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IRS Tightens Tax Credit Regulations

by Mike Godfrey,, Washington

22 December 2011

The United States Internal Revenue Service (IRS) has issued final regulations requiring paid tax return preparers to file a due diligence checklist with any federal return claiming the Earned Income Tax Credit (EITC).

The due diligence requirement, enacted by the US Congress over a decade ago, was designed to reduce errors on returns claiming the EITC, most of which are prepared by tax professionals. The IRS created the Preparer's Earned Income Credit Checklist (Form 8867), to help preparers meet the requirement by obtaining eligibility information from their clients.

Preparers have been required to keep copies of the checklist, or comparable documentation, which is subject to review by the IRS. However, to help ensure compliance with the law, and that eligible taxpayers receive the right credit amount, the new regulations now require preparers, effective from January 1, 2012, to file the checklist with each return claiming the EITC.

The regulations also reflect recent Congressional action to increase the penalty for non-compliance with the due diligence requirement from USD100 to USD500.

The EITC benefits low-and moderate-income workers and working families, and the tax benefit varies by income, family size and filing status. Unlike most deductions and credits, the EITC is refundable - taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit is USD5,751.

Although as many as one-in-five eligible taxpayers fail to claim the EITC, some of those who do claim it either compute it incorrectly or are ineligible. The new requirement is part of an IRS initiative to ensure that the credit is afforded to taxpayers who qualify. This year, over 26m people received nearly USD59bn through the EITC, and tax professionals prepared nearly 66% of these claims.

TAGS: individuals | compliance | tax | tax compliance | law | tax credits | Internal Revenue Service (IRS) | tax authority | professionals | United States | regulation

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