83_FR_55848 83 FR 55632 - Tax Return Preparer Due Diligence Penalty Under Section 6695(g)

83 FR 55632 - Tax Return Preparer Due Diligence Penalty Under Section 6695(g)

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 83, Issue 216 (November 7, 2018)

Page Range55632-55636
FR Document2018-24411

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.

Federal Register, Volume 83 Issue 216 (Wednesday, November 7, 2018) 
[Federal Register Volume 83, Number 216 (Wednesday, November 7, 2018)]
[Rules and Regulations]
[Pages 55632-55636]
From the Federal Register Online  [www.thefederalregister.org]
[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

55632 Federal Register / Vol. 83, No. 216 / Wednesday, November 7, 2018 / Rules and Regulations Beneficiary Table 2 to paragraph (b)(2): Modified adjusted gross income effective in 2018 percentage (percent) Greater than $170,000 but less than or equal to $214,000 ................................................................................................................ 35 Greater than $214,000 but less than or equal to $267,000 ................................................................................................................ 50 Greater than $267,000 but less than or equal to $320,000 ................................................................................................................ 65 Greater than $320,000 ........................................................................................................................................................................ 80 Beneficiary Table 3 to paragraph (b)(2): Modified adjusted gross income effective beginning in 2019 percentage (percent) Greater than $170,000 but less than or equal to $214,000 ................................................................................................................ 35 Greater than $214,000 but less than or equal to $267,000 ................................................................................................................ 50 Greater than $267,000 but less than or equal to $320,000 ................................................................................................................ 65 Greater than $320,000 but less than $750,000 .................................................................................................................................. 80 Greater than or equal to $750,000 ...................................................................................................................................................... 85 (3) Tables of applicable percentages at some time during that tax year, and in the right column, which represents a for married individuals filing separate your modified adjusted gross income is percentage of the cost of basic Medicare returns. If, for the tax year we use, your in the range listed in the left column in prescription drug coverage. Federal tax filing status is married filing the following tables, you will pay an separately, you lived with your spouse amount based on the percentage listed Beneficiary Table 1 to paragraph (b)(3): Modified adjusted gross income effective in 2011–2017 percentage (percent) Greater than $85,000 but less than or equal to $129,000 .................................................................................................................. 65 Greater than $129,000 ........................................................................................................................................................................ 80 Beneficiary Table 2 to paragraph (b)(3): Modified adjusted gross income effective in 2018 percentage (percent) Greater than $85,000 .......................................................................................................................................................................... 80 Beneficiary Table 3 to paragraph (b)(3): Modified adjusted gross income effective beginning in 2019 percentage (percent) Greater than $85,000 but less than $415,000 .................................................................................................................................... 80 Greater than or equal to $415,000 ...................................................................................................................................................... 85 * * * * * preparer penalty. The final regulations reviewed and approved under control [FR Doc. 2018–24336 Filed 11–6–18; 8:45 am] are necessary to implement recent law number 1545–1570. Control number BILLING CODE 4191–02–P changes that expand the scope of the tax 1545–1570 was discontinued in 2014, as return preparer due diligence penalty so the burden for the collection of that it applies to the child tax credit information contained in § 1.6695–2 is DEPARTMENT OF THE TREASURY (CTC)/additional child tax credit reflected in the burden for Form 8867, (ACTC), and the American opportunity ‘‘Paid Preparer’s Due Diligence Internal Revenue Service tax credit (AOTC) as well as to Checklist,’’ under control number 1545– eligibility to file a return or claim for 1629. 