Penalty for failing to meet EIC due diligence requirements can be assessed against employer or employee.

• Author: Beavers, James A.
• Position: Earned income credit

The Office of Chief Counsel (OCC) advised that after the amendments to the regulations in T.D. 9436 in December 2008, the IRS continues to have the authority to assert the penalty against either the employee-preparer of a return or his or her employer for failing to meet the earned income credit (EIC) due diligence requirements. However, the IRS cannot impose a penalty against both an employee-preparer and the employer based on the same factual situation. In addition, the OCC advised that the signing preparer of a tax return is responsible for retaining the records showing that the preparer met the EIC due diligence requirements.

Employer/Employee Liability

The amendments to the regulations made by T.D. 9436 in December 2008, changed the person who is responsible for meeting the due diligence requirements to "a signing tax return preparer of a tax return or claim for refund." Previously, the person responsible was "an income tax return preparer ... of an income tax return or claim for refund." Thus, in determining whether the IRS could hold both an employer and an employee responsible for a due diligence failure, the OCC considered the meaning of the term "signing preparer."

Under Regs. Sec. 301.7701-15(b)(l), "[a] signing tax return preparer is the individual tax return preparer who has the primary responsibility for the overall substantive accuracy of the preparation of such return or claim for refund." According to the OCC, if the employee meets the signing preparer criteria, he or she is subject to the due diligence requirements. However, due to the nature of the employer/employee relationship, the employer retains the responsibility for the overall accuracy of the return and thus would also meet the signing preparer criteria, even if the employer did not actually sign the return. Consequently, both the employee and the employer could be responsible for the penalty for failing to meet the due diligence requirements.

Although the OCC advised that the IRS could assert the penalty against either the employer or the employee, it further advised that, due to the amendments to the regulations in T.D. 9436, the penalty should only be asserted against a single person within a firm. In its discussion of the penalty under Sec. 6694 (Understatement of a Taxpayer's Liability by Tax Return Preparer), the preamble to T.D. 9436 states that where evidence would support a finding that either a signing preparer or a nonsigning preparer within a firm was...