Federal Refundable Credits – Preparer Due Diligence and Other Things to Know About Refundable Credits
This page is designed to give preparers the details they need to know about the preparer due diligence requirements which now include not only the earned income tax credit but also the child tax credit and the American Opportunity education credit.
Preparer Due Diligence Requirements Have Been Expanded to Other Refundable Credits
At the end of 2015 Congress expanded preparer due diligence requirements under Code Section 6695 (including the $510 penalty) to include not only the earned income tax credit but also the child tax credit and the American Opportunity Education credit.
As a result of this change the Form 8867 has been modified as follows:
- Form has been renamed to be “Paid Preparers Due Diligence Checklist”.
- The questions related to the qualifying children were removed from Form 8867 and are included on a worksheet in the instructions.
- The questions have been completely rewritten to include questions for not only EITC but also the Child Tax Credit and the American Opportunity Education Credit.
- For 2017, the questions have been modified again in order make it easier to answer the questions when more than one of the credits applies and to make questions clearer.
For more details on these changes see the draft of the 2017 Form 8867 on the IRS website.
Due Diligence Requirements for Return Preparers
IRS code section 6695(g) gives the IRS authority to penalize a tax preparer $510 for each return for which the preparer fails to comply with the due diligence requirements imposed by the Treasury Secretary by regulation with respect to determining the eligibility for, or the amount of credit allowance for the earned income tax credit, child tax credit or the American Opportunity Education Credit.
The Four Due Diligence Requirements can be summed up as follows:
- Complete and submit the Form 8867 (Paid Preparers Due Diligence Checklist) whenever the earned income tax credit, child tax credit and/or the American Opportunity Education credit is claimed on a federal return.
- Complete all necessary worksheets or similar documents showing how each of the credits was calculated.
- Knowledge – Know the tax law and ask questions until you have all the information you need to determine eligibility and the correct amount for each of the credits. This means the preparer when evaluating the information provided by the taxpayer should ask additional questions if that information seems incorrect, inconsistent or incomplete. Any additional questions, and the taxpayer’s answers, should be documented and kept with the taxpayer file at the time they are asked.
- 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.
For more information, see the Refundable Credit Preparer Due Diligence Law page on the EITC Central website.
For more information on other aspects of due diligence and refundable credits see the following pages on the EITC Central website:
- Due Diligence Training Module
- Other Refundable Credits Toolkit – Links and information related to other refundable credits
- Refundable Credit Frequently Asked Questions
- Child Related Tax Benefits Comparison
- Common EITC Questions and Answers
- What You Need to Know About CTC and ACTC – Information on Child Tax Credit and Additional Child Tax Credit
- What You Need to Know About AOTC and LLC – Information on the American Opportunity Education Credit and the Lifetime Learning Education Credit
- Avoiding Common American Opportunity Education credit Errors
- Preparer Compliance Program – How IRS determines which preparers to conduct a due diligence audit on.
PATH Act Changes that affected Refundable Credit Reminders
Refunds for Federal Returns with EITC and/or Additional Child Tax Credit will not be released until February 15
IRS is now required to not release the refund on federal returns that claim the earned income tax credit or additional child tax credit until February 15.
Therefore any return that claims one of these credits that is prepared in the early part of the filing season will not be released for up to 4 weeks (depending on when the return is filed) instead of the standard 21 days or less timeframe.
Additional Earned Income Tax Credit (EITC) Changes
The following changes were made that may affect individuals who claim EITC on their returns:
- Cannot retroactively claim the credit for any year the qualifying child did not have a Social Security Number. This provision went into effect as of the date of enactment which was December 18, 2015.
- IRS can bar an individual from claiming EITC for 10 years if IRS finds they have fraudulently claimed the credit.
- EITC is now subject to the penalty for erroneous claim for refunds and credits
- From now on, all incorrectly claimed refundable credits will be taken into consideration when determining the underpayment payment penalty.
Changes for Child Tax Credit and the American Opportunity Education Credit
The PATH Act made the following changes for returns that claim the child tax credit or the American Opportunity credit:
- If the IRS determines that an individual has intentionally disregarded the rules for claiming the Child Tax Credit and/or the American Opportunity Education Credit they can bar them for two years from claiming either or both of these credits.
- Cannot retroactively claim either credit for any year the qualifying child did not have Social Security Number or ITIN in the case of the Child Tax Credit.
- Beginning with tax year 2016, The EIN of the educational institution will be required to be reported on Form 8863. If it is missing the IRS will reject the return.
- Beginning with tax year 2016, requires that a Form 1098-T be received in order to claim the American Opportunity Education credit or the lifetime learning education credit.