[Federal Register Volume 83, Number 216 (Wednesday, November 7, 2018)]
[Rules and Regulations]
[Pages 55632-55636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24411]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9842]
RIN 1545-BO63


Tax Return Preparer Due Diligence Penalty Under Section 6695(g)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation and removal of temporary regulation.

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SUMMARY: This document contains final regulations relating to the tax 
return preparer penalty. The final regulations are necessary to 
implement recent law changes that expand the scope of the tax return 
preparer due diligence penalty so that it applies to the child tax 
credit (CTC)/additional child tax credit (ACTC), and the American 
opportunity tax credit (AOTC) as well as to eligibility to file a 
return or claim for refund as head of household. The regulations affect 
tax return preparers.

DATES: 
    Effective date: These regulations are effective November 7, 2018.
    Applicability date: For the applicability date, see Sec.  1.6695-
2(e).

FOR FURTHER INFORMATION CONTACT: Marshall French, 202-317-6845 (not a 
toll-free number).

Paperwork Reduction Act

    The collection of information in current Sec.  1.6695-2 was 
previously reviewed and approved under control number 1545-1570. 
Control number 1545-1570 was discontinued in 2014, as the burden for 
the collection of information contained in Sec.  1.6695-2 is reflected 
in the burden for Form 8867, ``Paid Preparer's Due Diligence 
Checklist,'' under control number 1545-1629.

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 6695(g) of the Internal Revenue Code (Code) 
regarding the tax return preparer due diligence requirements.
    Prior to 2016, section 6695(g) imposed a penalty on tax return 
preparers who failed to comply with due diligence requirements set 
forth in regulations prescribed by the Secretary with respect

[[Page 55633]]

to determining eligibility for, or the amount of, the earned income 
credit (EIC). For tax years beginning after December 31, 2015, the 
scope of section 6695(g) was expanded to apply the penalty to tax 
return preparers who fail to comply with due diligence requirements 
with respect to determining eligibility for, or the amount of, the 
child tax credit (CTC)/additional child tax credit (ACTC) and the 
American opportunity tax credit (AOTC). See section 207 of the 
Protecting Americans from Tax Hikes Act of 2015, Div. Q of Public Law 
114-113 (129 Stat. 2242, 3082) (PATH Act). On December 5, 2016, final 
and temporary regulations (TD 9799, 81 FR 87444) with cross-referencing 
proposed regulations (REG-102952-16, 81 FR 87502) (2016 proposed 
regulations) were published in the Federal Register to reflect these 
changes. No public hearing was held or requested. One comment 
responding to the notice of proposed rulemaking was received.
    Effective for tax years beginning after December 31, 2017, section 
6695(g) was amended to expand the scope of the penalty to tax return 
preparers who fail to comply with due diligence requirements set by the 
Secretary with respect to determining eligibility to file as head of 
household (as defined in section 2(b)). See section 11001(b) of ``An 
Act to provide for reconciliation pursuant to titles II and V of the 
concurrent resolution on the budget for fiscal year 2018,'' Public Law 
115-97 (131 Stat. 2054, 2058 (2017)). A notice of proposed rulemaking 
(REG-103474-18, 83 FR 33875) (2018 proposed regulations) was published 
in the Federal Register on July 18, 2018 to withdraw paragraphs (a), 
(b)(3), and (e) of Sec.  1.6695-2 of the 2016 proposed regulations and 
to propose in their place new paragraphs (a), (b)(3), and (e) of Sec.  
1.6695-2. The amended paragraphs updated the 2016 proposed regulations 
to reflect the most recent change to section 6695(g). No public hearing 
was held or requested. Comments responding to the notice of proposed 
rulemaking were received. After consideration of all the comments, 
paragraphs (b)(1)(i) introductory text, (b)(1)(ii), (b)(2), 
(b)(4)(i)(B), (b)(4)(i)(C), and (c)(3) of the 2016 proposed regulations 
and the entirety of the 2018 proposed regulations are adopted by this 
Treasury decision without substantive changes. Minor grammatical 
revisions were made to the examples provided in paragraph (b)(3)(ii) of 
Sec.  1.6695-2 of the 2018 proposed regulations and example 5 was 
revised for clarity. A new example 6 was added to paragraph (b)(3)(ii) 
and the previous examples 6 and 7 from the 2018 proposed regulations 
were renumbered as 7 and 8 respectively. A detailed explanation of 
these regulations can be found in the preambles to the 2016 temporary 
regulation and the 2018 proposed rules. 81 FR 87446; 83 FR 33876.

