EITC Due Diligence Law and Regulation

Internal Revenue Code §6695 and the related regulations set out the EITC Due Diligence requirements and the penalties assessable for return preparers who fail to comply with these requirements.

Law:

IRC §6695(g) states: Any person who is an income 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 eligibility for, or the amount of, the credit allowable by section 32 shall pay a penalty of $100 for each such failure.

Regulation:

Those who prepare Earned Income Tax Credit (EITC) claims must not only ask all the questions required on Form 8867, Paid Preparers's Earned Income Credit Checklist, but must also ask additional questions when information seems incorrect, inconsistent or incomplete. In addition, the preparer must prepare an EIC computational checksheet and meet a recordkeeping requirement.

Those who fail to meet all four due diligence requirements can be assessed a penalty for each failure.

Due Diligence Requirements

Requirement	Description
1. Completion of Eligibility checklist	Either complete Form 8867 or its equivalent Complete checklist based on information provided by the taxpayer for the preparer
2. Computation of the Credit	Keep the EIC worksheet or an equivalent that demonstrates how the EIC was computed
3. Knowledge	Not know or have reason to know that any information used in determining the taxpayer's eligibility for, or the amount of, the EIC is incorrect Not ignore the implications of information furnished or known Make reasonable inquiries if information furnished or known appears to be incorrect, inconsistent or incomplete Additional inquiries should be made if a reasonable and well-informed tax return preparer knowledgable in the law would conclude that the information furnished to the tax return preparer appears to be incomplete, incorrect, or inconsistent Contemporaneously document any additional inquiries made and the client's response
4. Record Retention	Retain Form 8867 and EIC worksheet or the equivalent Maintain record of how and when the information used to complete these forms was obtained Verify the identify of the person furnishing the information Retain records for 3 years after the June 30th following the date the return or claim was presented for signature

The following links will provide you with additional information on meeting your due diligence requirements:

Additional information on the new due diligence regulations issued December, 2008.
Form 8867, Preparer's Due Diligence Checklist
Useful examples on how to handle common due diligence situations
Information and examples on handling the most common EITC errors
How to use Form 886-H-EIC, HOH and DEP to help meet your due diligence requirements