Expanded due-diligence requirements for 2012 returns.

• Author: Chambers, Valrie

Tax practitioners are in the midst of a challenging tax season. In addition to the complexity of the late tax law changes, the IRS requirement for practitioners' due diligence has risen to a new level. This item discusses Form 8867, Paid Preparer's Earned Income Credit Checklist, extensive new due-diligence requirements for wage earners, and Schedule C, Profit or Loss From Business. Whether the tax practitioner does no returns, a few returns, or many returns with the earned income tax credit (EITC), he or she needs to be aware of the expanded due-diligence requirements because the IRS may apply similar procedures to other issues.

Expansion of Form 8867

Beginning with the December 2006 revision of Form 8867, the form had four parts to be completed by the tax practitioner and retained for three years in the file (not sent or e-filed to the government):

* Part I: EITC eligibility requirements for all taxpayers.

* Part II: EITC eligibility requirements for taxpayers with a child.

* Part III: EITC eligibility requirements for taxpayers without a qualifying child.

* Part IV: The preparer's due-diligence requirements.

The fourth part consisted of four yes/no, preparer due-diligence questions:

* Line 20: Did you complete Form 8867 based on information provided by the taxpayer or reasonably obtained by you?

* Line 21: Did you complete the EIC worksheet found in the Form 1040, 1040A, or 1040EZ?

* Line 22: Did you comply with the knowledge requirements? (The form explains the "knowledge requirement.")

* Line 23: Did you keep the following records? (Form 8867 or your own form or files; the EIC worksheets or your own worksheets; and a record of how, when, and from whom the information used to prepare the form and worksheets was obtained.)

The form then clarified what happened if the preparer answered "yes" to all four questions or if the preparer answered "no" to the questions. If all answers were "no," the preparer had not complied with all the due-diligence requirements and may have had to pay a $100 penalty for each failure to comply. The form continued to be retained in the preparer's file and not e-filed or mailed with the completed tax return.

Beginning last year (tax year 2011), Form 8867 had to be completed by the preparer and filed with Form 1040, 1040A, or 1040EZ. The form continued to contain the four parts as listed above. The preparer's due-diligence requirement, however, was expanded to include not only records of how, when, and from whom...