Summary of Comments

    Paragraph (a) of Sec.  1.6695-2 of the 2016 proposed regulations 
provides guidance on the operation of the penalty for failure to meet 
due diligence requirements with respect to returns claiming the EIC, 
the CTC/ACTC, the AOTC, or any combination of those credits. A 
commenter to the 2016 proposed regulations recommended that the rule 
include language stating that the phrase ``tax return preparer'' is 
defined to include business entities and persons without an identifying 
number. The commenter suggested that including this definition in the 
rule would decrease the likelihood that tax return preparers without an 
identifying number would be able to escape enforcement of section 
6695(g) of the Code. Paragraph (a) defines ``tax return preparer'' by 
cross-reference to section 7701(a)(36) of the Code. The definition of 
tax return preparer provided in section 7701(a)(36) of the Code states: 
``The term `tax return preparer' means any person who prepares for 
compensation, or who employs one or more persons to prepare for 
compensation, any return of tax imposed by this title or any claim for 
refund of tax imposed by this title. For purposes of the preceding 
sentence, the preparation of a substantial portion of a return or claim 
for refund shall be treated as if it were the preparation of such 
return or claim for refund.'' In addition, the definition of ``person'' 
provided in section 7701(a)(1) of the Code states: ``The term `person' 
shall be construed to mean and include an individual, a trust, estate, 
partnership, association, company or corporation.'' Thus the definition 
of tax return preparer already includes business entities in addition 
to individuals. Further, while individual paid tax return preparers who 
prepare, or assist in preparation of, all or substantially all of a tax 
return or claim for refund are required by Treas. Reg. Sec.  1.6109-2 
to obtain an identifying number, the definition of ``tax return 
preparer'' in section 7701(a)(36) does not include a requirement that 
the person have obtained an identifying number. Therefore, penalties 
under section 6695(g) of the Code apply to any person who falls within 
the definition provided in section 7701(a)(36) of the Code, without 
regard for whether they have an identifying number. Because the 
definition already includes paid tax return preparers who do not have 
an identifying number, it is not necessary to adopt this comment.
    One commenter suggested that clarity would be increased if the 
knowledge requirement of paragraph (b)(3)(i) of the 2018 proposed 
regulations were rephrased in positive terms, rather than in negative 
terms. Paragraph (b)(3)(i) as proposed requires tax return preparers to 
not know, or have reason to know, that the information they use to 
prepare the tax returns or claims for refund is incorrect. Paragraph 
(b)(3)(i) also states that tax return preparers cannot ignore the 
implications of information furnished to or known by them and must make 
further inquiries if it is reasonable to do so. The IRS and the 
Treasury Department considered this issue and decided not to modify the 
language in paragraph (b)(3)(i). This language mirrors the pre-existing 
language in Sec.  10.34 of Circular 230. Departing from the language in 
Circular 230 may cause confusion among tax return preparers and 
decrease overall clarity.
    One commenter requested that the final regulations clarify the 
circumstances under which a tax return preparer can meet the knowledge 
requirement of paragraph (b)(3) of the 2018 proposed regulations by 
relying upon pre-existing knowledge. The commenter noted that Examples 
2 and 4 of paragraph (b)(3)(ii) illustrate that a return preparer with 
pre-existing knowledge of the facts surrounding a taxpayer's return or 
claim for refund can meet the knowledge requirement when the pre-
existing knowledge was acquired in the context of the tax return 
preparer's tax return preparation practice. The commenter requested 
guidance as to whether tax return preparers' use of pre-existing 
knowledge is limited to these circumstances. A new Example 6 has been 
added to paragraph (b)(3)(ii) and Examples 6 and 7 from the 2018 
proposed regulations have been renumbered as Examples 7 and 8, 
respectively. The new Example 6 clarifies that a tax return preparer 
who possesses pre-existing knowledge that was acquired outside the 
context of the preparer's tax return preparation practice cannot meet 
the knowledge requirement of paragraph (b)(3)(ii) by relying on that 
pre-existing knowledge. The tax return preparer must make reasonable 
inquiries to determine the applicable facts, and the inquiries and 
responses to those inquiries must be

