, and not simply on verbal statements. There is requirement for the tax preparer to receive and maintain documentation for the residence of any eligible child, as well as information about income, residency status and the like for the taxpayer and spouse if applicable.
The point of all of this is to ensure that the tax preparer has exerted due diligence in gathering information to ensure that the credit being claimed is allowable and correct. Without this sort of checklist, in the past there have been substantial abuses of this particular credit. Because of this abuse, the due diligence checklist was implemented, along with prescribed penalties to the preparer for not filing the appropriate due diligence, or incomplete due diligence.
This penalty is $560 per credit per return to the preparer – so of course, this can add up pretty quickly if the preparer isn’t doing a good job. Since Form 8867 is used by up to four classes of credits (CTC, ACTC and ODC are considered one class of credits), there can be a penalty of up to $2,240 on a single return if all four credits are being claimed and due diligence is missing or incomplete.