Due Diligence Requirements for Tax Preparers

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Tax Alert from Maloney+Novotny

Preparer Due Diligence Rules Include Head of Household Eligibility

The IRS has proposed amendments to the tax preparer due diligence regulations to reflect a recent law change. The Tax Cuts and Jobs Act ( P.L. 115-97) expanded the scope of the due diligence penalty to apply to tax preparers who fail to use due diligence when determining a client’s head of household status.

Preparer Due Diligence

Under Code Sec. 6695(g), tax return preparers must meet due diligence requirements in ensuring that their clients meet the eligibility requirements for:

  • the earned income credit;
  • the child tax credit /additional child tax credit;
  • the American opportunity tax credit; and
  • for tax years beginning after December 31, 2017, head of household filing status.

Tax return preparers comply with this due diligence requirement by completing a Form 8867, Paid Preparer’s Due Diligence Checklist, and attaching it to a return or refund claim. Among other things, the preparer must not know or have reason to know that the client does not qualify. A tax preparer who fails to exercise due diligence must pay a $500 penalty for each failure.

Amendments to Proposed Regulations

The IRS has proposed amendments that update 2016 proposed regulations, to reflect the expansion of the preparer due diligence requirements to determining head of household status. An example in the proposed regulations is being updated to demonstrate how the head of household due diligence requirements are intertwined with the rules for determining a taxpayer’s eligibility for the child tax credit. Also, a new example illustrates how the penalty applies when there is a failure to meet the due diligence requirements for determining head of household eligibility as well as for determining eligibility for one of the applicable credits.

The IRS anticipates that it will revise Form 8867 to include head of household filing status in time for the 2019 filing season.

Questions regarding these new proposed amendments? Contact your Maloney + Novotny representative today or use this online contact form.