26 CFR Part 1 refund as head of household. The SUPPLEMENTARY INFORMATION: regulations affect tax return preparers. [TD 9842] Background DATES: RIN 1545–BO63 Effective date: These regulations are This document contains amendments effective November 7, 2018. to the Income Tax Regulations (26 CFR Tax Return Preparer Due Diligence Applicability date: For the part 1) under section 6695(g) of the Penalty Under Section 6695(g) applicability date, see § 1.6695–2(e). Internal Revenue Code (Code) regarding AGENCY: Internal Revenue Service (IRS), FOR FURTHER INFORMATION CONTACT: the tax return preparer due diligence amozie on DSK3GDR082PROD with RULES Treasury. Marshall French, 202–317–6845 (not a requirements. ACTION: Final regulation and removal of toll-free number). Prior to 2016, section 6695(g) imposed temporary regulation. a penalty on tax return preparers who Paperwork Reduction Act failed to comply with due diligence SUMMARY: This document contains final The collection of information in requirements set forth in regulations regulations relating to the tax return current § 1.6695–2 was previously prescribed by the Secretary with respect VerDate Sep<11>2014 16:15 Nov 06, 2018 Jkt 247001 PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 E:\FR\FM\07NOR1.SGM 07NOR1

Federal Register / Vol. 83, No. 216 / Wednesday, November 7, 2018 / Rules and Regulations 55633 to determining eligibility for, or the to paragraph (b)(3)(ii) and the previous in section 7701(a)(36) of the Code, amount of, the earned income credit examples 6 and 7 from the 2018 without regard for whether they have an (EIC). For tax years beginning after proposed regulations were renumbered identifying number. Because the December 31, 2015, the scope of section as 7 and 8 respectively. A detailed definition already includes paid tax 6695(g) was expanded to apply the explanation of these regulations can be return preparers who do not have an penalty to tax return preparers who fail found in the preambles to the 2016 identifying number, it is not necessary to comply with due diligence temporary regulation and the 2018 to adopt this comment. requirements with respect to proposed rules. 81 FR 87446; 83 FR One commenter suggested that clarity determining eligibility for, or the 33876. would be increased if the knowledge amount of, the child tax credit (CTC)/ Summary of Comments requirement of paragraph (b)(3)(i) of the additional child tax credit (ACTC) and 2018 proposed regulations were the American opportunity tax credit Paragraph (a) of § 1.6695–2 of the rephrased in positive terms, rather than (AOTC). See section 207 of the 2016 proposed regulations provides in negative terms. Paragraph (b)(3)(i) as Protecting Americans from Tax Hikes guidance on the operation of the penalty proposed requires tax return preparers Act of 2015, Div. Q of Public Law 114– for failure to meet due diligence to not know, or have reason to know, 113 (129 Stat. 2242, 3082) (PATH Act). requirements with respect to returns that the information they use to prepare On December 5, 2016, final and claiming the EIC, the CTC/ACTC, the the tax returns or claims for refund is temporary regulations (TD 9799, 81 FR AOTC, or any combination of those incorrect. Paragraph (b)(3)(i) also states 87444) with cross-referencing proposed credits. A commenter to the 2016 that tax return preparers cannot ignore regulations (REG–102952–16, 81 FR proposed regulations recommended that the implications of information 87502) (2016 proposed regulations) the rule include language stating that furnished to or known by them and were published in the Federal Register the phrase ‘‘tax return preparer’’ is must make further inquiries if it is to reflect these changes. No public defined to include business entities and reasonable to do so. The IRS and the hearing was held or requested. One persons without an identifying number. Treasury Department considered this comment responding to the notice of The commenter suggested that issue and decided not to modify the proposed rulemaking was received. including this definition in the rule language in paragraph (b)(3)(i). This would decrease the likelihood that tax Effective for tax years beginning after language mirrors the pre-existing return preparers without an identifying December 31, 2017, section 6695(g) was language in § 10.34 of Circular 230. number would be able to escape amended to expand the scope of the enforcement of section 6695(g) of the Departing from