EITC Due Diligence Law and Regulation

Internal Revenue Code §6695 and related regulations set out the EITC Due Diligence requirements and the penalties for failure to comply with them.

Law:

IRC §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.

*The penalty amount increased from $100 to $500 for returns required to be filed after December 31, 2011 by the United States-Korea Free Trade Implementation Act signed into law October 21, 2011 View the United States-Korea Free Trade Implementation Act on the Library of Congress site.

Treasury Regulation Information:

Treasury issued regulations finalized in December 2011 that affect all EITC claims required to be filed after December 31, 2011. Find the adobe version of the Treasury Decision here.
 

There are four due diligence requirements. Generally, if you prepare EITC claims, you must not only ask all the questions to get the information required on Form 8867, Paid Preparers' Earned Income Credit Checklist, but you must also ask additional questions when the information your client gives you seems incorrect, inconsistent or incomplete. Prepare, submit, and keep a copy of the Form 8867. Prepare and keep all worksheets showing how the credit was computed. The table below provides more information on recordkeeping requirements. The new requirements are shown in

You could be penalized $500 for each time you fail to meet all four due diligence requirements for each EITC claim.

You can find the regulations, Section 1.6695-2, Preparer due diligence requirements for determining earned income credit eligibility" on the Government Printing Office site.

Due Diligence Requirements:

Requirement

You must:

1. Complete and Submit Eligibility Checklist
  • Complete Form 8867, Paid Preparer's Earned Income Credit Checklist, to make sure you consider all EITC eligibility criteria for each return prepared.

 

  • Complete checklist based on information provided by your client(s).

 

  • For returns or claims for refund filed electronically, submit Form 8867 to IRS electronically with the return.

 

  • For returns or claims for refund not filed electronically, attach the completed form to any paper return you prepare and file.

 

  • For returns or claims for refund you prepare but do not submit directly to the IRS, provide completed Form 8867 to the taxpayer to send with the filed tax return or claim for refund.

2. Computing the Credit
  • Complete EITC worksheet from the Form 1040 instructions, or Publication 596, Earned Income Credit, or a document with the same information.  The worksheet shows what is included in the computation, that is, self-employment income, total earned income, investment income, and adjusted gross income. Most tax preparation software has the computation worksheet.

3. Knowledge
  • Know the law and use your knowledge of the law to ensure you are asking your client the right questions to get all relevant facts.

 

  • Take into account what your client says and what you know about your client.

 

  • Not know or have reason to know any information used to determine your client's eligibility for, or the amount of, EITC is incorrect, inconsistent or incomplete.

 

  • Make additional inquiries if a reasonable and well-informed tax return preparer would know the information is incomplete, inconsistent or incorrect.

 

  • Document any additional questions you ask and your client's answer at the time of the interview.

 

4. Keeping Records

 

  • Keep a copy of the Form 8867 and EIC worksheet, and a record of any additional questions you asked your client to comply with your due diligence requirements and your client's answers to those questions.

 

  • Keep copies of any documents your client gives you that you use to determine eligibility for, or the amount of the EITC.
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  • Verify the identity of the person giving you the return information and keep a record of who provided the information and when you got it.

 

  • Keep your records in either paper or electronic format, but make sure you can produce if IRS asks for them.

 

  • Keep these records for 3 years from the latest date of the following that apply:
    • The original due date of the tax return (This does not include any extension of time for filing.), or
    • If you electronically file the return or claim for refund and sign it as the return preparer, the date the tax return or claim for refund is filed, or
    • If the return or claim for refund is not filed electronically and you sign it as the return preparer, the date you present the tax return or claim for refund to your client for signature; or
    • If you prepare part of the return or claim for refund and another preparer completes and signs the return or claim for refund, you must keep the part of the return you were responsible to complete for 3 years from the date you submit it to the signing tax return preparer. 
  • Keep your records in either paper or electronic format, but make sure you can produce if IRS asks for them.