[Federal Register Volume 65, Number 201 (Tuesday, October 17, 2000)]
[Rules and Regulations]
[Pages 61268-61270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26521]



[[Page 61268]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8905]
RIN 1545-AW74


Preparer Due Diligence Requirements for Determining Earned Income 
Credit Eligibility

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the due 
diligence requirements under section 6695(g) of the Internal Revenue 
Code for paid preparers of Federal income tax returns or claims for 
refund involving the earned income credit (EIC). These regulations 
reflect changes to the law made by the Taxpayer Relief Act of 1997. The 
regulations provide guidance to paid preparers who prepare Federal 
income tax returns or claims for refund claiming the earned income 
credit.

DATES: Effective Date. These regulations are effective October 17, 
2000.
    Applicability Date. For dates of applicability, see Sec. 1.6695-
2(d) of these regulations.

FOR FURTHER INFORMATION CONTACT: Andrea Tucker, (202) 622-4940 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information in these final regulations has been 
reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
under control number 1545-1570. This information is required by the IRS 
to determine preparer due diligence compliance for purposes of the 
penalty imposed under section 6695(g). 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 assigned by the Office of 
Management and Budget.
    The estimated annual burden per recordkeeper varies depending on 
individual circumstances. The estimated total annual recordkeeping 
burden: 507,136 hours with the estimated average annual burden hours 
per recordkeeper: 5 hours 4 minutes (40 minutes per return or claim for 
refund, 7.6 returns per preparer). The estimated number of 
recordkeepers: 100,000.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to this 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

    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 
regulations prescribed by the Secretary.
    On December 22, 1997, the IRS published Notice 97-65 (1997-2 C.B. 
326), in which 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 penalty under section 6695(g) for 1997 
returns and claims for refund, Notice 97-65 required 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) not know or have reason to know that any 
information used by the preparer in determining eligibility for, and 
the 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 the amount of, the EIC was obtained by 
the preparer. This information may be retained as a paper record, in 
magnetic media format, or in an electronic storage media system, 
consistent with applicable IRS revenue procedures.
    On December 21, 1998, temporary regulations (TD 8798, 1999-1 C.B. 
804) under section 6695(g) were published in the Federal Register (63 
FR 70339). A notice of proposed rulemaking (REG-120168-97, 1999-1 C.B. 
809) cross-referencing the temporary regulations was published in the 
Federal Register (63 FR 70357) on that same date. The text of the 
temporary regulations served as the text of the proposed regulations. 
The requirements set forth in the temporary regulations were 
substantially similar to those in Notice 97-65.
    The notice of proposed rulemaking solicited comments from the 
public. One comment was received, but no public hearing was requested 
or held. After consideration of the comment received, the proposed 
regulations under section 6695(g) are adopted by this Treasury 
decision, and the corresponding temporary regulations are removed.

Summary of Comments

    The commentator expressed concern that requiring the completion of 
an eligibility checklist and a computation worksheet impose additional 
recordkeeping burdens on tax return preparers. The commentator did not 
suggest alternative due diligence requirements.
    The additional recordkeeping required by the regulations is 
necessary to implement congressional intent with respect to section 
6695(g). The legislative history accompanying the Act explains that 
Congress ``believes that more thorough efforts by return preparers are 
important to improving EIC compliance.'' H.R. Rep. No. 148, 105th 
Cong., 1st Sess. 512 (1997) and S. Rep. No. 29, 105th Cong., 1st Sess. 
125 (1997). The additional information gathering and recordkeeping 
required by these regulations are intended to ensure that preparers are 
thorough when determining whether a taxpayer qualifies to claim the EIC 
credit. Further, the regulations allow preparers the flexibility to use 
either the prescribed forms or alternative records containing the same 
information as the prescribed forms to meet the due diligence 
requirements.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure

[[Page 61269]]

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, 
the notice of proposed rulemaking that preceded these regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Andrea Tucker, Office 
of Associate Chief Counsel, Procedure and Administration 
(Administrative Provisions and Judicial Practice Division). 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 
removing the entry for ``Section 1.6695-2T'' and adding an entry in 
numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *. Section 1.6695-2 also issued 
under 26 U.S.C. 6695(g). * * *

    Par. 2. Section 1.6695-2 is added to read as follows:


Sec. 1.6695-2  Preparer due diligence requirements for determining 
earned income credit eligibility.

    (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 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 and such other information as may be 
prescribed by the Internal Revenue Service (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 and such other information 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 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) The items in paragraph (b)(4)(i) of this section 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 (see Sec. 601.601(d)(2) of this chapter).
    (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. This section applies to income tax returns and 
claims for refund due on or after October 17, 2000.


Sec. 1.6695-2T  [Removed]

    Par. 3. Section 1.6695-2T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

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    Par. 5. In Sec. 602.101, paragraph (b) is amended by removing the 
entry for ``1.6695-2T'' and adding the following entry in numerical 
order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

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                                                             Current OMB
     CFR part or section where identified and described      control No.
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                  *        *        *        *        *
1.6695-2...................................................    1545-1570
 
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    Approved: October 6, 2000.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-26521 Filed 10-16-00; 8:45 am]
BILLING CODE 4830-01-P