the language in Circular penalty to tax return preparers who fail Code. Paragraph (a) defines ‘‘tax return 230 may cause confusion among tax to comply with due diligence preparer’’ by cross-reference to section return preparers and decrease overall requirements set by the Secretary with 7701(a)(36) of the Code. The definition clarity. respect to determining eligibility to file of tax return preparer provided in One commenter requested that the as head of household (as defined in section 7701(a)(36) of the Code states: final regulations clarify the section 2(b)). See section 11001(b) of ‘‘The term ‘tax return preparer’ means circumstances under which a tax return ‘‘An Act to provide for reconciliation any person who prepares for preparer can meet the knowledge pursuant to titles II and V of the compensation, or who employs one or requirement of paragraph (b)(3) of the concurrent resolution on the budget for more persons to prepare for 2018 proposed regulations by relying fiscal year 2018,’’ Public Law 115–97 compensation, any return of tax upon pre-existing knowledge. The (131 Stat. 2054, 2058 (2017)). A notice imposed by this title or any claim for commenter noted that Examples 2 and of proposed rulemaking (REG–103474– refund of tax imposed by this title. For 4 of paragraph (b)(3)(ii) illustrate that a 18, 83 FR 33875) (2018 proposed purposes of the preceding sentence, the return preparer with pre-existing regulations) was published in the preparation of a substantial portion of a knowledge of the facts surrounding a Federal Register on July 18, 2018 to return or claim for refund shall be taxpayer’s return or claim for refund can withdraw paragraphs (a), (b)(3), and (e) treated as if it were the preparation of meet the knowledge requirement when of § 1.6695–2 of the 2016 proposed such return or claim for refund.’’ In the pre-existing knowledge was regulations and to propose in their place addition, the definition of ‘‘person’’ acquired in the context of the tax return new paragraphs (a), (b)(3), and (e) of provided in section 7701(a)(1) of the preparer’s tax return preparation § 1.6695–2. The amended paragraphs Code states: ‘‘The term ‘person’ shall be practice. The commenter requested updated the 2016 proposed regulations construed to mean and include an guidance as to whether tax return to reflect the most recent change to individual, a trust, estate, partnership, preparers’ use of pre-existing knowledge section 6695(g). No public hearing was association, company or corporation.’’ is limited to these circumstances. A new held or requested. Comments Thus the definition of tax return Example 6 has been added to paragraph responding to the notice of proposed preparer already includes business (b)(3)(ii) and Examples 6 and 7 from the rulemaking were received. After entities in addition to individuals. 2018 proposed regulations have been consideration of all the comments, Further, while individual paid tax renumbered as Examples 7 and 8, paragraphs (b)(1)(i) introductory text, return preparers who prepare, or assist respectively. The new Example 6 (b)(1)(ii), (b)(2), (b)(4)(i)(B), (b)(4)(i)(C), in preparation of, all or substantially all clarifies that a tax return preparer who and (c)(3) of the 2016 proposed of a tax return or claim for refund are possesses pre-existing knowledge that regulations and the entirety of the 2018 required by Treas. Reg. § 1.6109–2 to was acquired outside the context of the proposed regulations are adopted by obtain an identifying number, the preparer’s tax return preparation this Treasury decision without definition of ‘‘tax return preparer’’ in practice cannot meet the knowledge amozie on DSK3GDR082PROD with RULES substantive changes. Minor grammatical section 7701(a)(36) does not include a requirement of paragraph (b)(3)(ii) by revisions were made to the examples requirement that the person have relying on that pre-existing knowledge. provided in paragraph (b)(3)(ii) of obtained an identifying number. The tax return preparer must make § 1.6695–2 of the 2018 proposed Therefore, penalties under section reasonable inquiries to determine the regulations and example 5 was revised 6695(g) of the Code apply to any person applicable facts, and the inquiries and for clarity. A new example 6 was added who falls within the definition provided responses to those inquiries must be VerDate Sep<11>2014 16:15 Nov 06, 2018 Jkt 247001 PO 00000 Frm 00033 Fmt 4700 Sfmt 4700 E:\FR\FM\07NOR1.SGM 07NOR1

