Paid tax return preparers are required to exercise due diligence when preparing any client’s return or claim for refund. Starting in 2016, the paid tax return preparer’s Earned Income Credit (EIC) due diligence and recordkeeping requirements have been expanded to also cover the Child Tax Credit/Additional Child Tax Credit (CTC/ACTC) and the American Opportunity Tax Credit (AOTC). As a result, Form 8867 has been modified to account for these additional requirements and the form has been renamed the Paid Preparer’s Due Diligence Checklist and this revised Form 8867 must be filed with the tax return for any taxpayer claiming EIC, the CTC/ACTC, and/or the AOTC.
As part of exercising due diligence, the preparer must (1) interview the client, (2) ask adequate questions, and (3) obtain appropriate and sufficient information to determine the correct reporting of income, claiming of tax benefits (such as deductions and credits), and compliance with the tax laws. To meet these due diligence requirements, the preparer may need to ask additional questions and obtain additional information to determine eligibility for, and the amount of, the EIC, the CTC/ACTC, or the AOTC. Failure to meet the EIC, CTC/ACTC, or the AOTC due diligence requirements could result in a penalty for each failure.
The 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 claim for refund if they do all 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.
- Submit Form 8867 in the manner required.
- 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. (See: Form 8867 – Paid Preparer Knowledge Requirement and Documenting Taxpayer Responses) and
- Keep all five (5) of the following records for three (3) years from the latest of when the return was due (not including extensions) or was actually filed:
1. – A copy of Form 8867,
2. – The applicable worksheet(s) or your own worksheet(s) for any credits claimed,
3. – Copies of any documents provided by the taxpayer on which you relied to determine eligibility for, and the amount of, the credit(s),
4. – A record of how, when, and from whom the information used to prepare Form 8867 and worksheet(s) was obtained, and
5. – A record of any additional questions you may have asked to determine eligibility for, and amount of, the credits, and the taxpayer’s answers.
The Form 8867 – Paid Preparer’s Due Diligence Checklist can be accessed in Keystone Tax Solutions once one of the EIC, the CTC/ACTC, or the AOTC credits are taken on the return. At that point, from the Main Menu of the tax return a new menu item, Preparer Due Diligence will appear and can be selected.
NOTE: This is a guide on entering Form 8867 into the Keystone Tax Solutions program. This is not intended as tax advice.