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Thursday, December 13, 2018

TCJA Expanded Preparer Due Diligence Beyond What Congress and IRS Highlight

The Tax Cuts and Jobs Act enacted December 22, 2017, included over 100 tax changes. In the discussion of tax reform, there was a possibility that the head-of-household filing status would be repealed for simplification purposes. But, it was kept. To try to reduce the errors in claiming this status, Congress expanded the Section 6695(g) preparer penalty to include application of the penalty to a paid preparer who does not exercise the appropriate due diligence in preparing a return where the client claims that status. The penalty is $530 per failure.

The Section 6695(g) penalty has gradually expanded since it was first enacted in 1997 to reduce errors in claiming and calculating the Earned Income Tax Credit by paid preparers. In 2015, Congress expanded the penalty to also possibly apply to a preparer who prepares a return where the client claims the Child Tax Credit (CTC) or American Opportunity Tax Credit (AOTC).

Congress and IRS have highlighted that the TCJA expanded the penalty to cover returns where the client claims head-of-household filing status. See for example, this November 7 news release (IR-2018-216). Well, the TCJA actually made this penalty potentially apply even more broadly! The TCJA temporarily repealed the personal and dependency exemptions. The dependency exemption was partly replaced with a $500 per dependent credit. Generally, this credit is available for your children over age 16 and under 19 (under age 24 is a full-time college student). It is also available to a qualifying relative. If a child is under age 17, the parent most likely gets a $2,000 credit for that child instead of $500.

The $500 credit is new and Congress put it in IRC Section 24 where the CTC is located. The Section 6695(g) penalty applies to "the credit allowable by section 24." So, the $500 dependent credit requires paid preparers to do extra due diligence to be sure the client is entitled to any such credit claimed. This basically means asking appropriate questions and documenting the questions and answers and maintaining this information and any documents received for at least three years after filing the return. Form 8867 must also be attached to the return.


What do you think?

Additional resources for Form 8867 and the Section 6695(g) preparer penalty:

  • Section 6695
  • Final regulations released in November 2018 (TD 9842 (11/7/18)
  • Draft instructions for Form 8867
  • Information from the California Franchise Tax Board on head-of-household status (California requires additional information on a return claiming this status due to potential for mistake)
  • Due diligence for the EITC, CTC and AOTC (IRS Pub 4687) (let's see if this gets updated to address all items under Section 6695(g))
  • AOTC - Pub 970 includes some helpful flowchart a preparer might want to have a client use to determine if they might be eligible for the AOTC

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