55634 Federal Register / Vol. 83, No. 216 / Wednesday, November 7, 2018 / Rules and Regulations contemporaneously documented in the information furnished to the tax return satisfied the due diligence requirements tax return preparer’s files. preparer is incomplete. of 6695(g). A commenter recommended that A commenter requested additional Special Analyses paragraph (b)(3)(i) of the 2018 proposed guidance concerning the extent to regulations be modified to remove the which tax return preparers are required This regulation is not subject to requirement that tax return preparers by paragraph (b)(3)(i) of the 2018 review under section 6(b) of Executive contemporaneously document any proposed regulations to engage in Order 12866 pursuant to the inquiries made and responses to those additional inquiries. The commenter Memorandum of Agreement (April 11, inquiries. The commenter stated that notes that a reasonable person would 2018) between the Department of the some tax return preparers may have not take unlimited and unending steps Treasury and the Office of Management made contemporaneous inquiries but as part of the due diligence process but and Budget regarding review of tax failed to document them, and suggested states that the regulations do not regulations. that other forms of evidence, such as sufficiently identify a stopping point Pursuant to the Regulatory Flexibility testimony, should be allowed to prove after which a tax return preparer is no Act (5 U.S.C. chapter 6), it is hereby that the tax return preparer asked the longer required to make additional certified that these regulations will not questions. The commenter also inquiries. Guidance as to the stopping have a significant economic impact on suggested that tax return preparers point referenced by the commenter is a substantial number of small entities. should be allowed to illustrate facts provided in the regulation at paragraph Although the regulations will have an through non-contemporaneous (b)(3)(i), which states that additional economic impact on a substantial documentation as a defense to the inquiries are required if a reasonable number of small entities, this impact penalty. The IRS and the Treasury and well-informed tax return preparer will not be significant. Department considered this issue and knowledgeable in the law would The current final and temporary decided to not make the suggested conclude that the information furnished regulations under section 6695(g) modifications to paragraph (b)(3)(i) to the tax return preparer appears to be already require tax return preparers to because contemporaneous incorrect, inconsistent, or incomplete. complete Form 8867 when a return or documentation is important for A commenter suggested that the claim for refund includes a claim of the improving compliance and reducing the requirement in paragraph (b)(1) of the EIC, the CTC/ACTC, the AOTC, or any error rate in tax returns and claims for 2016 proposed regulations that tax combination of those credits. Tax return refund prepared by tax return preparers. return preparers complete and attach preparers also must currently maintain One commenter stated that example 5 Form 8867 be eliminated. The IRS and records of the checklists and in paragraph (b)(3)(ii) of the 2018 the Treasury Department decline to computations, as well as a record of proposed regulations requires a tax adopt this suggestion. The completion how and when the information used to return preparer to engage in inquiries and filing of Form 8867 by tax return compute the credits was obtained by the beyond those required by the knowledge preparers is an essential part of the tax return preparer. The information requirement in paragraph (b)(3)(i). In section 6695(g) due diligence needed to document a taxpayer’s example 5, a tax return preparer is enforcement process. The commenter eligibility to file as head of household informed that the taxpayer has never also stated that some tax return is information the preparer must gather been married and that the taxpayer’s preparers are uncertain as to whether to file the return. Even if certain niece and nephew lived with the completing Form 8867 is sufficient to preparers are required to maintain the taxpayer for part of the year. The tax avoid due diligence penalties under checklists and complete Form 8867 for return preparer believes that the section 6695(g). Filing a completed the first time, the IRS estimates that the taxpayer may be eligible to file as head Form 8867 is one of the requirements total time required should be minimal of household and that the taxpayer may established by the final regulations, but for these tax return preparers. Further, be able to claim the children as there are additional requirements. the IRS does not expect that the qualifying children for purposes of the Paragraph (b)(2) requires tax return requirements in the final rule would EIC and CTC. Example 5 in the 2018 preparers who prepare returns or claims necessitate the purchase of additional proposed regulations states that the tax for refund claiming one or more of EIC, software or equipment to meet