If you claim the Earned Income Credit, Child Tax Credit, Additional Child Tax Credit, American Opportunity Credit, or Head of Household filing status on a client’s return, the IRS requires you to complete Form 8867 and meet specific due diligence requirements. Skipping this step is a $600 penalty per failure per return.
What Due Diligence Means
Due diligence means you made reasonable inquiries to verify that the client actually qualifies for the credit or filing status being claimed. You can’t just take the client’s word for it and move on. You have to ask the right questions, evaluate the answers, and document what you did.
The Four Requirements
Complete Form 8867. This is a checklist form that walks through the eligibility criteria for each covered credit and filing status. You complete it for every return that claims any of the covered benefits.
Complete the applicable worksheets. The Earned Income Credit worksheet, the Child Tax Credit worksheet, or the education credit worksheet, depending on which credits are claimed. These are built into most professional tax software.
Verify knowledge. You must not know, or have reason to know, that the information used to determine eligibility is incorrect. If a client tells you they earned $20,000 but their W-2 shows $45,000, you have a problem. If a client claims Head of Household but their story doesn’t add up, you need to ask follow-up questions.
Retain records. Keep a copy of Form 8867, the worksheets, and any records of the inquiries you made for at least three years from the date the return was filed.
What “Reasonable Inquiries” Looks Like
For Head of Household: Did you ask whether the client was unmarried on December 31? Did you ask who lived in the home and for how long? Did you ask about the cost of maintaining the household?
For the EITC: Did you verify earned income? Did you confirm qualifying children meet the age, relationship, and residency tests?
For the AOTC: Did you confirm the student is in their first four years of post-secondary education? Did you verify they haven’t already claimed the credit for four years?
You don’t need to conduct an investigation. But you do need to ask reasonable questions, and if the answers don’t make sense, you need to dig deeper before claiming the benefit.
The Penalty
$600 per failure per return. That’s per credit and per filing status. A return claiming EITC, CTC, and Head of Household with no due diligence documentation is a $1,800 penalty on a single return. The IRS assesses these regularly.
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