The IRS imposes four major due diligence requirements regarding the Earned Income Tax Credit that must be applied to every tax return prepared by tax preparers. The four major due diligence requirements are meant to focus on correctly determining a taxpayer’s eligibility for the credit and aid you in creating an accurate return for your clients.
Four Major Due Diligence Requirements
1. Complete and Submit The Eligibility Checklist ,Form 8867
The purpose of Form 8867, Paid Preparer’s Earned Income Credit Checklist, is to ensure that the tax preparer has considered all applicable Earned Income Tax Credit eligibility requirements for each prepared tax return. Form 8867 should be completed based on information provided by the taxpayer to you, the tax return preparer. You should ask questions valid to each client and be able to explain the meaning and reasoning behind each question when necessary.
· For returns or claims for refund filed electronically, submit Form 8867 to the 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.
2. Computing the Credit
TaxSlayer Pro software calculates the correct amount of Earned Income Credit on the tax returns that you prepare. Special rules regarding the treatment of income, deductions, credits, etc. in certain circumstances are all preprogrammed into the software.
· Although the software calculates the amount of the Earned Income Credit, the calculations are based strictly on the information and data that is entered into the tax return. It is the responsibility of the taxpayer to ensure the accuracy of all figures used in the calculation of the EITC. This is why it is important to make sure that Form 8867 is correctly and completely filled out.
3. Knowledge Requirement
The knowledge requirement states that you must not know or be aware of any reason that the information given to you by your client is incorrect.
· Additional questions must be asked and documented, if you believe the information the client is providing you with is false, incomplete or contradictory.
4. Keep Records
The IRS requirement for keeping records is more extensive than you may have realized.
· Keep a copy of Form 8867 and the EIC Worksheet as well as a record of any additional questions that you asked your client to comply with your due diligence requirements. Also keep a record of the client’s answer to the questions that you asked.
· Keep copies of any documents your client gives you that you use to determine eligibility for, or the amount of the Earned Income Tax Credit.
· Verify the identity of the person giving you the return information and keep a record of who provided the information and when you received it.
· Keep your records in either paper or electronic format, but make sure you can reproduce them if the IRS asks.
· Keep these records for three years from the latest date of the following that applies:
o The original due date of the return (This does not include any extension of time to file), or
o If you electronically file the return and sign it as the return preparer, the date the tax return is filed.
Due diligence promotes accurate Earned Income Credit Tax Claims. Incorrect tax returns and failure to comply with the due diligence requirements can adversely affect you and your client. Penalties that can be placed upon you include but are not limited to, receiving a $500 penalty against you and your employer for each failure, subject to disciplinary action by the IRS, barred from preparing tax returns, or even criminal prosecution. According to the IRS, pay particular attention to the following issues that account for more than 60 percent of all Earned Income Tax Credit errors:
· Claiming a child who does not meet the age, relationship, or residency requirement.
o The taxpayer is claiming a child other than their own son or daughter.
o The age of the taxpayer compared to the age of the child they are claiming seems inconsistent.
o Very young taxpayers with qualifying children could potentially be qualifying children themselves.
o A single taxpayer is claiming a young qualifying child but has no dependent care expenses.
o The taxpayer is claiming a disabled adult as a qualifying child.
· Filing as single or head of household when married.
o The taxpayer states that they are separated and qualify for HOH filing status.
o Taxpayer states that they are HOH or single when they are married.
o Taxpayer claims HOH when they should be claiming single.
o More than one HOH taxpayer at the same address.
· Incorrectly reporting income or expense.
· Incorrect Social Security Numbers Reported