the return preparer must ask additional CTC/ACTC, and AOTC to either additional information retention questions to meet the knowledge complete the applicable worksheet(s) requirements. requirement in paragraph (b)(3)(i). The prescribed by the Secretary or record in Pursuant to section 7805(f) of the commenter stated that the tax return one or more documents the tax return Code, the notice of proposed rulemaking preparer should not be required to preparer’s method and information used preceding these regulations was engage in additional inquiries because to make the computations for the submitted to the Chief Counsel for none of the information provided to the credits. Paragraph (b)(3) requires tax Advocacy of the Small Business tax return preparer appears to be return preparers to meet knowledge Administration for comment on its incorrect or inconsistent. This comment requirements concerning the basis for impact on small businesses. No overlooks the additional requirement of the benefits claimed on returns or comments were received from the Small (b)(3)(i) that tax return preparers engage claims for refund and also to Business Administration. in additional inquiries where the contemporaneously document inquiries Drafting Information information furnished to them is and responses related to meeting these incomplete. The information in knowledge requirements. Paragraph The principal author of these Example 5 is incomplete because the (b)(4) sets retention requirements for regulations is Marshall French of the amozie on DSK3GDR082PROD with RULES preparer does not know enough about documents used by the tax return Office of the Associate Chief Counsel the children’s residency or the source of preparer in preparing the return or (Procedure and Administration). their support. Example 5 has been claim for refund. A tax return preparer List of Subjects in 26 CFR Part 1 revised to clarify that the reason the tax who completes Form 8867 but fails to return preparer must engage in comply with one or more of these Income taxes, Reporting and additional inquiries is because the additional requirements has not recordkeeping requirements. VerDate Sep<11>2014 16:15 Nov 06, 2018 Jkt 247001 PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 E:\FR\FM\07NOR1.SGM 07NOR1

Federal Register / Vol. 83, No. 216 / Wednesday, November 7, 2018 / Rules and Regulations 55635 Adoption of Amendments to the under this section with respect to the CTC described in paragraph (b)(2)(i)(A) of Regulations claimed on the taxpayer’s return, but this section (or other record of the tax Preparer B did meet the due diligence return preparer’s computation of the Accordingly, 26 CFR part 1 is requirements under this section with respect amended as follows: to the AOTC claimed on the taxpayer’s credit or credits permitted under return. Unless the exception to penalty paragraph (b)(2)(i)(B) of this section) PART 1—INCOME TAXES provided by paragraph (d) of this section must be based on information provided applies, Preparer B is subject to one penalty by the taxpayer to the tax return ■ Paragraph 1. The authority citation under section 6695(g) for the failure to meet preparer or otherwise reasonably for part 1 continues to read in part as the due diligence requirements for the CTC. obtained or known by the tax return follows: Preparer B is not subject to a penalty under preparer. section 6695(g) for failure to meet the due (3) Knowledge—(i) In general. The tax Authority: 26 U.S.C. 7805 * * * diligence requirements for the AOTC. (iii) Example 3. Preparer C prepares a return preparer must not know, or have ■ Par. 2. Section 1.6695–2 is amended federal income tax return for a taxpayer using reason to know, that any information by revising the section heading and the head of household filing status and used by the tax return preparer in paragraphs (a), (b)(1)(i) introductory claiming the CTC and the AOTC. Preparer C determining the taxpayer’s eligibility to text, (b)(1)(ii), (b)(2) and (3), (b)(4)(i)(B) did not meet the due diligence requirements file as head of household or in and (C), (c)(3), and (e) to read as follows: under this section with respect to the head determining the taxpayer’s eligibility § 1.6695–2 Tax return preparer due of household filing status and the CTC for, or the amount of, any credit diligence requirements for certain tax claimed on the taxpayer’s return. Preparer C described in paragraph (a) of this returns and claims. did meet the due diligence requirements under this section with respect to the AOTC section and claimed on the return or (a) Penalty for failure to meet due claimed on the taxpayer’s return. Unless the claim for refund is incorrect. The tax diligence requirements—(1) In general. exception to penalty provided by paragraph return preparer