In Chief Counsel Email 201846005 the IRS discusses the potential issues with imposing the due diligence penalty under IRC §6695(g) against the 25% owner of an S corporation.  The issue related to the risk of hazards of litigation in such a pursuit.  But the email gives information on the application of this penalty.

Under IRC §6695(g), a tax preparer may be penalized for failing to exercise due diligence in his/her preparation of returns if certain information is not obtained for taxpayers claiming certain benefits.  Originally the penalty was limited to claims for the earned income tax credit, but Congress has expanded the penalty to cover claims for the child tax credit, additional child tax credit and American opportunity tax credit.  In the Tax Cuts and Jobs Act Congress branched out beyond credits to impose the requirements on preparers of a return where the taxpayer claims head of household filing status.

The IRS has issued proposed regulations (REG-103474-18) to implement the Tax Cuts and Jobs Act changes made to IRC §6695(g), expanding the preparer due diligence rules and penalty to cover qualification for head of household filing status.

Congress in recently years has decided that having preparers be required to do more work inquiring about taxpayer’s qualifications for various tax benefits has proven useful, so they have expanded the due diligence from being limited to the earned income tax credit, to cover additional items.

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Temporary (TD 9799) and identical proposed regulations (REG-102952-16) have been released by the IRS to implement the expanded due diligence rules imposed on tax preparers as part of the Protecting Americans from Tax Hikes Act of 2015.  The PATH Act expanded the preparer due diligence requirements that originally applied to returns claiming an Earned Income Tax Credit (EITC), first added by Taxpayer Relief Act of 1997, to apply to returns claiming the Child Tax Credit (CTC), Additional Child Tax Credit (ACTC) and American Opportunity Tax Credit (AOTC).

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The IRS has released a draft copy of the 2016 Form 8867, Preparer’s Due Diligence Checklist, for use the preparing 2016 returns.  One key difference is that the form now applies not only when a preparer is preparing a return claiming the Earned Income Tax Credit, but will also apply in 2016 to any returns claiming the Child Tax Credit or the American Opportunity Tax Credit, expanded coverage mandated by the Protecting Americans from Tax Hikes Act of 2015.

The form consists of a checklist of due diligence steps required to be undertaken by a preparer when preparing a return where the taxpayer claims eligibility for one of these credits.  A preparer who fails to comply with these requirements risks a $510 penalty for each failure. [IRC §6695]