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Post Date:  11/7/2016
Last Updated:  11/7/2016

Summary
Cross References
- Form 8867, Paid Preparer’s Due Diligence Checklist for Earned Income Credit (EIC), the American Opportunity Tax Credit (AOTC), the Child Tax Credit (CTC) and/or the Additional Child Tax Credit (ACTC)

Under IRC section 6695(g), a penalty of $500 per return may be imposed on a person who, as a tax return preparer, prepares a tax return for a taxpayer claiming the Earned Income Credit (EIC), unless the tax return preparer exercises due diligence with respect to that claim. For taxable years beginning after December 31, 2015, a new law requires paid tax return preparers, who prepare federal income tax returns on which the Child (or Additional Child) Tax Credit is claimed and/or which the American Opportunity Tax Credit is claimed, to meet due diligence requirements similar to those applicable to returns claiming an Earned Income Credit (The Protecting Americans from Tax Hikes Act of 2015).

The IRS released the new draft version of the 2016 tax year Form 8867 instructions, which describes in greater detail the type of due diligence that is required. Form 8867 must be filed with the taxpayers return or amended return in which a paid preparer prepared the return claiming the EIC, AOTC, and/or CTC/ACTC. The penalty for failure to meet the due diligence requirements with respect to returns and claims for refund filed in 2017 (for 2016 tax returns) is $510 per credit per return. The penalty is also indexed for inflation.

Author’s Comment: There is potential for a $1,530 per return penalty for the three credits (CTC and ACTC are treated as one credit). It should also be noted that the IRS usually imposes the penalty for failure to meet the due diligence requirements on all tax returns claiming a credit prepared by the paid preparer. The IRS generally assumes a paid preparer’s procedure for filing one return is the same as the procedures for filing all returns so that a failure on one return is generally a failure on all returns prepared by that preparer.

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