may not ignore the A person who is a tax return preparer (d) of this section applies, Preparer C is implications of information furnished (as defined in section 7701(a)(36)) of a subject to two penalties under section to, or known by, the tax return preparer, tax return or claim for refund under the 6695(g) for the failure to meet the due and must make reasonable inquiries if a Internal Revenue Code who determines diligence requirements: One for the head of reasonable and well-informed tax return the taxpayer’s eligibility to file as head household filing status and one for the CTC. preparer knowledgeable in the law Preparer C is not subject to a penalty under of household under section 2(b), or who section 6695(g) for failure to meet the due would conclude that the information determines the taxpayer’s eligibility for, diligence requirements for the AOTC. furnished to the tax return preparer or the amount of, the child tax credit appears to be incorrect, inconsistent, or (CTC)/additional child tax credit (b) * * * incomplete. The tax return preparer (ACTC) under section 24, the American (1) * * * must also contemporaneously document (i) The tax return preparer must opportunity tax credit (AOTC) under in the preparer’s paper or electronic complete Form 8867, ‘‘Paid Preparer’s section 25A(i), or the earned income files any inquiries made and the Due Diligence Checklist,’’ or complete credit (EIC) under section 32, and who responses to those inquiries. such other form and provide such other (ii) Examples. The provisions of fails to satisfy the due diligence information as may be prescribed by the paragraph (b)(3)(i) of this section are requirements of paragraph (b) of this Internal Revenue Service (IRS), and— illustrated by the following examples: section will be subject to a penalty as prescribed in section 6695(g) (indexed * * * * * (ii) The tax return preparer’s (A) Example 1. In 2018, Q, a 22-year-old for inflation under section 6695(h)) for taxpayer, engages Preparer C to prepare Q’s each failure. A separate penalty applies completion of Form 8867 must be based 2017 federal income tax return. Q completes to a tax return preparer with respect to on information provided by the taxpayer Preparer C’s standard intake questionnaire the head of household filing status to the tax return preparer or otherwise and states that Q has never been married and determination and to each applicable reasonably obtained or known by the tax has two sons, ages 10 and 11. Based on the return preparer. intake sheet and other information that Q credit claimed on a return or claim for provides, including information that shows (2) Computation of credit or credits. refund for which the due diligence that the boys lived with Q throughout 2017, (i) When computing the amount of a requirements of this section are not Preparer C believes that Q may be eligible to credit or credits described in paragraph satisfied and for which the exception to claim each boy as a qualifying child for (a) of this section to be claimed on a purposes of the EIC and the CTC. However, penalty provided by paragraph (d) of return or claim for refund, the tax return Q provides no information to Preparer C, and this section does not apply. (2) Examples. The provisions of preparer must either— Preparer C does not have any information (A) Complete the worksheet in the from other sources, to verify the relationship paragraph (a)(1) of this section are Form 1040, 1040A, 1040EZ, and/or between Q and the boys. To meet the illustrated by the following examples: knowledge requirement in paragraph (b)(3) of Form 8863 instructions or such other (i) Example 1. Preparer A prepares a form including such other information this section, Preparer C must make federal income tax return for a taxpayer as may be prescribed by the IRS reasonable inquiries to determine whether claiming the CTC and the AOTC. Preparer A each boy is a qualifying child of Q for did not meet the due diligence requirements applicable to each credit described in purposes of the EIC and the CTC, including under this section with respect to the CTC or paragraph (a) of this section claimed on reasonable inquiries to verify Q’s relationship the AOTC claimed on the taxpayer’s return. the return or claim for refund; or to the boys, and Preparer C must Unless the exception to penalty provided by (B) Otherwise record in one or more contemporaneously document these inquiries paragraph (d) of this section applies, Preparer documents in the tax return preparer’s and the responses. A is subject to two penalties under section paper or electronic files the tax return (B) Example 2. Assume the same facts as 6695(g): One for failure to meet the due preparer’s computation of the credit or in Example 1 of paragraph (b)(3)(ii)(A) of this amozie on