[[Page 55634]]

contemporaneously documented in the tax return preparer's files.
    A commenter recommended that paragraph (b)(3)(i) of the 2018 
proposed regulations be modified to remove the requirement that tax 
return preparers contemporaneously document any inquiries made and 
responses to those inquiries. The commenter stated that some tax return 
preparers may have made contemporaneous inquiries but failed to 
document them, and suggested that other forms of evidence, such as 
testimony, should be allowed to prove that the tax return preparer 
asked the questions. The commenter also suggested that tax return 
preparers should be allowed to illustrate facts through non-
contemporaneous documentation as a defense to the penalty. The IRS and 
the Treasury Department considered this issue and decided to not make 
the suggested modifications to paragraph (b)(3)(i) because 
contemporaneous documentation is important for improving compliance and 
reducing the error rate in tax returns and claims for refund prepared 
by tax return preparers.
    One commenter stated that example 5 in paragraph (b)(3)(ii) of the 
2018 proposed regulations requires a tax return preparer to engage in 
inquiries beyond those required by the knowledge requirement in 
paragraph (b)(3)(i). In example 5, a tax return preparer is informed 
that the taxpayer has never been married and that the taxpayer's niece 
and nephew lived with the taxpayer for part of the year. The tax return 
preparer believes that the taxpayer may be eligible to file as head of 
household and that the taxpayer may be able to claim the children as 
qualifying children for purposes of the EIC and CTC. Example 5 in the 
2018 proposed regulations states that the tax return preparer must ask 
additional questions to meet the knowledge requirement in paragraph 
(b)(3)(i). The commenter stated that the tax return preparer should not 
be required to engage in additional inquiries because none of the 
information provided to the tax return preparer appears to be incorrect 
or inconsistent. This comment overlooks the additional requirement of 
(b)(3)(i) that tax return preparers engage in additional inquiries 
where the information furnished to them is incomplete. The information 
in Example 5 is incomplete because the preparer does not know enough 
about the children's residency or the source of their support. Example 
5 has been revised to clarify that the reason the tax return preparer 
must engage in additional inquiries is because the information 
furnished to the tax return preparer is incomplete.
    A commenter requested additional guidance concerning the extent to 
which tax return preparers are required by paragraph (b)(3)(i) of the 
2018 proposed regulations to engage in additional inquiries. The 
commenter notes that a reasonable person would not take unlimited and 
unending steps as part of the due diligence process but states that the 
regulations do not sufficiently identify a stopping point after which a 
tax return preparer is no longer required to make additional inquiries. 
Guidance as to the stopping point referenced by the commenter is 
provided in the regulation at paragraph (b)(3)(i), which states that 
additional inquiries are required if a reasonable and well-informed tax 
return preparer knowledgeable in the law would conclude that the 
information furnished to the tax return preparer appears to be 
incorrect, inconsistent, or incomplete.
    A commenter suggested that the requirement in paragraph (b)(1) of 
the 2016 proposed regulations that tax return preparers complete and 
attach Form 8867 be eliminated. The IRS and the Treasury Department 
decline to adopt this suggestion. The completion and filing of Form 
8867 by tax return preparers is an essential part of the section 
6695(g) due diligence enforcement process. The commenter also stated 
that some tax return preparers are uncertain as to whether completing 
Form 8867 is sufficient to avoid due diligence penalties under section 
6695(g). Filing a completed Form 8867 is one of the requirements 
established by the final regulations, but there are additional 
requirements. Paragraph (b)(2) requires tax return preparers who 
prepare returns or claims for refund claiming one or more of EIC, CTC/
ACTC, and AOTC to either complete the applicable worksheet(s) 
prescribed by the Secretary or record in one or more documents the tax 
return preparer's method and information used to make the computations 
for the credits. Paragraph (b)(3) requires tax return preparers to meet 
knowledge requirements concerning the basis for the benefits claimed on 
returns or claims for refund and also to contemporaneously document 
inquiries and responses related to meeting these knowledge 
requirements. Paragraph (b)(4) sets retention requirements for 
documents used by the tax return preparer in preparing the return or 
claim for refund. A tax return preparer who completes Form 8867 but 
fails to comply with one or more of these additional requirements has 
not satisfied the due diligence requirements of 6695(g).

