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Proposed Regulations Address TCJA's Expansion of Return Preparer Due Diligence Penalty to Head of Household Determination

(Parker Tax Publishing July 2018)

The IRS issued proposed regulations on the tax return preparer due diligence requirements of Code Sec. 6695(g). The proposed regulations reflect a change to the due diligence penalty enacted by the Tax Cuts and Jobs Act of 2017, which amended Code Sec. 6695(g) to provide that, in addition to child tax credit, additional child tax credit, and the American opportunity tax credit, the due diligence penalty also applies to a return preparer's determination of a taxpayer's eligibility to file a return or claim a refund as head of household. REG-103474-18 (7/18/18).


As originally enacted, Code Sec. 6695(g) imposed a penalty on tax return preparers who fail to comply with due diligence requirements set forth in Reg. Sec. 1.6695-2(b) for determining a taxpayer's eligibility for the earned income credit (EIC).

In 2015, Congress amended Code Sec. 6695(g) to apply the penalty to return preparers' failure to meet their due diligence obligations in determining eligibility for, or the amount of, the child tax credit (CTC), the additional child tax credit (ACTC) and the American opportunity tax credit (AOTC). The IRS issued final and temporary regulations (T.D. 9799) with cross-referencing proposed regulations (REG-102952-16) in 2016 to reflect these changes (proposed 2016 regulations).

The Tax Cuts and Jobs Act of 2017 (TCJA) further amended Code Sec. 6695(g) to apply the penalty to return preparers who fail use due diligence in determining a taxpayer's eligibility to file as the head of household under Code Sec. 2(b).

Proposed Regulations

The IRS has issued proposed regulations that amend the 2016 proposed regulations to reflect the TCJA's expansion of the return preparer due diligence rules to apply to head of household determinations. This change is reflected by adding a reference to head of household status where Proposed Reg. Sec. 1.6695-2 refers to determining eligibility for, or the amount of, the EIC, the CTC/ACTC, and the AOTC.

The proposed regulations also revise an example (Example 5) to demonstrate how the head of household due diligence requirements are intertwined with the rules for determining a taxpayer's eligibility for the CTC.

The proposed regulations add a new example (Example 3) to illustrate how the penalty applies if a return preparer fails to meet the due diligence requirements for determining head of household status in addition to one of the applicable credits. This new example reflects that under Code Sec. 6695(g), a separate penalty applies to each failure to comply with the due diligence requirements, and thus a single return or refund claim may result in more than one penalty.

Observation: The penalty amount for returns or claims for refund filed in 2019 is $520 per failure to meet the due diligence requirements (Rev. Proc. 2018-18).

The proposed regulations generally apply to returns and refund claims for 2016 and later that are prepared on or after the date the regulations are published as final regulations. However, the rules relating to the determination of a taxpayer's eligibility to file as head of household apply to returns and refund claims for 2018 and later that are prepared on or after the date the final regulations are published.

Form 8867

Tax return preparers are generally required to complete a Form 8867, Paid Preparer's Due Diligence Checklist, and attach it to the return or refund claim as part of satisfying their due diligence requirements. Form 8867 is a single checklist to be used for all applicable credits. According to the IRS, it anticipates that a revised Form 8867 which includes the head of household filing status will be available in time for the 2019 filing season.

For a discussion of the penalty for failing to meet the tax return preparer due diligence requirements, see Parker Tax ¶276,535.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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