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IRS Announces Due Diligence Checklist



On December 20th the IRS announced that a due diligence checklist, Form 8867, will now be required to be filed with any federal return that claims the Earned Income Tax Credit (EITC). This decision will be enacted as of January 1, 2012, and all will affect returns filed after that date that claim the EITC. Previously, this form had to be completed and kept only in the paid preparer’s records, but the IRS has now issued the final regulations that require the checklist to be filed with the return.

Congress enacted the due diligence requirement over ten years ago to reduce errors and fraud on returns claiming the EITC. The IRS created Form 8867 in order to help preparers meet requirements by acquiring eligibility information from their clients. Preparers were required to keep copies of the form, which is subject to review by the IRS. For returns filed after December 31, 2011, Form 8867 is required to be filed with the return.

The Earned Income Tax Credit (EITC) benefits low-and moderate-income workers and working families. The tax benefits from each claim vary by income, family size and filing status. The EITC is refundable, unlike most deductions and credits, which means that taxpayers may receive it even if they owe no taxes. For 2011 tax returns, the maximum credit is $5,751.

So, what does this mean for the paid preparer? Electronic filing a return will also mean electronically filing the due diligence checklist. It pays to fill out the checklist correctly, because Congress has voted to raise the fine for errors on the checklist from $100 to $500. This means you could be penalized $500 for each time you fail to meet all four due diligence requirements for each EITC claim. To protect yourself as a paid preparer filing EITC claims, you must not only ask the right questions to get the required information on Form 8867, but may also need to ask additional questions when the information your client gives you seems incorrect, inconsistent or incomplete. Prepare and keep the Form 8867 and keep all worksheets showing how the credit was computed. For addition record-keeping requirements and the four requirements for the due diligence checklist, you can visit this webpage by clicking here. The complete list of regulations can be found here.

The IRS has said that although around one in five eligible taxpayers fail to claim the EITC, some of those who do claim it are either ineligible or compute it incorrectly. The new requirement to file the checklist with a return claiming EITC is part of the IRS initiative to ensure that the credit is afforded to those taxpayers who qualify and need the benefits it provides. This year alone, over 26 million people received nearly $59 billion through the EITC, and tax professionals prepare close to 66 percent of these claims, which means that it is important that it is done correctly from the paid preparer’s standpoint.

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