Conscripting Tax Preparers Part 2: EITC Due Diligence Requirements

Conscripting Tax Preparers Part 2: EITC Due Diligence Requirements

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Last year I wrote a post titled IRS Disbars CPA for Relying on Client’s Income and Expense Numbers about a disturbing trend by the IRS to draft private tax preparers and force them to work as IRS auditors without pay.

Here’s what I said:

Tax preparers are advocates for their taxpayer clients and do not work for the IRS. Even if they could somehow be forced into service by the government, they would not be paid enough to perform pre-audits of their clients’ books and records.

The recent attempts by the IRS to impose greater responsibilities and duties on the part of tax preparers amounts to the conscription of those preparers as IRS auditors and, I believe, is an abuse of power.

If the government is going to make tax preparers be their clients’ auditors, they ought to pay them for it, rather than force them into service by threatening to take away their livelihoods

Well, here is the IRS’s latest foray into the dark, and previously illegal, world of involuntary servitude:

Paid preparers must meet four due diligence requirements on returns with EITC claims or face possible penalties. New expanded regulations clarify these requirements and set a performance standard for the “knowledge” requirement–what a reasonable and well-informed tax return preparer, knowledgeable in the law, would do.

When preparing EITC returns and claims for refund, paid preparers must:

  • Evaluate information received from clients
  • Apply a consistency and reasonableness standard to the information
  • Ask additional questions if the information appears incorrect, inconsistent
    or incomplete
  • Document and retain the record of inquiries made and client

The updated Treasury Regulation §1.6695-2, effective for EITC returns and claims for refund filed after December 31, 2008, includes examples where paid preparers may need to ask additional probing questions.

The four due diligence requirements are:

Requirement Description
1. Completion of Eligibility checklist
  1. Either complete Form 8867 or its equivalent
  2. Complete checklist based on information provided by taxpayer
2. Computation of the Credit
  1. Keep the EIC worksheet or an equivalent that demonstrates how the EIC was computed
3. Knowledge
  1. Not know or have reason to know that any information used in determining the
    taxpayer’s eligibility for, or the amount of, the EIC is incorrect, incomplete
    or inconsistent
  2. Not ignore the implications of information furnished or known
  3. Make reasonable inquiries if a reasonable and well-informed tax return
    preparer, knowledgeable in the law, would conclude the information furnished
    appears to be incorrect, inconsistent or incomplete
  4. Document in your records any additional inquiries made and your client’s
4.  Record Retention
  1. Retain Form 8867 and EIC worksheet or the equivalent
  2. Maintain record of how and when the information used to complete these forms
    was obtained
  3. Verify the identity of the person furnishing the information
  4. Retain records for 3 years after June 30th following date the return
    or claim was presented for signature
About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida


  1. Lee J Wendt EA says:

    The only data that is not verified with some documentation is the children’s data: names, SS numbers and dates of birth. Taxpayer and spouse data are confirmed by W-2 forms, etc. prepared by third parties.

  2. You are soooo right. I have said, and continue to say, that IRS is using tax professionals as their unpaid tax auditors. I also believe that what they have done with tax preparers is unconstitutional since it violates an individual’s personal rights to do whatever that person wants to do free of government interference and that an agency, likc the ACLU, needs to look at this and file litigation and have the issue resolved in the Supreme Court. The IRS is totally out of control

  3. kaysonline says:

    No additional thoughts?

    What to do if you are selected and don’t retain actual records besides taking the client’s word for it??? For Godsake, must we make our client’s bring in school records? Medical records? Marriage license? Divorce letters? Separation docs Birth Certificates? Record & retain everything? Etc…??? I don’t get it…