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Tax Cuts and Jobs Act

Final regs cover tax return preparer due diligence penalty under Sec. 6695(g)

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Preparer Due Diligence Penalty under Section 6695(g)

TD 9842Reg § 1.6695-2

IRS has issued final regs on the tax return preparer penalty to reflect the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017)’s expansion of the scope of the tax return preparer due diligence penalty under Code Sec. 6695(g). The final regs apply to the child tax credit (CTC)/additional child tax credit (ACTC), and the American opportunity tax credit (AOTC) as well as to eligibility to file a return or claim for refund as head of household.

Background. Prior to 2016, Code Sec. 6695(g) imposed a penalty on tax return preparers who failed to comply with due diligence requirements set out in regs with respect to determining eligibility for, or the amount of, the earned income credit (EIC).

For tax years beginning after Dec. 31, 2015, the scope of Code Sec. 6695(g) was expanded to apply the penalty to tax return preparers who fail to comply with due diligence requirements with respect to determining eligibility for, or the amount of, the child tax credit (CTC), additional child tax credit (ACTC) and the American opportunity tax credit (AOTC).

On Dec. 5, 2016, final and temporary regs, together with a cross-referencing proposed reg, were issued to reflect these changes (see “Temporary regs update prepare’s due diligence rules to reflect recent laws”).

As part of satisfying the due diligence requirements, tax return preparers are required to complete Form 8867, “Paid Preparer’s Due Diligence Checklist,” and, in most cases, attach it to the relevant return or claim for refund as part of satisfying the Code Sec. 6695(g) due diligence requirements. (Reg § 1.6695-2(b)(1))

The TCJA amended Code Sec. 6695(g) to expand the scope of the penalty to tax return preparers who fail to comply with due diligence requirements with respect to determining eligibility to file as head of household, for tax years beginning after Dec. 31, 2017.

In July 2018, IRS issued proposed regs that amended portions of previously proposed regs to reflect the TCJA provision which provided that the penalty applies to preparer due diligence with respect to eligibility to file a return or claim for refund as head of household (see “Amended return preparer due diligence proposed regs reflect new head of household rule”).

Final regs. IRS has issued final regs that incorporate the TCJA change and withdraw the existing temporary regs. The final regs adopt the proposed regs with minimal changes, but include clarifications Reg § 1.6695-2(b)(3)(i), Example 5, and Reg § 1.6695-2(b)(3)(ii), Examples 7.

In addressing a commenter that noted that a reasonable person would not take unlimited and unending steps as part of the due diligence process but states that the proposed regs do not sufficiently identify a stopping point after which a tax return preparer is no longer required to make additional inquiries, IRS states that guidance as to the stopping point referenced by the commenter is provided at Reg § 1.6695-2(b)(3)(i). The reg states that additional inquiries are required if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete.

Effective date. The final regs apply to tax returns and claims for refund for tax years beginning after Dec. 31, 2015, that are prepared on or after Dec. 5, 2016. However, the rules relating to the determination of a taxpayer’s eligibility to file as head of household under Reg § 1.6695-2(b) apply to tax returns and claims for refund for tax years beginning after Dec. 31, 2017, that are prepared on or after published in the Federal Register. (Reg § 1.6695-2(e))

References: For preparer due diligence requirements in determining eligibility for earned income credit, child tax credit, American opportunity tax credit, and head of household status, see FTC 2d/FIN ¶V-2677.1FTC 2d/FIN ¶S-1106.1United States Tax Reporter ¶66,954.01.

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