President Signs Bill Increasing EITC Due Diligence Penalty

October 21, 2011

President Barack Obama signed into law Friday a trade agreement with South Korea (HR 3080) that increases from $100 to $500 the Sec. 6695(g) penalty for failure by preparers to exercise due diligence with respect to the earned income tax credit (EITC). Under another provision of the agreement, the IRS will receive detailed information about federal and state prison inmates.

Congress passed the Korea trade agreement on Oct. 12, along with agreements with Colombia (HR 3078) and Panama (HR 3079), which the president also signed on Friday (see “Trade Bills Pass Congress With Tax Provisions”).

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. The increased penalty amount will apply to returns required to be filed after Dec. 31, 2011. Earlier this month, the IRS proposed new regulations (see “IRS Proposes Stiffer Preparer Requirements for EITCs”) that would also add new due diligence requirements and procedures for the refundable credit. The proposed regulations would require preparers to submit an EITC eligibility checklist to the IRS in addition to keeping it in their records, as is currently required. The proposed regulations would also make preparers’ firms as well as individual preparers potentially liable for the penalty.

The Korea trade act also requires the Federal Bureau of Prisons and state prison administrative agencies to send the IRS annually a list of all inmates incarcerated in the prison system at any time during the previous two calendar years and the first eight months of the current year.

All three trade acts also accelerate the amount of corporate estimated tax due by corporations with $1 billion or more in assets, by a combined increase of 0.5% for the third calendar quarter of 2012 and 3.5% for the third quarter of 2016. Affected taxpayers may reduce their estimated tax payments for the following quarter by the same amount.

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