New law, proposed regs heighten EITC preparer due diligence

January 1, 2012

The Sec. 6695(g) penalty for failure by preparers to exercise due diligence with respect to the earned income tax credit (EITC) increased from $100 to $500 effective for returns required to be filed after Dec. 31, 2011.

The measure was enacted in late October as part of the U.S.-Korea Free Trade Agreement Implementation Act of 2011, P.L. 112-41. The EITC penalty applies to each failure of a tax return preparer to exercise due diligence in determining taxpayer eligibility for or the amount of an EITC.

Also in October, the IRS proposed regulations (REG-140280-09) that would add new due-diligence requirements and procedures for the refundable credit. Existing regulations (Regs. Sec. 1.6695-2) require preparers to complete Form 8867, Paid Preparer’s Earned Income Credit Checklist, or to otherwise record the information it requires for each return claiming the EITC and keep it in the preparer’s records. The checklist must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer.

The proposed regulations would require preparers to submit Form 8867 with the tax return on which the EITC is claimed and would not allow any substitute for the form. Return preparers would also be required to keep a copy of the form and of any document that the taxpayer supplied and the preparer relied upon to complete Form 8867. Return preparers would be required to retain this information for three years from the return due date (without regard to any extension) or the date the return or claim for refund was filed, whichever is later.

The proposed regulations also would add a special rule subjecting firms to the same penalty as their preparers if:

  • One or more members of the principal management or principal officers of the firm or its branch office participated in or knew of the failure to comply with due diligence;
  • The firm failed to establish reasonable and appropriate procedures to ensure compliance; or
  • The firm had such procedures but disregarded them through willfulness, recklessness or gross indifference.


Under the current regulations, a return preparer can avoid the Sec. 6695(g) penalty if the preparer can demonstrate to the IRS’ satisfaction that his or her normal office procedures are reasonably designed and routinely followed to ensure compliance with the EITC due-diligence requirements and that any failure to meet the requirements was “isolated and inadvertent.” However, under the proposed regulations, this defense would not be available to a firm (Prop. Regs. Sec. 1.6695-2(d)).

The proposed regulations would apply to returns and claims for refund for tax years ending on or after Dec. 31, 2011, that are filed after the final regulations are published in the Federal Register.

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