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:

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.
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