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these regulations will not have a significant 
economic impact on a substantial number of small entities. Although the 
regulations will have an economic impact on a substantial number of 
small entities, this impact will not be significant.
    The current final and temporary regulations under section 6695(g) 
already require tax return preparers to complete Form 8867 when a 
return or claim for refund includes a claim of the EIC, the CTC/ACTC, 
the AOTC, or any combination of those credits. Tax return preparers 
also must currently maintain records of the checklists and 
computations, as well as a record of how and when the information used 
to compute the credits was obtained by the tax return preparer. The 
information needed to document a taxpayer's eligibility to file as head 
of household is information the preparer must gather to file the 
return. Even if certain preparers are required to maintain the 
checklists and complete Form 8867 for the first time, the IRS estimates 
that the total time required should be minimal for these tax return 
preparers. Further, the IRS does not expect that the requirements in 
the final rule would necessitate the purchase of additional software or 
equipment to meet the additional information retention requirements.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small businesses. No comments were received from the 
Small Business Administration.

Drafting Information

    The principal author of these regulations is Marshall French of the 
Office of the Associate Chief Counsel (Procedure and Administration).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

[[Page 55635]]

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section 1.6695-2 is amended by revising the section heading and 
paragraphs (a), (b)(1)(i) introductory text, (b)(1)(ii), (b)(2) and 
(3), (b)(4)(i)(B) and (C), (c)(3), and (e) to read as follows:


Sec.  1.6695-2   Tax return preparer due diligence requirements for 
certain tax returns and claims.

    (a) Penalty for failure to meet due diligence requirements--(1) In 
general. A person who is a tax return preparer (as defined in section 
7701(a)(36)) of a tax return or claim for refund under the Internal 
Revenue Code who determines the taxpayer's eligibility to file as head 
of household under section 2(b), or who determines the taxpayer's 
eligibility for, or the amount of, the child tax credit (CTC)/
additional child tax credit (ACTC) under section 24, the American 
opportunity tax credit (AOTC) under section 25A(i), or 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 as prescribed in section 6695(g) (indexed for inflation 
under section 6695(h)) for each failure. A separate penalty applies to 
a tax return preparer with respect to the head of household filing 
status determination and to each applicable credit claimed on a return 
or claim for refund for which the due diligence requirements of this 
section are not satisfied and for which the exception to penalty 
provided by paragraph (d) of this section does not apply.
    (2) Examples. The provisions of paragraph (a)(1) of this section 
are illustrated by the following examples:

