Proposed regulations have been issued by the Internal Revenue Service that amend portions of previously proposed regulations to reflect the Tax Cuts and Jobs Act (TCJA) expansion of the scope of the tax return preparer due diligence penalty under Code Sec. 6695(g). Under that expansion, the penalty applies to preparer due diligence with respect to eligibility to file a return or claim for refund as head of household.
Prior to 2016, Code Sec. 6695(g) imposed a penalty on tax return preparers who fail to comply with due diligence requirements set out in regs with respect to determining eligibility for, or the amount of, the earned income credit (EIC).
For tax years beginning after December 31, 2015, the scope of Code Sec. 6695(g) was expanded to apply the penalty to tax return preparers who fail to comply with due diligence requirements with respect to determining eligibility for, or the amount of, the child tax credit (CTC), additional child tax credit (ACTC) and the American opportunity tax credit (AOTC). On December 5, 2016, final and temporary with cross-referencing proposed reg were issued to reflect these changes.
The TCJA further amended Code Sec. 6695(g) to expand the scope of the penalty to tax return preparers who fail to comply with due diligence requirements with respect to determining eligibility to file as head of household, for tax years beginning after December 31, 2017. The IRS has amended the 2016 proposed regs to reflect this TCJA change.
The IRS will amend the 2016 proposed return preparer rules reflect a recent law change. The 2018 Budget Reconciliation Act expanded the scope of the preparer penalty. The penalty now applies to preparers who fail to use due diligence when determining head of household status.
Preparer Due Diligence Rules Include Head of Household
The new rules add a reference to determining eligibility to file as head of household. Also, they revise Example 5 in the 2016 proposals to show the interaction between
- how the head of household due diligence requirements, and
- the rules for determining a taxpayer’s eligibility for the CTC.
Also, the rules have a new example to illustrate how the penalty applies when there is a failure to meet the due diligence requirements
- for determining head of household eligibility, and
- for determining for one of the applicable credits.
Return Preparer Penalty
Preparing one return or claim for refund may result in one or more penalty. This is because each failure to meet the due diligence requirements results in a separate penalty. To illustrate this point, the rules add a new Example 3.
Due diligence requires a preparer to complete Form 8867, Paid Preparer’s Due Diligence Checklist. In most cases, the preparer must attach this form to a return or claim for refund that claims a credit subject to the due diligence requirements.
In 2016, Form 8867 underwent significant revisions. Currently, it is a single checklist that preparers can use for all applicable credits, including
- Earned Income Credit
- Child Tax Credit/Additional Child Tax Credit and/or
- American Opportunity Tax Credit
The IRS anticipates that it will revise Form 8867 to include head of household filing status in time for the 2019 filing season.