Concise Takeaway
Paid tax return preparers must follow strict due diligence rules when preparing returns involving EIC, CTC/ACTC/ODC, AOTC, and Head of Household. Failure to comply results in a $635 penalty per failure, with no maximum limit. Taxpayers who improperly claim these credits may face 2‑year or 10‑year bans.
Due Diligence Requirements for Preparers
Paid preparers must take specific actions when preparing returns that claim:
- Earned Income Credit (EIC)
- American Opportunity Tax Credit (AOTC)
- Child Tax Credit (CTC), Additional CTC, Credit for Other Dependents (ODC)
- Head of Household (HOH) filing status
The due diligence process requires:
- Interviewing the taxpayer
- Asking adequate questions
- Documenting responses
- Obtaining sufficient information to determine eligibility
From the document: “Paid tax return preparers have elevated due diligence requirements… involving Earned Income Credit, American Opportunity Tax Credit, Child Tax Credit… and Head of Household filing status.”
Penalty Under IRC §6695(g)
A preparer who fails to meet due diligence requirements must pay a $635 penalty per failure. There is no reasonable cause exception.
Each credit or HOH determination counts as a separate failure.
What Preparers Must Do
- Meet the Knowledge Requirement
Preparers must:
- Interview the taxpayer
- Ask all required questions
- Document questions and answers
- Review adequate information
- Complete Form 8867
Form 8867 (Paid Preparer’s Due Diligence Checklist) must be:
- Completed accurately
- Filed with the return
- Maintain Required Records
Preparers must keep for three years:
- Copy of Form 8867
- Worksheets used
- Copies of documents relied upon
- Record of how and when information was obtained
- Record of additional questions asked and taxpayer responses
From the document: “Keep all five of the following records… A copy of Form 8867… applicable worksheets… documents provided by the taxpayer… record of how, when, and from whom the information was obtained…”
- Submit Form 8867 Properly
Must be submitted with the return in the required manner.
Record Retention Period
Preparers must retain records for three years from the latest of:
- Return due date
- Filing date
- Date presented to taxpayer for signature
- Date nonsigning preparer submitted their portion
Disallowance of Certain Credits
These rules apply to:
- EIC
- CTC / ACTC / ODC
- AOTC
Reasons for Disallowance
- Reckless or intentional disregard → 2‑year ban
- Fraud → 10‑year ban
From the document: “If the denial is because of taxpayer error due to reckless or intentional disregard… cannot claim the credit for the next 2 years… If the error is due to fraud… cannot claim… for the next 10 years.”
Form 8862 Requirement
Taxpayers must file Form 8862 to reclaim a credit after disallowance unless:
- The credit was later allowed after filing Form 8862
- The only issue was that a child listed for EIC was not a qualifying child
- The disallowance was due to math or clerical error
Do NOT file Form 8862 if:
- Within the 2‑year ban period
- Within the 10‑year fraud ban period
In these cases, the taxpayer cannot claim the credit.
Credit Reinstatement Flow Summary
- Determine reason for prior disallowance
- Apply 2‑year or 10‑year ban if applicable
- If eligible, attach Form 8862
- Verify all credit eligibility rules
- Claim credit only if fully eligible