Paid Preparer Due Diligence Requirements
A preparer complies with the due diligence requirements set forth in Treasury Regulations for the EIC, the CTC/ACTC or the AOTC claimed on a return or claimed for refund if they do the following:
- Complete Form 8867 truthfully and accurately and complete the actions described on Form 8867 for each credit claimed for which a person is the paid tax return preparer. Keystone Tax Solutions will prompt the user to answer a series of question when the preparer goes to claim EIC, the CTC/ACTC or the AOTC and these questions correspond to the questions contained on Form 8867.
- Submit Form 8867 in the manner required. If all of the questions for the specific credits claimed are answered and the return is then electronically filed, Keystone Tax Solutions will submit a copy of the Form 8867 with the return.
- Meet the knowledge requirement by interviewing the taxpayer and asking the client adequate questions to determine if the taxpayer is eligible to claim the credit(s) and in what amount(s). At the same time, the preparer should document the questions and the taxpayer’s responses in their notes. Keystone Tax Solutions allows the preparer the option to document their interview with the taxpayer within the program as set forth below or the program will generate a diagnostic warning stating that “no due diligence notes have been entered in the program. Make sure that you have asked and documented any questions necessary to complete your due diligence.” Information on entering Due Diligence Notes in Keystone Tax Solutions is set forth below.
- Keep all required records for three (3) years from when the return was due (not including extensions) or was actually filed, whichever is later. (See: Instructions for Form 8867 – Document Retention Requirements for Paid Preparers). This document recordkeeping requirement is separate and apart from the knowledge documentation requirement.
Satisfying the Due Diligence Knowledge Requirements
To satisfy the knowledge requirement for eligibility for, or the amount of, a credit claimed on a return or claim for refund, the preparer must use information that you know, or have reason to know, is correct. The preparer may not ignore the implications of information provided to, or known by them, and the preparer must make reasonable inquiries if the information provided to the preparer appears to be incorrect, inconsistent, or incomplete.
The preparer must know the tax law for each credit claimed on a return or claim for refund they prepare and use that knowledge to ask their client the right questions to get all the relevant facts to determine the client’s eligibility for the credit(s) and the correct amount of the credit(s). See: Additional Resources below for the links to the specific legal requirements for claiming EIC, the CTC/ACTC or the AOTC.
As a result of this knowledge requirement, the preparer is required to make all reasonable inquiries that a reasonable and well-informed tax return preparer, knowledgeable in the tax law, would make which would allow that preparer to conclude that the information provided to the preparer appears to be correct, consistent, and complete. At the same time, the preparer must document in their files any reasonable inquiries made and the responses to these inquiries.
In other words, the preparer must ask the taxpayer the relevant questions that a reasonable preparer would ask to establish that the taxpayer is eligible to claim the credit and they must keep a record of all the questions asked and the answers given. The preparer must also keep a record of any questions and answers that caused the preparer to question the taxpayer’s eligibility for claiming the credit and what information they received that allowed them to still claim the credit. It is not sufficient for the preparer to simply respond to the questions that are prompted in Keystone Tax Solutions. Instead, the preparer must ask all reasonable questions necessary to determine that the taxpayer is eligible for the credit(s) and then document the questions and answers.
The recordkeeping of the questions asked and answered can be done in Keystone Tax Solutions from the Main Menu of the tax return by selecting the following:
Preparer Due Diligence
Due Diligence Notes
In this Due Diligence Notes Field, the preparer should then record each question asked, and the responses that were given. Only the paid preparer can determine if the notes entered are sufficient to meet the due diligence knowledge requirements imposed for claiming EIC, the CTC/ACTC, or the AOTC, and entering any note in this field will remove the due diligence warning.
If the preparer elects to satisfy the knowledge documentation requirements by some other method outside of the program, the preparer should retain those records for at least three (3) years, see: Form 8867 – Document Retention Requirements for Paid Preparers.
NOTE: This is a guide on the knowledge requirements for entering Due Diligence Notes to support Form 8867 into the Keystone Tax Solutions program. This is not intended as tax advice.
Additional Resources
Instructions for Form 8867 – Paid Preparer’s Due Diligence Checklist
Publication 596 – Earned Income Credit