DSK3GDR082PROD with RULES diligence requirements for the CTC and a credits claimed on the return or claim section. In addition, as part of preparing Q’s second penalty for failure to meet the due 2017 federal income tax return, Preparer C diligence requirements for the AOTC. for refund, including the method and made sufficient reasonable inquiries to verify (ii) Example 2. Preparer B prepares a information used to make the that the boys were Q’s legally adopted federal income tax return for a taxpayer computations. children. In 2019, Q engages Preparer C to claiming the CTC and the AOTC. Preparer B (ii) The tax return preparer’s prepare Q’s 2018 federal income tax return. did not meet the due diligence requirements completion of an applicable worksheet When preparing Q’s 2018 federal income tax VerDate Sep<11>2014 16:15 Nov 06, 2018 Jkt 247001 PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 E:\FR\FM\07NOR1.SGM 07NOR1

55636 Federal Register / Vol. 83, No. 216 / Wednesday, November 7, 2018 / Rules and Regulations return, Preparer C is not required to make Preparer E knows from prior social well as a copy of any document that was additional inquiries to determine each boy’s interactions with S that the children resided provided by the taxpayer and on which relationship to Q for purposes of the with S for more than one-half of the 2018 tax the tax return preparer relied to knowledge requirement in paragraph (b)(3) of year and that the children did not provide complete Form 8867 and/or an this section. over one-half of their own support for the (C) Example 3. In 2018, R, an 18-year-old 2018 tax year. To meet the knowledge applicable worksheet required under taxpayer, engages Preparer D to prepare R’s requirement in paragraph (b)(3) of this paragraph (b)(2)(i)(A) of this section (or 2017 federal income tax return. R completes section, Preparer E must make the same other record of the tax return preparer’s Preparer D’s standard intake questionnaire reasonable inquiries to determine whether S computation permitted under paragraph and states that R has never been married, has is eligible to file as head of household and (b)(2)(i)(B) of this section). one child, an infant, and that R and R’s infant whether each child is a qualifying child for * * * * * lived with R’s parents during part of the 2017 purposes of the EIC and the CTC as discussed (c) * * * tax year. R also provides Preparer D with a in Example 5 of this section, and Preparer E (3) The firm disregarded its Form W–2 showing that R earned $10,000 must contemporaneously document these during 2017. R provides no other documents inquiries and the responses. reasonable and appropriate compliance or information showing that R earned any (G) Example 7. W engages Preparer F to procedures through willfulness, other income during the tax year. Based on prepare W’s federal income tax return. recklessness, or gross indifference the intake sheet and other information that R During Preparer F’s standard intake (including ignoring facts that would provides, Preparer D believes that R may be interview, W states that W is 50 years old, lead a person of reasonable prudence eligible to claim the infant as a qualifying has never been married, and has no children. and competence to investigate) in the child for the EIC and the CTC. To meet the W further states to Preparer F that during the preparation of the tax return or claim for knowledge requirement in paragraph (b)(3) of tax year W was self-employed, earned refund with respect to which the this section, Preparer D must make $10,000 from W’s business, and had no penalty is imposed. reasonable inquiries to determine whether R business expenses or other income. Preparer is eligible to claim these credits, including F believes W may be eligible for the EIC. To * * * * * reasonable inquiries to verify that R is not a meet the knowledge requirement in (e) Applicability date. The rules of qualifying child of R’s parents (which would paragraph (b)(3) of this section, Preparer F this section apply to tax returns and make R ineligible to claim the EIC) or a must make reasonable inquiries to determine claims for refund for tax years beginning dependent of R’s parents (which would make whether W is eligible for the EIC, including after December 31, 2015, that are R ineligible to claim the CTC), and Preparer reasonable inquiries to determine whether prepared on or after December 5, 2016. D must contemporaneously document these W’s business income and expenses are However, the rules relating to the inquiries and the responses. correct, and Preparer F must contemporaneously document these inquiries determination of a taxpayer’s eligibility (D) Example 4. Assume the same facts as the facts in Example 3 of paragraph and the responses. to file as head of