eitc due diligence law and regulation | Earned Income Tax Credit (2024)

Requirements for paid preparers when claiming certain credits or head of household filing status

Under the Internal Revenue Code, a penalty can be assessed against a paid tax return preparer for not meeting due diligence requirements when preparing a return or claim for refund claiming the:

Earned income tax credit (EITC),
Child tax credit (CTC), additional child tax credit (ACTC), credit for other dependents (ODC),
American opportunity tax credit (AOTC), or
Head of household (HOH) filing status.

Law

Section 6695(g) of the Internal Revenue Code states:

Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining (1) eligibility to fileas head of household (as defined in section 2(b)) on the return, or (2)eligibility for, orthe amount of, the credit allowable by section 24 [CTC/ACTC/ODC], 25A(a)(1) [AOTC] or32 [EITC] shall pay a penalty of $500 for each such failure.

Treasury Regulation

Section 1.6695-2 of the Regulations describes the four due diligence requirements a paid tax return preparer must meet when preparing a return or claim for refund claiming the EITC, CTC/ACTC/ODC, AOTC or HOH filing status.

Firms employing preparers: A firm that employs a tax return preparer can be subject to a due diligence penalty for a return or claim prepared by its employee. (Treas. Reg. section 1.6695-2(c))

The Four Due Diligence Requirements

Requirement	Your responsibility
1. Complete and Submit Form 8867 (Treas. Reg. section 1.6695-2(b)(1))	Based on information obtained from your client or information you otherwise reasonably obtain or know, you must – Complete Form 8867PDF, Paid Preparer's Due Diligence Checklist, And Electronically submit the completed Form 8867 to the IRS with the e-Filed return or claim, or For a return not e-Filed, provide a copy of the completed Form 8867 to your client for inclusion with the filed return or claim, or If you are the nonsigning preparer, provide a completed electronic or paper copy of Form 8867 to the signing preparer for inclusion with the filed return or claim. Find out more about the Form 8867 here.

Requirement

Your responsibility

1. Complete and Submit Form 8867

(Treas. Reg. section 1.6695-2(b)(1))

Based on information obtained from your client or information you otherwise reasonably obtain or know, you must –

Complete Form 8867PDF, Paid Preparer's Due Diligence Checklist,

And

Electronically submit the completed Form 8867 to the IRS with the e-Filed return or claim, or
For a return not e-Filed, provide a copy of the completed Form 8867 to your client for inclusion with the filed return or claim, or
If you are the nonsigning preparer, provide a completed electronic or paper copy of Form 8867 to the signing preparer for inclusion with the filed return or claim.

Find out more about the Form 8867 here.

Requirement	Your responsibility
2. Compute the Credits (Treas. Reg. section 1.6695-2(b)(2))	Based on information obtained from your client or information you otherwise reasonably obtain or know, you must - Complete the appropriate worksheets to compute each applicable credit, such as those found in the instructions for Form 1040 or Form 8863, Or Complete the computations using your own similar worksheets and make sure to keep records showing what information you used and how you made the computations.

Requirement

Your responsibility

2. Compute the Credits

(Treas. Reg. section 1.6695-2(b)(2))

Based on information obtained from your client or information you otherwise reasonably obtain or know, you must -

Complete the appropriate worksheets to compute each applicable credit, such as those found in the instructions for Form 1040 or Form 8863,

Complete the computations using your own similar worksheets and make sure to keep records showing what information you used and how you made the computations.

Requirement	Your responsibility
3. Knowledge (Treas. Reg. section 1.6695-2(b)(3))	You must not know or have reason to know that any information you used to claim the credits or HOH filing status is incorrect. You cannot ignore the implications of any information given to you or known to you. You must make additional reasonable inquiries, if a reasonable and well-informed tax return preparer, knowledgeable in the law, would conclude the information furnished appears incorrect, inconsistent or incomplete. At the time you interview your client, make and keep a record of these inquiries and your client's answers. Know the law and use that knowledge of the law to ensure you are asking your client the right questions to get all relevant information. The Treasury Regulationgives eight examples of meeting the knowledge requirement.

Requirement

Your responsibility

3. Knowledge

(Treas. Reg. section 1.6695-2(b)(3))

You must not know or have reason to know that any information you used to claim the credits or HOH filing status is incorrect.
You cannot ignore the implications of any information given to you or known to you.
You must make additional reasonable inquiries, if a reasonable and well-informed tax return preparer, knowledgeable in the law, would conclude the information furnished appears incorrect, inconsistent or incomplete.
At the time you interview your client, make and keep a record of these inquiries and your client's answers.
Know the law and use that knowledge of the law to ensure you are asking your client the right questions to get all relevant information.

The Treasury Regulationgives eight examples of meeting the knowledge requirement.

Requirement	Your responsibility
4. Keep Records for Three Years (Treas. Reg. section 1.6695-2(b)(4))	Keep a copy of - The completed Form 8867, The completed worksheets used to determine the amount of each credit, A record of how, when and from whom you received the information used to complete Form 8867 and the worksheets, and Any documents your client showed you that you relied on to complete Form 8867 or the worksheets. Any additional information you relied on. Keep these records for 3 years from the latest date of the following that apply: The due date of the tax return (not including any extension of time for filing), or The date the tax return or claim for refund was electronically filed, or If not electronically filed, the date you presented the tax return or claim for refund to your client for signature, or If you prepare it and another preparer completes and signs the return or claim for refund, the date you submitted it to the signing tax return preparer. Keep these records secure in either a paper or electronic format.