    (i) Example 1.  Preparer A prepares a federal income tax return 
for a taxpayer claiming the CTC and the AOTC. Preparer A did not 
meet the due diligence requirements under this section with respect 
to the CTC or the AOTC claimed on the taxpayer's return. Unless the 
exception to penalty provided by paragraph (d) of this section 
applies, Preparer A is subject to two penalties under section 
6695(g): One for failure to meet the due diligence requirements for 
the CTC and a second penalty for failure to meet the due diligence 
requirements for the AOTC.
    (ii) Example 2.  Preparer B prepares a federal income tax return 
for a taxpayer claiming the CTC and the AOTC. Preparer B did not 
meet the due diligence requirements under this section with respect 
to the CTC claimed on the taxpayer's return, but Preparer B did meet 
the due diligence requirements under this section with respect to 
the AOTC claimed on the taxpayer's return. Unless the exception to 
penalty provided by paragraph (d) of this section applies, Preparer 
B is subject to one penalty under section 6695(g) for the failure to 
meet the due diligence requirements for the CTC. Preparer B is not 
subject to a penalty under section 6695(g) for failure to meet the 
due diligence requirements for the AOTC.
    (iii) Example 3.  Preparer C prepares a federal income tax 
return for a taxpayer using the head of household filing status and 
claiming the CTC and the AOTC. Preparer C did not meet the due 
diligence requirements under this section with respect to the head 
of household filing status and the CTC claimed on the taxpayer's 
return. Preparer C did meet the due diligence requirements under 
this section with respect to the AOTC claimed on the taxpayer's 
return. Unless the exception to penalty provided by paragraph (d) of 
this section applies, Preparer C is subject to two penalties under 
section 6695(g) for the failure to meet the due diligence 
requirements: One for the head of household filing status and one 
for the CTC. Preparer C is not subject to a penalty under section 
6695(g) for failure to meet the due diligence requirements for the 
AOTC.

    (b) * * *
    (1) * * *
    (i) The tax return preparer must complete Form 8867, ``Paid 
Preparer's Due Diligence Checklist,'' or complete such other form and 
provide such other information as may be prescribed by the Internal 
Revenue Service (IRS), and--
* * * * *
    (ii) The tax return preparer's completion of Form 8867 must be 
based on information provided by the taxpayer to the tax return 
preparer or otherwise reasonably obtained or known by the tax return 
preparer.
    (2) Computation of credit or credits. (i) When computing the amount 
of a credit or credits described in paragraph (a) of this section to be 
claimed on a return or claim for refund, the tax return preparer must 
either--
    (A) Complete the worksheet in the Form 1040, 1040A, 1040EZ, and/or 
Form 8863 instructions or such other form including such other 
information as may be prescribed by the IRS applicable to each credit 
described in paragraph (a) of this section claimed on the return or 
claim for refund; or
    (B) Otherwise record in one or more documents in the tax return 
preparer's paper or electronic files the tax return preparer's 
computation of the credit or credits claimed on the return or claim for 
refund, including the method and information used to make the 
computations.
    (ii) The tax return preparer's completion of an applicable 
worksheet described in paragraph (b)(2)(i)(A) of this section (or other 
record of the tax return preparer's computation of the credit or 
credits permitted under paragraph (b)(2)(i)(B) of this section) must be 
based on information provided by the taxpayer to the tax return 
preparer or otherwise reasonably obtained or known by the tax return 
preparer.
    (3) Knowledge--(i) In general. The tax return preparer must not 
know, or have reason to know, that any information used by the tax 
return preparer in determining the taxpayer's eligibility to file as 
head of household or in determining the taxpayer's eligibility for, or 
the amount of, any credit described in paragraph (a) of this section 
and claimed on the return or claim for refund is incorrect. The tax 
return preparer may not ignore the implications of information 
furnished to, or known by, the tax return preparer, and must make 
reasonable inquiries if a reasonable and well-informed tax return 
preparer knowledgeable in the law would conclude that the information 
furnished to the tax return preparer appears to be incorrect, 
inconsistent, or incomplete. The tax return preparer must also 
contemporaneously document in the preparer's paper or electronic files 
any inquiries made and the responses to those inquiries.
    (ii) Examples. The provisions of paragraph (b)(3)(i) of this 
section are illustrated by the following examples:

