[Federal Register Volume 63, Number 244 (Monday, December 21, 1998)]
[Rules and Regulations]
[Pages 70339-70341]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33343]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8798]
RIN 1545-AW74
Preparer Due Diligence Requirements for Determining Earned Income
Credit Eligibility
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations relating to the
due diligence requirements for paid preparers of federal income tax
returns or claims for refund involving the earned income credit. The
temporary regulations reflect changes to the law made by the Taxpayer
Relief Act of 1997. The temporary regulations provide guidance to paid
preparers who prepare federal income tax returns or claims for refund
claiming the earned income credit. The text of the temporary
regulations also serves as the text of the proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section of this issue of the Federal Register.
DATES: These regulations are effective December 21, 1998.
FOR FURTHER INFORMATION CONTACT: Marc C. Porter (202) 622-4940 (not a
toll free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collection of information contained in these
regulations has been reviewed and pending receipt and evaluation of
public comments, approved by the Office of Management and Budget under
control number 1545-1570. Responses to this collection of information
are mandatory.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the preamble to the cross-referencing notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Books and records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to the Income Tax Regulations (26
CFR parts 1 and 602) under section 6695(g) relating to the penalty for
failure of a preparer to be diligent in determining a taxpayer's
eligibility for the earned income credit (EIC). Section 6695(g) was
added by section 1085(a)(2) of the Taxpayer Relief Act of 1997, Public
Law 105-34 (11 Stat. 788, 955 (1997)) (the Act), effective for taxable
years beginning after December 31, 1996.
Section 6695(g) imposes a $100 penalty for each failure by an
income tax return preparer to meet the due diligence requirements set
forth in this regulation. The IRS may impose the section 6695(g)
penalty in addition to any other applicable penalty provided by law.
In Notice 97-65 (1997-51 I.R.B. 14 (December 22, 1997)), the IRS
set forth the preparer due diligence requirements for 1997 returns and
claims for refund involving the EIC. To avoid the imposition of the
section 6695(g) penalty for 1997 returns and claims for refund, Notice
97-65 requires preparers to meet four requirements: (1) Complete the
Earned Income Credit Eligibility Checklist attached to Notice 97-65
(Eligibility Checklist), or otherwise record the information necessary
to complete the Eligibility Checklist; (2) complete the Earned Income
Credit Worksheet (Computation Worksheet), as contained in the 1997 Form
1040 instructions, or otherwise record the computation and information
necessary to complete the Computation Worksheet; (3) have no knowledge
that any information used by the preparer in determining eligibility
for, and amount of, the EIC is incorrect; and (4) retain for three
years the Eligibility Checklist and Computation Worksheet (or
alternative records), and a record of how and when the information used
to determine eligibility for, and amount of, the EIC was obtained by
the preparer. This information may be retained either as a paper record
or in magnetic media format consistent with Rev. Proc. 81-46 (1981-2
C.B. 621).
Notice 97-65 also requested comments on preparer due diligence
requirements for tax years after 1997. Two comments were received. The
commentators did not suggest alternative due diligence requirements.
One commentator suggested, however, increased education for the public.
The IRS and Treasury Department adhere to the principle that education
is an integral part of good tax administration. Therefore, as part of
its overall EIC strategy, the IRS has established various educational
tools and outreach programs for taxpayers and preparers. These efforts
are intended to provide the public with the tools necessary to receive
the full amount of the EIC allowed by law.
The second commentator suggested that preparers should be able to
meet the due diligence requirements by using software reviewed and
approved by the IRS. The IRS does not approve commercial software. The
IRS is currently exploring, however, new opportunities for partnership
with outside stakeholders to reduce burden, enhance customer service,
and increase compliance. As part of this effort, the IRS will continue
to review this comment and evaluate options.
Explanation of Provisions
The temporary and proposed regulations impose due diligence
standards on persons who are income tax return preparers with respect
to determining eligibility for, or the amount of, the EIC. Consistent
with existing regulations under section 6695, these temporary
regulations apply a modified definition of income tax return preparer.