household under (b)(3)(ii)(C) of this section. In addition, (H) Example 8. Y, who is 32 years old, section 2(b) apply to tax returns and Preparer D previously prepared the 2017 engages Preparer G to prepare Y’s federal claims for refund for tax years beginning joint federal income tax return for R’s income tax return. Y completes Preparer G’s after December 31, 2017, that are parents. Based on information provided by standard intake questionnaire and states that prepared on or after November 7, 2018. R’s parents, Preparer D has determined that Y has never been married. As part of Preparer R is not eligible to be claimed as a dependent G’s client intake process, Y provides Preparer § 1.6695–2T [Removed] or as a qualifying child for purposes of the G with a copy of the Form 1098–T Y received ■ Par. 3. Section 1.6695–2T is removed. EIC or the CTC on R’s parents’ return. showing that University M billed $4,000 of Therefore, for purposes of the knowledge qualified tuition and related expenses for Y’s Kirsten Wielobob, requirement in paragraph (b)(3) of this enrollment or attendance at the university Deputy Commissioner for Services and section, Preparer D is not required to make and that Y was at least a half-time Enforcement. additional inquiries to determine that R is undergraduate student. Preparer G believes Approved: October 1, 2018. not R’s parents’ qualifying child or that Y may be eligible for the AOTC. To meet dependent. the knowledge requirement in paragraph David J. Kautter, (D) Example 5. In 2019, S engages Preparer (b)(3) of this section, Preparer G must make Assistant Secretary of the Treasury (Tax E to prepare S’s 2018 federal income tax reasonable inquiries to determine whether Y Policy). return. During Preparer E’s standard intake is eligible for the AOTC, as Form 1098–T [FR Doc. 2018–24411 Filed 11–5–18; 4:15 pm] interview, S states that S has never been does not contain all the information needed BILLING CODE 4830–01–P married and that S’s niece and nephew lived to determine eligibility for the AOTC or to with S for part of the 2018 tax year. Preparer calculate the amount of the credit if Y is E believes S may be eligible to file as head eligible, and contemporaneously document of household and claim each of these these inquiries and the responses. DEPARTMENT OF COMMERCE children as a qualifying child for purposes of (4) * * * the EIC and the CTC, but the information National Oceanic and Atmospheric (i) * * * Administration furnished to Preparer E is incomplete. To (B) A copy of each completed meet the knowledge requirement in paragraph (b)(3) of this section, Preparer E worksheet required under paragraph 50 CFR Part 300 must make reasonable inquiries to determine (b)(2)(i)(A) of this section (or other whether S is eligible to file as head of record of the tax return preparer’s RIN 0648–XG515 household and whether each child is a computation permitted under paragraph qualifying child for purposes of the EIC and (b)(2)(i)(B) of this section); and Fraser River Sockeye Salmon the CTC, including reasonable inquiries (C) A record of how and when the Fisheries; Inseason Orders about the children’s residency, S’s information used to complete Form AGENCY: National Marine Fisheries relationship to the children, the children’s 8867 and the applicable worksheets income, the sources of support for the Service (NMFS), National Oceanic and required under paragraph (b)(2)(i)(A) of amozie on DSK3GDR082PROD with RULES children, and S’s contribution to the payment Atmospheric Administration (NOAA), this section (or other record of the tax Commerce. of costs related to operating the household, and Preparer E must contemporaneously return preparer’s computation permitted ACTION: Temporary orders; inseason document these inquiries and the responses. under paragraph (b)(2)(i)(B) of this orders. (F) Example 6. Assume the same facts as section) was obtained by the tax return the facts in Example 5 of paragraph preparer, including the identity of any SUMMARY: NMFS publishes Fraser River (b)(3)(ii)(E) of this section. In addition, person furnishing the information, as salmon inseason orders to regulate VerDate Sep<11>2014 16:15 Nov 06, 2018 Jkt 247001 PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 E:\FR\FM\07NOR1.SGM 07NOR1


Document Created: 2018-11-07 00:04:30
Document Modified: 2018-11-07 00:04:30
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionRules and Regulations
ActionFinal regulation and removal of temporary regulation.
DatesEffective date: These regulations are effective November 7, 2018.
ContactMarshall French, 202-317-6845 (not a toll-free number).
FR Citation83 FR 55632 
RIN Number1545-BO63
CFR AssociatedIncome Taxes and Reporting and Recordkeeping Requirements
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