    (A) Example 1.  In 2018, Q, a 22-year-old taxpayer, engages 
Preparer C to prepare Q's 2017 federal income tax return. Q 
completes Preparer C's standard intake questionnaire and states that 
Q has never been married and has two sons, ages 10 and 11. Based on 
the intake sheet and other information that Q provides, including 
information that shows that the boys lived with Q throughout 2017, 
Preparer C believes that Q may be eligible to claim each boy as a 
qualifying child for purposes of the EIC and the CTC. However, Q 
provides no information to Preparer C, and Preparer C does not have 
any information from other sources, to verify the relationship 
between Q and the boys. To meet the knowledge requirement in 
paragraph (b)(3) of this section, Preparer C must make reasonable 
inquiries to determine whether each boy is a qualifying child of Q 
for purposes of the EIC and the CTC, including reasonable inquiries 
to verify Q's relationship to the boys, and Preparer C must 
contemporaneously document these inquiries and the responses.
    (B) Example 2.  Assume the same facts as in Example 1 of 
paragraph (b)(3)(ii)(A) of this section. In addition, as part of 
preparing Q's 2017 federal income tax return, Preparer C made 
sufficient reasonable inquiries to verify that the boys were Q's 
legally adopted children. In 2019, Q engages Preparer C to prepare 
Q's 2018 federal income tax return. When preparing Q's 2018 federal 
income tax

[[Page 55636]]

return, Preparer C is not required to make additional inquiries to 
determine each boy's relationship to Q for purposes of the knowledge 
requirement in paragraph (b)(3) of this section.
    (C) Example 3.  In 2018, R, an 18-year-old taxpayer, engages 
Preparer D to prepare R's 2017 federal income tax return. R 
completes Preparer D's standard intake questionnaire and states that 
R has never been married, has one child, an infant, and that R and 
R's infant lived with R's parents during part of the 2017 tax year. 
R also provides Preparer D with a Form W-2 showing that R earned 
$10,000 during 2017. R provides no other documents or information 
showing that R earned any other income during the tax year. Based on 
the intake sheet and other information that R provides, Preparer D 
believes that R may be eligible to claim the infant as a qualifying 
child for the EIC and the CTC. To meet the knowledge requirement in 
paragraph (b)(3) of this section, Preparer D must make reasonable 
inquiries to determine whether R is eligible to claim these credits, 
including reasonable inquiries to verify that R is not a qualifying 
child of R's parents (which would make R ineligible to claim the 
EIC) or a dependent of R's parents (which would make R ineligible to 
claim the CTC), and Preparer D must contemporaneously document these 
inquiries and the responses.
    (D) Example 4.  Assume the same facts as the facts in Example 3 
of paragraph (b)(3)(ii)(C) of this section. In addition, Preparer D 
previously prepared the 2017 joint federal income tax return for R's 
parents. Based on information provided by R's parents, Preparer D 
has determined that R is not eligible to be claimed as a dependent 
or as a qualifying child for purposes of the EIC or the CTC on R's 
parents' return. Therefore, for purposes of the knowledge 
requirement in paragraph (b)(3) of this section, Preparer D is not 
required to make additional inquiries to determine that R is not R's 
parents' qualifying child or dependent.
    (D) Example 5.  In 2019, S engages Preparer E to prepare S's 
2018 federal income tax return. During Preparer E's standard intake 
interview, S states that S has never been married and that S's niece 
and nephew lived with S for part of the 2018 tax year. Preparer E 
believes S may be eligible to file as head of household and claim 
each of these children as a qualifying child for purposes of the EIC 
and the CTC, but the information furnished to Preparer E is 
incomplete. To meet the knowledge requirement in paragraph (b)(3) of 
this section, Preparer E must make reasonable inquiries to determine 
whether S is eligible to file as head of household and whether each 
child is a qualifying child for purposes of the EIC and the CTC, 
including reasonable inquiries about the children's residency, S's 
relationship to the children, the children's income, the sources of 
support for the children, and S's contribution to the payment of 
costs related to operating the household, and Preparer E must 
contemporaneously document these inquiries and the responses.
    (F) Example 6.  Assume the same facts as the facts in Example 5 
of paragraph (b)(3)(ii)(E) of this section. In addition, Preparer E 
knows from prior social interactions with S that the children 
resided with S for more than one-half of the 2018 tax year and that 
the children did not provide over one-half of their own support for 
the 2018 tax year. To meet the knowledge requirement in paragraph 
(b)(3) of this section, Preparer E must make the same reasonable 
inquiries to determine whether S is eligible to file as head of 
household and whether each child is a qualifying child for purposes 
of the EIC and the CTC as discussed in Example 5 of this section, 
and Preparer E must contemporaneously document these inquiries and 
the responses.
    (G) Example 7.  W engages Preparer F to prepare W's federal 
income tax return. During Preparer F's standard intake interview, W 
states that W is 50 years old, has never been married, and has no 
children. W further states to Preparer F that during the tax year W 
was self-employed, earned $10,000 from W's business, and had no 
business expenses or other income. Preparer F believes W may be 
eligible for the EIC. To meet the knowledge requirement in paragraph 
(b)(3) of this section, Preparer F must make reasonable inquiries to 
determine whether W is eligible for the EIC, including reasonable 
inquiries to determine whether W's business income and expenses are 
correct, and Preparer F must contemporaneously document these 
inquiries and the responses.
    (H) Example 8.  Y, who is 32 years old, engages Preparer G to 
prepare Y's federal income tax return. Y completes Preparer G's 
standard intake questionnaire and states that Y has never been 
married. As part of Preparer G's client intake process, Y provides 
Preparer G with a copy of the Form 1098-T Y received showing that 
University M billed $4,000 of qualified tuition and related expenses 
for Y's enrollment or attendance at the university and that Y was at 
least a half-time undergraduate student. Preparer G believes that Y 
may be eligible for the AOTC. To meet the knowledge requirement in 
paragraph (b)(3) of this section, Preparer G must make reasonable 
inquiries to determine whether Y is eligible for the AOTC, as Form 
1098-T does not contain all the information needed to determine 
eligibility for the AOTC or to calculate the amount of the credit if 
Y is eligible, and contemporaneously document these inquiries and 
the responses.

