Guidance Issued for New Head of Household Due Diligence Penalty

July 18, 2018


On July 18, IRS published proposed regulations, Reg-103474-18, to implement the new head of household due diligence penalty added by the Tax Cuts and Jobs Act. The new law adds yet another heightened due diligence requirement for tax return preparers filing individual returns, potentially subjecting them to a $520 penalty for each misstep on every return. With this penalty, Congress continues to enlist preparers as the first line of defense for eliminating fraudulent returns.

Tax return preparers have grown accustomed to the due diligence penalty already in place for the earned income credit, the child tax credit and additional child tax credit, and the American opportunity tax credit. Thanks to the TCJA, Form 8867 is getting more complex in 2018, and potential penalties are growing steeper!

The TCJA modified IRC § 6695(g) to add a separate penalty for tax return preparers who fail to satisfy the due diligence requirements for determining head of household status under IRC § 2(b).The proposed regulations impose the due diligence requirement for the head of household determination in the same manner IRS has been imposing due diligence requirements for the credits.

The tax return preparer must not know or have reason to know that any information used in determining eligibility for head of household (or for one of the credits) is incorrect. The preparer may not ignore any implications of the information furnished and must make reasonable inquiries if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information provided appears to be incorrect, inconsistent, or incomplete. The preparer must also contemporaneously document through paper or electronic files any inquiries made and the responses to those inquiries.

The regulations provide numerous examples detailing the inquiries that must be made in different situations.

Key to preparers is that a separate penalty applies to a tax return preparer with respect to the head of household filing status determination and to each applicable credit claimed on a return or claim for refund for which the due diligence requirements of this section are not satisfied. At $520 (after adjusting for inflation) under § IRC § 6695(h) for each violation, a preparer could face hundreds in penalties for one shoddy return.

The proposed rules apply to the credits for taxable years beginning after December 31, 2015, and to the head of household determination for taxable years beginning after December 31, 2017, prepared on or after the date of publication of a Treasury decision adopting the rules as final.

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