The IRS announced this week that it is changing the filing requirements for tax pros who submit a federal tax return claiming the Earned Income Tax Credit (EITC). Under new proposed regulations, paid tax preparers submitting EITC claims must also file a federal form 8867, Paid Preparer’s Earned Income Credit Checklist (downloads as a pdf). The form is a due diligence checklist and is currently required to be completed and retained for inspection by IRS if requested; the new requirement would require that the form actually be submitted to IRS.
The due diligence checklist was intended to assist tax preparers with returns claiming the EITC. The EITC is a refundable federal income tax credit targeted to low to moderate income working individuals and families since it helps offset Social Security taxes for taxpayers who work but make a limited amount of earned income during the year. If the EITC exceeds the amount of taxes owed, the result is a credit.
You can imagine that the idea of a refundable credit – and can be a big one – creates an atmosphere for abuse. For 2009, over 26 million people received nearly $59 billion through the EITC, not all of them legitimate claims. That’s why Congress created a set of due diligence requirements; tax preparers that didn’t comply with the requirements faced potential penalties. The requirements, found in the Regs at §1.6695-2, include:
- Completion of EITC eligibility checklist
- Computation of the credit
- Knowledge
- Record retention
With respect to retention, the rule used to be that a tax preparer had to keep the checklist for 3 years after the June 30th following the date on the return. Under the new proposed regulations, tax preparers would have to file the checklist with each return claiming the credit. Failure to comply would result in fees to the preparer. The new requirements are effective for tax years ending on or after December 31, 2011.
Further details can be found in REG-140280-09.
