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| Tax School Homepage |
| EITC Due Diligence |
| Complete and submit Form 8867 for all paper and electronic tax returns and for all other EITC claims for claims with qualifying children and also for claims with no qualifying children. 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 eligibility for, or the amount of, the allowable EITC credit. There is the diligence requirement to ask all the questions required on Form 8867 and to keep a copy of form and EITC calculation worksheets. You also must ask additional questions when the information your client gives you seems incorrect, inconsistent or incomplete. Remember, you must complete and submit the Form 8867 for all paper and electronic tax returns and for all other EITC claims regardless if with children or claims with no children. |
| The tax return preparer must keep a copy of the Form 8867 and the EIC calculation worksheet. You may feel that this is not you job but you must verify the identity of the person giving you the return information and keep a record of who provided the information and when information was provided. It is your duty to keep copies of any documents your client provided that you relied on to determine eligibility for the amount of the EITC. |
| To meet your earned income credit due diligence requirements, you must complete the form with information you get from your client. And, you must document, at the time of the interview, any additional questions you asked and your client’s replies. I cannot iterate enough, complete all required parts! You must complete Parts I, IV and V for every client, and, either Part II or Part III as required. Always, submit the completed Form 8867 with each EITC electronic return you send or attach the completed Form 8867 to any EITC return or claim for refund you prepare and present to your client to send. Remind your client that Form 8867 must be send in order for their Earned Income Credit be processed correctly. If too many of your clients leave Form 8867 out, the IRS for sure will come knocking on your door. |
| You need to answer the questions covering EITC eligibility on the Form 8867 using information from your client. But, we don't recommend you ask your clients the questions listed on the form. Use words and terms your client knows and won't misunderstand. For example: Don't ask: What's your marital status? Ask: Are you single or married? Don't ask: Are you head of household? Find out if they qualify by asking all the right questions. Don't ask if they have a qualifying child or a dependent, find out who they lived with during the tax year and for how long. The manner in which you ask the interview questions will determine the accuracy of the responses. Also, you want to avoid any possibility of fraud, so gear your questions in such a way as to be clear of fraud. |
| If you give your client an EITC return or electronic version to sign and send in, you must attach the completed Form 8867 to it. Be sure to stress the importance of sending in all the forms to the IRS. Form 8867 is extremely important. Follow and make sure the questions are answered on it correctly. If you suspect any wrongdoing or anything wrong with the responses, ask more questions. Ultimately, you are given the responsibility of the accuracy of information that goes on this form. There are high penalties at stake for you and you must do everything is your power to avoid these due diligence penalties. |
| If the Form 8867 is not included with EITC returns you prepared, you may get a warning letter from the IRS during the filing season. You may also start getting alerts with your acknowledgements that Form 8867 is not being included. You can use all the help you can get, and the IRS is there to help you after all. Furthermore, if Form 8867 is not included with EITC returns you prepared, you may get letter 5364 which is sent to those who prepare paper EITC returns without a Form 8867. Receiving acknowledgement Alerts which are sent electronically to those preparers who e-file EITC returns without Form 8867, is a good thing. You may inadvertently be excluding this extremely important document from your filings and these notifications could be a blessing. |
| If you have been leaving this form out of your filings, you don't want to submit Form 8867 separately without a tax return because the IRS cannot associate a Form 8867 with a tax return that has already been processed. Therefore, doing so will have no effect on the tax preparer's penalty assessments. You should never send Form 8867 separately. If the IRS continues to receive EITC claims prepared by you missing the Form 8867, they will continue to send warning letters. The IRS can only take so much abuse and may start sending Letter 1125 with the Form 5816, assessing the EITC Due Diligence penalty of $500 for each missing form. |
| You should start changing your procedures to ensure the Form 8867 is completed and submitted with every EITC claim to avoid the warnings for not submitting Form 8867 with returns. The last thing you want to do is ignore the letters. You could also make sure that your tax return software is not automatically excluding Form 8867. So, for tax returns submitted electronically, make sure the setting for including the Form 8867 is not disabled and for paper returns, make sure you let your clients know the importance of submitting all the forms you include. In addition, make sure to keep a record of the forms you included in the package your give your clients and personalize Form 8867 as much as possible by asking those additional questions. |
| If the IRS examines your client's return and deny all or a part of EITC, your client must pay back the amount in error with interest. Furthermore, you client may need to file Form 8862 and may be banned from claiming EITC for the next two years if the IRS finds the error is because of reckless or intentional disregard of the rules. If the error is extreme and due to fraud, your client may be banned from claiming the Earned Income Credit for the next ten years. |
| If the IRS examines the EITC claims you prepared and they find you did not meet all four due diligence requirements, you can get A $500 penalty for each failure to comply with EITC due diligence requirements. You will get a minimum penalty of $1,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to an unreasonable position. If you just don't care and exercise reckless or intentional disregard for the rules, you will be liable for a minimum penalty of $5,000. |
| Copyright © 2014 [Hera's Income Tax School]. All Annual Filing Season Program rights reserved. |
| Revised: 12/14/14 |
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