Requirement

Your responsibility

4. Keep Records for Three Years

(Treas. Reg. section 1.6695-2(b)(4))

Keep a copy of -
The completed Form 8867,
The completed worksheets used to determine the amount of each credit,
A record of how, when and from whom you received the information used to complete Form 8867 and the worksheets, and
Any documents your client showed you that you relied on to complete Form 8867 or the worksheets.
Any additional information you relied on.
Keep these records for 3 years from the latest date of the following that apply:
- The due date of the tax return (not including any extension of time for filing), or
- The date the tax return or claim for refund was electronically filed, or
- If not electronically filed, the date you presented the tax return or claim for refund to your client for signature, or
- If you prepare it and another preparer completes and signs the return or claim for refund, the date you submitted it to the signing tax return preparer.

Keep these records secure in either a paper or electronic format.

Additional Due Diligence Topics

What is Form 8867?
Consequences ofNot Meeting Your Due Diligence Requirements

Return to mainPreparer Due Diligence Page

FAQs

What is the due diligence requirement for EITC? ›

You have complied with all the due diligence requirements if you: A. Interview the taxpayer, ask adequate questions, contemporaneously document the taxpayer's responses on the return or in your notes, review adequate information to determine if the taxpayer is eligible to claim the credit and in what amount; and B.

Read On ›

What is the most common error for EITC? ›

Claiming a child who is not a qualifying child for the EITC – This error occurs when taxpayers claim a child who does not meet all four tests for a qualifying child. This is the most common EITC error.

Discover More Details ›

When should tax preparer document taxpayers' answers to due diligence questions? ›

At the time of the client interview, make a record of the inquiries made and the client's answers. Keep a copy of the completed Form 8867, Paid Preparer's Due Diligence Checklist.

What disqualifies you from earned income credit? ›

In general, disqualifying income is investment income such as taxable and tax-exempt interest, dividends, child's interest and dividend income reported on the return, child's tax-exempt interest reported on Form 8814, line 1b, net rental and royalty income, net capital gain income, other portfolio income, and net ...

See Details ›

What is the penalty for due diligence on EITC? ›

A penalty under Internal Revenue Code section 6695(g) for each failure to be diligent can be assessed against a paid preparer. For returns and claims for refund filed in 2023, the penalty is $600 per failure to be diligent.

Find Out More ›

What is the qualifying requirement for everyone attempting to claim EITC? ›

You're at least 18 years old or have a qualifying child. Have earned income of at least $1.00 and not more that $30,950. Have a valid Social Security Number or Individual Taxpayer Identification Number (ITIN) for you, your spouse, and any qualifying children. Live in California for more than half the filing year.

Tell Me More ›

What disqualifies you from earned income credit 2024? ›

If you received more than $11,000 in investment income or income from rentals, royalties, or stock and other asset sales during 2023, you can't qualify for the EIC. This amount increases to $11,600 in 2024. You have to be 25 or older but under 65 to qualify for the EIC.

Show Me More ›

How many requirements are there for due diligence? ›

The Due Diligence Requirements may be summed up in the following Four Requirements: Complete and submit Form 8867 (Paid Preparer Due Diligence Checklist) for each return that the tax preparer prepares that includes one of the covered credits and/or the head of household filing status.

Explore More ›

What are the most common EITC and CTC errors? ›

Most errors happen because the child you claim doesn't meet the qualification rules: Relationship: Your child must be related to you. Residency: Your child must live in the same home as you for more than half the tax year. Age: Your child's age and student or disability status will affect if they qualify.

What are the due diligence questions for a tax return? ›

Taxpayer's response

1 How long have you owned your business? 2 Do you have any documentation to substantiate your business? 3 Who maintains the business records for your business? 4 Do you have separate bank accounts for personal and business transactions?

Show Me More ›

How do I fill out a due diligence form? ›

When you first begin putting together your due diligence report, review the following due diligence checklist to ensure you're including all the necessary elements:

Financial statements, including balance sheets, cash flow statements and profit & loss reports.
Company valuation.
Capital structure.
Financial projections.

More items...

Mar 14, 2023

Read The Full Story ›

How do you prepare a due diligence report? ›

A due diligence report should capture these key elements. Executive summary, company overview, purpose, due diligence (financial, legal, operational, commercial, market, environmental and regulatory), insurance and risk management, growth prospects and recommendations.

See Details ›

What do you need to meet the EIC due diligence knowledge requirement? ›

Meet the Knowledge Requirement – The tax preparer must know the tax law and ask questions until they are satisfied, they have enough information to determine the taxpayer's eligibility for each of the covered credits and/or for taking the head of household filing status, and the correct amount of the credit is ...

Get More Info Here ›

Which of the following is not a due diligence requirement with respect to the EITC? ›

All of the following are required for a tax preparer to meet their EITC due diligence requirements EXCEPT: Maintain a record of how and when EITC information was obtained and the identity of the person who provided it.

What is the criteria for due diligence? ›

A due diligence checklist is an organized way to analyze a company. The checklist will include all the areas to be analyzed, such as ownership and organization, assets and operations, the financial ratios, shareholder value, processes and policies, future growth potential, management, and human resources.

What are the basic requirements of due diligence? ›

Areas to target for scrutiny in the due diligence checklist should include:

Historical Financial Statements. ...
Revenue and Expense Analysis. ...
Assets and Liabilities Review. ...
Taxation and Tax Compliance. ...
Debt and Financing Agreements. ...
Working Capital Analysis. ...
Financial Projections and Assumptions. ...
Cash Flow Analysis.

View Details ›