The IRS issued proposed regulations Thursday (REG-140280-09) that would impose new requirements for tax return preparers and their firms for returns claiming the earned income tax credit (EITC), including submission of information regarding taxpayers’ eligibility to the IRS.
The EITC provides a refundable credit to eligible taxpayers, and it has been criticized for high levels of improper claims—between 23% and 28% of claims, equaling between $11 billion and $13 billion in fiscal 2009 alone, the IRS estimates. In February 2011, the Treasury Inspector General for Tax Administration reported that despite better administration and progress in identifying improper EITCs since 2002, the IRS had made little improvement in reducing them.
IRC § 6695(g) provides that tax preparers who do not exercise due diligence in determining eligibility for or the amount of an EITC may be liable for a penalty of $100 for each failure. (The penalty would increase to $500 under section 501 of the U.S.-Korea Free Trade Agreement Implementation Act, HR 3080, which was approved by the House Ways and Means Committee on Wednesday and, at the urging of the Obama administration, is expected to come to the floor of both congressional chambers this month.)
Existing regulations (Treas. Reg. § 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 Form 8867. Return preparers would also be required to keep a copy of the form and of any document that the taxpayer supplied and that 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 section 6695(g) penalty with respect to a particular tax return or claim for refund 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 due diligence requirements was “isolated and inadvertent.” However, under the proposed regulations, this defense would not be available to a firm (Prop. Treas. Reg. § 1.6695-2(d)).
The proposed regulations would be effective for returns filed after the final regulations are published in the Federal Register, for tax years ending on or after Dec. 31, 2011.
The IRS has asked for comments on the proposed rules, especially concerning the best way to implement the requirement that Form 8867 be submitted to the IRS and how it and Schedule EIC of Form 1040 might be revised to better enable the IRS to detect improper claims.
Comments should be submitted within 30 days after publication of the proposed regulations in the Federal Register. A public hearing is scheduled for Nov. 7 at the IRS building in Washington.