    (4) * * *
    (i) * * *
    (B) A copy of each completed worksheet required under paragraph 
(b)(2)(i)(A) of this section (or other record of the tax return 
preparer's computation permitted under paragraph (b)(2)(i)(B) of this 
section); and
    (C) A record of how and when the information used to complete Form 
8867 and the applicable worksheets required under paragraph 
(b)(2)(i)(A) of this section (or other record of the tax return 
preparer's computation permitted under paragraph (b)(2)(i)(B) of this 
section) was obtained by the tax return preparer, including the 
identity of any person furnishing the information, as well as a copy of 
any document that was provided by the taxpayer and on which the tax 
return preparer relied to complete Form 8867 and/or an applicable 
worksheet required under paragraph (b)(2)(i)(A) of this section (or 
other record of the tax return preparer's computation permitted under 
paragraph (b)(2)(i)(B) of this section).
* * * * *
    (c) * * *
    (3) The firm disregarded its reasonable and appropriate compliance 
procedures through willfulness, recklessness, or gross indifference 
(including ignoring facts that would lead a person of reasonable 
prudence and competence to investigate) in the preparation of the tax 
return or claim for refund with respect to which the penalty is 
imposed.
* * * * *
    (e) Applicability date. The rules of this section apply to tax 
returns and claims for refund for tax years beginning after December 
31, 2015, that are prepared on or after December 5, 2016. However, the 
rules relating to the determination of a taxpayer's eligibility to file 
as head of household under section 2(b) apply to tax returns and claims 
for refund for tax years beginning after December 31, 2017, that are 
prepared on or after November 7, 2018.


Sec.  1.6695-2T   [Removed]

0
Par. 3. Section 1.6695-2T is removed.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: October 1, 2018.

David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2018-24411 Filed 11-5-18; 4:15 pm]
 BILLING CODE 4830-01-P