What is Form 8867 – The Paid Preparer’s Due Diligence Checklist?
Tax season can be a confusing time, especially with all the forms and rules. One form you might hear about is Form 8867, the “Paid Preparer’s Due Diligence Checklist.” This isn’t a form you fill out as a taxpayer. Instead, it’s something your tax preparer uses. So, what exactly is it and why does it matter? Let’s break it down.
The Purpose of Form 8867
Form 8867 is all about due diligence, which basically means “doing your homework.” The IRS wants to make sure that tax preparers are not just taking their client’s word but are actually taking steps to ensure the information used to file a tax return, specifically for certain tax benefits, is accurate. This helps prevent errors, fraud, and incorrect claims that could end up costing taxpayers (and the IRS) time and money down the road.
It’s not enough for a paid preparer to simply input the numbers a client provides. They must take reasonable steps to confirm certain information before claiming specific tax credits or deductions. Form 8867 ensures they’ve done just that.
Why Does Due Diligence Matter?
You might be wondering why this level of checking is necessary. Well, it’s all about protecting everyone.
- Taxpayers: It prevents you from claiming a credit or deduction that you’re not eligible for, which could result in penalties, interest, and owing more taxes.
- IRS: It helps the IRS ensure that tax laws are applied correctly, and the correct amount of tax is collected, and it prevents fraudulent claims.
- Tax Preparers: It keeps preparers compliant with regulations and avoids potential penalties.
Who Uses Form 8867?
The “paid preparer” is the key player here. This is anyone who prepares tax returns for compensation, not for free. These preparers, whether they are a CPA, enrolled agent, or a freelance tax preparer, are the ones that must complete this form. If you prepare your taxes yourself or have a friend help without compensation, then this form doesn’t apply to you. This form also only applies when claiming certain tax credits or deductions.
Which Credits and Deductions Trigger Form 8867?
Form 8867 is used when certain credits or deductions are claimed. These include the following:
- Earned Income Credit (EIC): A tax credit for low- to moderate-income workers and families.
- Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC): Credits for qualifying children.
- American Opportunity Tax Credit (AOTC): A credit for qualified education expenses for students in their first four years of college.
- Head of Household Filing Status: This is a specific filing status for unmarried individuals who pay more than half the costs of keeping up a home for a qualifying child.
If a tax return includes one or more of these, Form 8867 becomes a must-do for the preparer.
How Does the Due Diligence Checklist Work?
The checklist on Form 8867 is quite detailed. The tax preparer must go through each section carefully. The checklist requires the preparer to ask specific questions and document information related to the credit or deduction being claimed. Here’s a general idea of what’s included:
- Taxpayer Interviews: The preparer must interview the taxpayer and make specific inquiries related to eligibility for the tax credits or deductions.
- Documentation: The preparer needs to keep detailed records of the interview, documents reviewed, and calculations made.
- Reasonable Inquiries: The preparer must make reasonable inquiries if any information is inconsistent or incomplete.
- Verification: The preparer must verify things like the qualifying child’s relationship to the taxpayer, the taxpayer’s income, and whether the child meets the residence test for EIC or CTC purposes.
- Head of Household: For those claiming Head of Household, the tax preparer must ask specific questions about whether the taxpayer is unmarried, paid more than half of the cost of keeping up the home, and whether they have a qualifying child.
It’s all about making sure the tax return is accurate and supported by sufficient information.
Real-World Scenarios
Let’s look at a couple of quick examples to see how this applies in real life:
- Example 1 – Earned Income Credit (EIC): A tax preparer is helping a client who is a single parent. Before claiming the EIC, they must ask detailed questions about their child’s residence, how long the child lived with them, and confirm the parent and child’s social security numbers. The preparer must document all of the information they gathered.
- Example 2 – Head of Household Status: A preparer must verify if their client is unmarried, paid over half the costs of maintaining the home, and if they have a qualifying child that they’re living with. They can’t simply mark “Head of Household” and move on, without documenting this.
What Happens if a Preparer Doesn’t Comply?
Failing to comply with the due diligence requirements can be costly for the preparer. The IRS can impose penalties for each tax return where due diligence isn’t followed. These penalties can really add up and make compliance crucial. It can also lead to issues with the IRS for the taxpayer and even for a refund to be delayed or taken back.
Tips for Taxpayers
While you don’t fill out Form 8867, there are a few things you can do to ensure a smooth tax preparation process:
- Choose a Reputable Preparer: Select a tax professional who is knowledgeable, ethical, and asks lots of questions. Look for certifications like an Enrolled Agent or CPA.
- Be Prepared: Gather all necessary documents such as social security cards, W-2s, 1099s, bank statements, childcare expenses, and records related to educational expenses.
- Answer Honestly: Answer your tax preparer’s questions honestly and to the best of your ability. Do not attempt to hide information.
- Review Carefully: Before signing your tax return, review it carefully and make sure that all the information is accurate.
Common Mistakes and Misconceptions
It’s easy to misunderstand the details of tax law. Here are a couple of common mistakes to look out for:
- Thinking it’s your form: Taxpayers don’t complete this form. It’s for paid preparers.
- Ignoring the questions: Taxpayers need to answer all questions from a preparer honestly and not assume that they know everything already.
- Assuming due diligence is optional: It’s not optional for paid preparers. It’s a requirement set by the IRS.
- Misunderstanding the credits: Many taxpayers may misunderstand the eligibility requirements of certain credits such as EIC and ACTC, and may think that they qualify when they don’t.
In Conclusion
Form 8867, the Paid Preparer’s Due Diligence Checklist, is a critical part of the tax system. It helps ensure that tax returns are accurate and compliant, protecting both taxpayers and the IRS. While it’s a form for paid preparers, it is beneficial for you to understand this process. By knowing how this form works, you can have better conversations with your tax preparer and be more prepared for the tax filing process. Remember to choose a tax preparer carefully, provide them with all necessary information, and review your tax return before it’s filed. This will help make tax season much less stressful.