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Tax Preparers, No Substitutes Due Diligence Form For EITC Please



Earned Income Tax Credit (EITC) benefits American workers and working families with low-and moderate-income. For 2011 tax returns, the maximum credit will be $5,751. Unlike most deductions and credits, the EITC is refundable––taxpayers with low and moderate income can get it even if they owe no tax.

Not every tax payer eligible for the credit. IRS requires tax preparers to do due diligence. To those tax preparers who file EITC for clients but do not exercise due diligence in determining eligibility for or the amount of the claim, under the existing IRC § 6695(g) they are liable for $100 penalty for each failure they make.


“Paid preparers must meet four due diligence requirements on returns with EITC claims or face possible penalties”, the EITC Due Diligence Requirements reads. The four due diligences require paid tax preparers to:

1. Evaluate information received from clients

2. Apply a consistency and reasonableness standard to the information

3. Ask additional questions if the information appears incorrect, inconsistent or incomplete

4. Document and retain the record of inquiries made and client responses

To help preparers meet the requirement—obtaining eligibility information from their clients, IRS has actually created Form 8867—called “Paid Preparer’s Earned Income Credit Checklist”. Preparers have also been required to keep copies of the form, or comparable (substitute) documentation, which is subject to review by the IRS.

Earned Income Tax Credit EITC Checklist

Form 8867 called “Paid Preparer’s Earned Income Credit Checklist.” Beginning in 2012 this form has to be attached with every single EITC filed, NO substitute.

However, the Treasury Inspector General for Tax Administration almost always find high level improver claims. According to IRS’ publication (IR-2011-98), “over 26 million people received nearly $59 billion through the EITC in 2009, and some of those who claimed it either compute it incorrectly or are ineligible”.

Treasury Inspector General for Tax Administration eventually provides preparers with even more clear due diligence guidance (Reg. §1.6695-2), which is consisted of the following four elements:

1. Completion of Eligibility checklist – (a) Complete Form 8867; (b) Complete checklist based on information provided by the taxpayer for the preparer

2. Computation of the Credit – Keep the EIC worksheet or an equivalent that demonstrates how the EIC was computed

3. Knowledge – (a) Not know or have reason to know that any information used in determining the taxpayer’s eligibility for, or the amount of, the EIC is incorrect, incomplete or inconsistent; (b) Not ignore the implications of information furnished or known; (c) Make reasonable inquiries if a reasonable and well-informed tax return preparer, knowledgeable in the law, would conclude the information furnished appears to be incorrect, inconsistent or incomplete; and (d) Document in your records any additional inquiries made and your client’s responses.

4. Record Retention – (a) Retain Form 8867 and EIC worksheet or the equivalent; (b) Maintain record of how and when the information used to complete these forms was obtained; (c) Verify the identity of the person furnishing the information; and (d) Retain records for 3 years after the June 30th following the date the return or claim was presented for signature.


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.

For that reason, on Thursday (October 06’ 2011) the IRS proposed a new regulation that would require paid tax return preparers, beginning in 2012, to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Tax Credit (EITC). It is the same form that is currently required to be completed and retained in a preparer’s records.

The only difference is: starting in the beginning of 2012, the form has to be the form 8867, NO substitutes, NO comparable documents is allowed, and it has to be attached on every EITC claims filed.

Now, IRS is asking for comments on the proposed rules—especially concerning the best way to implement the due diligence checklist (Form 8867), requirement that Form 8867 be submitted to the IRS, and how it might be revised to better enable the IRS to detect improper claims. Comments are due by Nov. 10, 2011, and a public hearing on the proposed regulations is scheduled for Nov. 7, 2011.

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