Due Diligence Requirements Will Apply to the Child Tax Credit and American Opportunity Education Credit

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The Protecting Americans from Tax Hikes (PATH) Act of 2015 was passed by Congress and signed by the president on Dec. 18, 2015. Under one of the provisions, Congress decided to expand the preparer due diligence requirements associated with the Earned Income Tax Credit (EITC) to also include the Child Tax Credit and the American Opportunity Education Credit beginning in tax year 2016.

The IRS also plans to make changes to Form 8867, Paid Preparer’s Earned Income Credit Checklist, and the form’s accompanying instructions to include these other two credits. The IRS is also in the process of modifying the due diligence regulations for the Child Tax Credit and the American Opportunity Education Credit.

Under existing tax law related to the EITC, any preparer who fails to comply with the due diligence requirements is required to pay a penalty of $505 for each infraction. The due diligence requirement encompasses the determination of eligibility for the credit and the amount of the credit. Similar due diligence requirements will now apply to the Child Tax Credit and the American Opportunity Education Credit, beginning on 2016 tax returns. The 2015 PATH Act also requires the IRS to conduct a study of the effectiveness of these due diligence requirements.

In general, Form 8867 covers the following:

  • Whether the taxpayer and dependents are in compliance with the EITC rules.
  • The preparer must identify and retain a copy of any document that the taxpayer provided to determine Earned Income Credit (EIC) eligibility.
  • To comply with the EIC knowledge requirement, the preparer must not know, or have reason to know, that any information used to determine the taxpayer’s eligibility for, and the amount of, the EIC is incorrect.

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