Section 7701(a)(36) provides that, in general, the term income tax
return preparer means any person who prepares for compensation, or who
employs one or more persons to prepare for compensation, any return or
claim for refund of tax imposed by subtitle A. The preparation of a
substantial portion of a return or claim for refund is treated as if it
were the preparation of such return or claim for refund. Persons are
considered preparers if they give legal advice concerning a return or
claim for refund or if they prepare another return which affects the
return or claim for refund (Sec. 301.7701-15(a)(2) and (b) and
Sec. 301.7701-15(b)(3), respectively). The
[[Page 70340]]
regulations retain this definition of an income tax return preparer,
except that preparers who merely give advice or prepare another return
that affects the EIC return or claim for refund are not preparers for
purposes of the section 6695(g) penalty. Rather, the due diligence
standards are imposed only on paid preparers who prepare the return
claiming the EIC.
The temporary regulations essentially adopt the four due diligence
requirements in Notice 97-65. Thus, to avoid the penalty under section
6695(g), a preparer must: (1) Complete the Eligibility Checklist (Form
8867, Paid Preparer's Earned Income Credit Checklist, or such other
form as may be prescribed by the IRS), or otherwise record in the
preparer's files the information necessary to complete the Eligibility
Checklist; (2) complete the Computation Worksheet (Earned Income Credit
Worksheet contained in the Form 1040 instructions), or otherwise record
in the preparer's files the computation and information necessary to
complete the Computation Worksheet; (3) have no knowledge, and have no
reason to know, that any information used by the preparer in
determining eligibility for, and amount of, the EIC is incorrect; and
(4) retain for three years the Eligibility Checklist and the
Computation Worksheet (or alternative records), and a record of how and
when the information used to determine eligibility for, and the amount
of, the EIC was obtained by the preparer.
The temporary regulations also provide that the income tax return
preparer may avoid the section 6695(g) penalty with respect to a
particular income tax return or claim for refund if the preparer can
demonstrate to the satisfaction of the IRS that, considering all the
facts and circumstances, the preparer's normal office procedures are
reasonably designed and routinely followed to ensure compliance with
the due diligence requirements of the regulations, and that the
particular failure was isolated and inadvertent.
The temporary regulations will be effective for taxable years
beginning after December 31, 1996. However, the Eligibility Checklist
contained in Notice 97-65 has been expanded in Form 8867. Therefore,
for taxable year 1997, the applicable Eligibility Checklist is the
Eligibility Checklist contained in Notice 97-65. For taxable year 1998,
a preparer may choose as the applicable Eligibility Checklist either
the Eligibility Checklist published in Notice 97-65 modified however,
by replacing, $9,770, $25,760, $29,290, and $2,250 each time these
figures appear on the 1997 Eligibility Checklist with $10,030, $26,473,
$30,095, and $2,300, respectively, or Form 8867. For taxable years
beginning after December 31, 1998, the applicable Eligibility Checklist
will be the Form 8867.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations. Further, it is hereby certified,
pursuant to sections 603(a) and 605(b) of the Regulatory Flexibility
Act, that the collection of information in these regulations will not
have a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that the amount of
time necessary to record and retain the required information will be
nominal for those income tax return preparers that choose to use the
Alternative Eligibility Record and Alternative Computation Record.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, these temporary
regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact.
Drafting Information
The principal author of these regulations is Marc C. Porter, Office
of Assistant Chief Counsel (Income Tax & Accounting). However, other
personnel from the IRS and Treasury Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
adding an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Section 1.6695-2T also issued
under 26 U.S.C. 6695(g). * * *
Par. 2. Section 1.6695-2T is added to read as follows:
Sec. 1.6695-2T Preparer due diligence requirements for determining
earned income credit eligibility (temporary).
(a) Penalty for failure to meet due diligence requirements. A
person who is an income tax return preparer (preparer) of an income tax
return or claim for refund under subtitle A of the Internal Revenue
Code (Code) with respect to determining the eligibility for, or the
amount of, the earned income credit (EIC) under section 32 and who
fails to satisfy the due diligence requirements of paragraph (b) of
this section will be subject to a penalty of $100 for each such
failure. However, no penalty will be imposed under section 6695(g) on a
person who is an income tax return preparer solely by reason of--
(1) Section 301.7701-15(a)(2) and (b) of this chapter, on account
of having given advice on specific issues of law; or
(2) Section 301.7701-15(b)(3) of this chapter, on account of having
prepared the return solely because of having prepared another return
that affects amounts reported on the return.
