Updates and guidance on key practitioner responsibilities.

• Author: Ridgeway, Heidi

Practice & Procedures

New due-diligence standards for head-of-household filing status

Tax return preparers are subject to a variety of due-diligence standards. Under Section 10.34(d) of Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), a practitioner may generally rely in good faith without verification upon information furnished by the client, but may not ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent, or incomplete. A similar requirement is found in AICPA Statement on Standards for Tax Services (SSTS) No. 3, Certain Procedural Aspects of Preparing Returns.

Over the years, Congress became increasingly concerned with taxpayers' taking certain credits for which they were not eligible. The Taxpayer Relief Act of 1997, P.L. 105-34, enacted a penalty under Sec. 6695(g) on paid tax return preparers who fail to comply with due-diligence requirements imposed under Treasury regulations to determine eligibility for, or the amount of, an earned income tax credit (EITC). The Protecting Americans From Tax Hikes Act of 2015, Division Q of P.L. 114-113, expanded the Sec. 6695 due-diligence requirements to preparers of returns that claim the child tax credit (CTC), the additional child tax credit, or the American opportunity tax credit. Most recently, the law known as the Tax Cuts and Jobs Act of 2017, P.L. 115-97, expanded the penalty's application to preparers of returns that claim the credit for other dependents or head-of-household filing status. The penalty for each such failure is $500, indexed for inflation ($520 for returns or claims for refund filed in 2019).

Sec. 6695 due-diligence standards

Regs. Sec. 1.6695-2 provides the due-diligence requirements that tax return preparers must follow to avoid the penalty and contains several examples reflecting these requirements. The primary requirement is the completion of Form 8867, Paid Preparer's Due Diligence Checklist, based on information provided by the taxpayer or otherwise reasonably obtained or known by the tax return preparer. The completed Form 8867 must be included with the tax return or claim for refund and contains general due-diligence questions that must be answered for any of the credits listed as well as head-of-household filing status. One question asks specifically, for returns claiming head-of-household filing status, whether the preparer determined the taxpayer was unmarried or considered unmarried on the last...