Section 6695 of the Internal Revenue Code and related regulations set out the refundable credit due diligence requirements and the penalties for failure to comply with them. The refundable credits subject to due diligence are the:
- Earned Income Tax Credit (EITC)
- Child Tax Credit (CTC)
- Additional Child Tax Credit (ACTC)
- American Opportunity Tax Credit (AOTC)
Section 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.
Section 6695(h) provides for an adjustment for inflation to the amount of the penalty. The penalty for taxable years beginning in 2016 or in 2017 is $510.
Section 1.6695-2 of the regulations describes the due diligence requirements. Generally, if you are paid to prepare a claim for the EITC, the CTC/ACTC or the AOTC, you must:
- Complete and submit the Form 8867, Paid Preparer's Due Diligence Checklist, as directed for all paper and electronic tax returns and all other claims for the EITC, the CTC/ACTC or the AOTC.
- Know the tax law and ask questions until you have all the information you need to determine eligibility for, and the amount of, the credits. In evaluating information provided by the taxpayer, the tax preparer is held to a standard of making reasonable inquiries, if a reasonable and well-informed tax preparer, knowledgeable in the law, would conclude that the information seems incorrect, inconsistent, or incomplete. Be sure to not the questions you asked and the answers your client gave you at the time of the interview.
- Keep a copy of all of the above, along with a record of how and when you obtained the information to determine eligibility for, and the amount of, the credits. You must also keep a copy of all the documents you reviewed and used to determine eligibility for and the amount of the credits.
You could be penalized for each time you fail to meet the due diligence requirements for one of the credits claimed on the return. That means if you are paid to prepare a return claiming al lthree credits and you fail to meet the due diligence requirements for each of the credits, during 2016, the IRS could assess a penalty of $510 for athe failure to meet the requirements with respect to each of the credits or $1,530.