Dealing with the Internal Revenue Service for Preparers and Taxpayers

The Tax Cuts and Jobs Act of 2017 (Public Law 115-97) modified the child tax credit (CTC) to provide a nonrefundable credit for qualifying dependents other than children (ODC) and amended Section 6695(g) to add due diligence requirements to cover eligibility to file as Head of Household (HOH) starting with tax year 2018.

Recent guidance by the IRS (Issue Number: 2020-07) for 2019 requires paid tax preparers that complete six or more 2019 and to complete and attach a Form 8867, Paid Preparer’s Due Diligence Checklist with the prepared return when filed for 2019. This is an attempt by IRS to prevent misunderstanding, fraud, and abuse by preparers and taxpayers who claim the five areas below:

  • Head of Household filing status,
    • Earned Income Tax Credit,
    • Child Tax Credit/Additional Child Tax Credit,
    • American Opportunity Tax Credit, and
    • Credit for Other Dependents

These have been areas of misunderstanding, fraud, and abuse for decades.

“The IRS has recently sent letters to tax preparers who completed six or more 2019 paper returns claiming refundable tax credits without attaching Form 8867 – Paid Preparer’s Due Diligence Checklist.”

Therefore, preparers are required to complete the Form 8867 and will feel more of a burden to ask questions and receive answers from clients claiming any of the five areas.

To comply with all due diligence requirements for claiming the applicable credit(s) and/or Head of Household (HOH) filing status on the return of the taxpayer, the preparer must certify that he/she:

  1. Interviews the taxpayer, asks adequate questions, contemporaneously document the taxpayer’s responses on the return or in your notes, review information to determine if the taxpayer is eligible to claim the credit(s) and/or filing status and to compute the amount(s) of the credit(s);
  2. Complete this Form 8867 truthfully and accurately and complete the actions described in this checklist for any applicable credit(s) claimed and HOH filing status if claimed;
  3. Submit Form 8867 as required; and
  4. Keep all five of the following records for three years from the latest of the dates specified in the Form 8867 instructions under Document Retention
    1. A copy of the Form 8867.
    2. The applicable worksheet(s) or your own worksheet(s) for any credit(s) claimed.
    3. Copies of any documents provided by the taxpayer on which the preparer relied to determine the taxpayer’s eligibility for the credit(s) and/or HOH filing status and to compute the amount(s) of the credit(s).
    4. Keep a record (paper or electronic format of the interview) of how, when, and from whom the information used to prepare this form and the applicable worksheet(s) was obtained in the event IRS asks for them.
    5. Keep a record of any additional information relied upon, including questions asked and the taxpayer’s responses, to determine the taxpayer’s eligibility for the credit(s) and/or HOH filing status and to compute the amount(s) of the credit(s).

Also, the preparer now certifies that all the answers on the Form 8867 are to the best of their knowledge, true, correct, and completed (Yes or No). Failure to complete and submit the Form 8867 may result in a penalty of $530 per area of failure, with a maximum penalty of $2,120 per return. Form 8867 is required to be filed with the individual’s return and becomes part of the return, which makes it filed under penalty of perjury.

Note that these requirements could be aggravating to clients who do not want to answer questions about the credits and HOH they have claimed in the past. This establishes a dilemma for the return preparer. There is no other way but to be truthful with the client. The IRS established the rule, and now you have to enforce it. See “Handling the Most common Due Diligence Situations” and Publication 4687. In completing Form 8867 page 2, line 15 be truthful, do not get in trouble for a return preparation fee.

If you or your client want to avoid the potential perils of claiming credits or Head of Household status without completing the Form 8867, think twice and if necessary consider contacting a licensed private investigator / forensic accountant by contacting Chief Investigator Edmond Martin of Sage Investigations, LLC at 512-659-3189, or email Let our 26 years as an IRS Special Agent and 18 years as a private investigator and forensic accountant benefit you and your clients. Click to read about our team and their CVs.