(b) Due diligence requirements. A preparer must satisfy the
following due diligence requirements:
(1) Completion of eligibility checklist. (i) The preparer must
either--
(A) Complete Form 8867, Paid Preparer's Earned Income Credit
Checklist, or such other form as may be prescribed by the IRS
(Eligibility Checklist); or
(B) Otherwise record in the preparer's paper or electronic files
the information necessary to complete the Eligibility Checklist
(Alternative Eligibility Record). The Alternative Eligibility Record
may consist of one or more documents containing the required
information.
(ii) The preparer's completion of the Eligibility Checklist or
Alternative Eligibility Record must be based on information provided by
the taxpayer to the preparer or otherwise reasonably obtained by the
preparer.
(2) Computation of credit. (i) The preparer must either--
(A) Complete the Earned Income Credit Worksheet in the Form 1040
instructions or such other form as may be prescribed by the IRS
(Computation Worksheet); or
(B) Otherwise record in the preparer's paper or electronic files
the preparer's EIC computation, including the method and information
used to make the computation (Alternative Computation Record). The
Alternative Computation Record may consist of one or more
[[Page 70341]]
documents containing the required information.
(ii) The preparer's completion of the Computation Worksheet or
Alternative Computation Record must be based on information provided by
the taxpayer to the preparer or otherwise reasonably obtained by the
preparer.
(3) Knowledge. The preparer must not know, or have reason to know,
that any information used by the preparer in determining the taxpayer's
eligibility for, or the amount of, the EIC is incorrect. The preparer
may not ignore the implications of information furnished to, or known
by, the preparer, and must make reasonable inquiries if the information
furnished to, or known by, the preparer appears to be incorrect,
inconsistent, or incomplete.
(4) Retention of records. (i) The preparer must retain--
(A) A copy of the completed Eligibility Checklist or Alternative
Eligibility Record;
(B) A copy of the Computation Worksheet or Alternative Computation
Record; and
(C) A record of how and when the information used to complete the
Eligibility Checklist or Alternative Eligibility Record and the
Computation Worksheet or Alternative Computation Record was obtained by
the preparer, including the identity of any person furnishing the
information.
(ii) These items must be retained for three years after the June
30th following the date the return or claim for refund was presented to
the taxpayer for signature, and may be retained on paper or
electronically in the manner prescribed in applicable regulations,
revenue rulings, revenue procedures, or other appropriate guidance.
(c) Exception to penalty. The section 6695(g) penalty will not be
applied with respect to a particular income tax return or claim for
refund if the preparer can demonstrate to the satisfaction of the IRS
that, considering all the facts and circumstances, the preparer's
normal office procedures are reasonably designed and routinely followed
to ensure compliance with the due diligence requirements of paragraph
(b) of this section, and the failure to meet the due diligence
requirements of paragraph (b) of this section with respect to the
particular return or claim for refund was isolated and inadvertent.
(d) Effective date--(1) In general. This section applies to income
tax returns and claims for refund for taxable years beginning after
December 31, 1996. This section expires on December 21, 2001. For the
applicable Eligibility Checklist see paragraph (d)(2) of this section.
(2) Eligibility Checklist--(i) For the 1997 taxable year. For
taxable year 1997, the applicable Eligibility Checklist is the
Eligibility Checklist published in Notice 97-65 (1997-51 I.R.B. 14)
December 22, 1997. (See Sec. 601.601(d)(2)(ii)(b) of this chapter.)
(ii) For the 1998 taxable year. For taxable year 1998 the
applicable Checklist is either--
(A) The Checklist published in Notice 97-65 (1997-51 I.R.B. 14)
December 22, 1997, modified however, by applying the figures $10,030,
$26,473, $30,095, and $2,300 in place of $9,770, $25,760, $29,290, and
$2,250, respectively, each time these figures appear on the 1997
Checklist; or
(B) Form 8867, Paid Preparer's Earned Income Credit Checklist.
(iii) For taxable years after 1998. For taxable years beginning
after December 31, 1998, the applicable Eligibility Checklist is the
Eligibility Checklist contained in Form 8867, Paid Preparer's Earned
Income Credit Checklist, or such other form as may be prescribed by the
IRS.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 4. In Sec. 602.101, paragraph (c) is amended by adding the
following entry in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
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Current OMB
CFR part or section where identified and described control No.
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* * * * *
1.6695-2T.................................................. 1545-1570
* * * * *
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David S. Mader,
Acting Deputy Commissioner of Internal Revenue.
Approved: December 9, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-33343 Filed 12-18-98; 8:45 am]
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