All paid tax return preparers who determine the eligibility for, or the amount of, the EITC are now subject to the EITC due diligence requirements and to the penalty under section 6695(g) of the Internal Revenue Code for failure to comply. This includes preparers who sign the return, preparers who prepare the EITC portion but do not sign the return, and the employers of these preparers.

• Record retention period changed to three years after the later of the date the return was due or the date it was transferred in final form by the preparer to the next person in  the filing process.
• Preparer must now keep copies of any documents that the client provides and the preparer used to determine eligibility for or amount of EITC.
• Preparer is required to use Form 8867 and submit it with every EITC tax return or claim for refund.
• The amount of the penalty increased from $100 to $500 to conform to the statutory language of section 6695(g), as amended by the United States-Korea Free Trade Agreement Implementation Act.

See our Preparer Due Diligence page for more information.

The changes are effective for returns for tax years ending on or after 12/31/2011.

• Any income documents other than W-2 forms
• Income or expense documents that support Schedules C or F income including client prepared records of income and expenses
• Interest income statements
• Social Security cards
• Guardianship records
• Court placement records, etc.

The new requirements do not require you to ask for or review any more documents than you would have under the old requirements, but now you are required to keep a copy of any document you received from the client and relied on to determine EITC eligibility or the amount of EITC.

• Management participated in or, prior to the time the return was filed, knew of the failure to comply with the due diligence requirements; or
• The firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements; or
• The firm establishes appropriate compliance procedures but disregards those procedures through willfulness, recklessness, or gross indifference, including ignoring facts that would lead a person of reasonable prudence and competence to investigate or figure out the employee was not complying.

• Review your current office procedures to make sure they address all appropriate EITC due diligence requirements.
• Review your procedures with your employees to make sure they clearly understand their responsibilities and your expectations of them.
• Conduct annual EITC due diligence training or instruct your staff to complete the online module that we offer in both English and Spanish.
• Test your employee's knowledge of due diligence and your procedures.
• Perform recurring quality review checks on your employee's work including credit computations, questions they asked clients, documents they reviewed, and the records kept.

• The due date of the tax return (not including extensions);
• The date the return was filed (if you signed the return and filed it electronically);
• The date the return was presented to the taxpayer for signature (if you signed the return and did not file it electronically); or
• The date you submitted the EITC part of the return to the preparer who signed the return (if you prepared the EITC portion of the return but another preparer signed the return).

Store the checklist in either paper or electronic format but you need to produce it if audited.

The knowledge requirement states you must not know, or have reason to know that any information used in determining your client's eligibility for or the amount of, EITC is incorrect. You must ask additional questions if the information your client gives you seems incorrect, incomplete or inconsistent. You are required to document the questions asked and the answers given at the time of the interview.

You can keep the documentation either electronically or on paper.

Revenue Ruling 56-407, 1956-2 C.B. 564, addresses whether taxpayers may disregard allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Because the net earnings from self-employment are included in earned income for EITC purposes this ruling is defined by cross-reference to I.R.C. §1402(a). CCA 200022051 also provides insight regarding deduction of Schedule C expenses.

You must also use professional judgment regarding the credibility of your client and the answers you receive. If you are not comfortable with the answers or credibility of the client, then due diligence dictates you do not prepare the return.

You may also want to present your client with the newPublication 4717, Help Your Tax Preparer get You the EITC You Deserve. This publication explains preparer's due diligence requirements and the consequences of not filing an accurate return.

If the preparer wants to report the taxpayer who he thinks will erroneously claim EITC with another preparer use the process described in the Fraud section of the Frequently Asked Questions.

What responsibility do we have to verify this information?

As a service to your customer, you may want to explain what happens when more than one person uses the same qualifying child-the return may reject or IRS could reverse the claim after an audit.

You may also want to present your client with the newPublication 4717, Help Your Tax Preparer get You the EITC You Deserve. This publication explains preparer's due diligence requirements and the consequences of not filing an accurate return.