The new tax law expands a paid preparer’s due diligence and record keeping requirements under IRC section 6695(g) to include determining a client’s eligibility to file as head of household. It imposes a $500 penalty for each failure. Due diligence requirements are already in place on Form 8867 for child tax credit, American opportunity tax credit and earned income tax credit.
Until the Treasury Department and the IRS provide guidance, it is uncertain if the effective date will apply to 2017 returns, 2018 returns or perhaps even earlier year returns if prepared after Dec. 31, 2017. Until then, practitioners should continue to exercise due diligence and presume that the new provision applies now.
Since most companies have published their "organizers," practitioners might consider modifying their firm’s organizer to include the elements that demonstrate the preparer exercised due diligence. For example, to show due diligence in the head of household area, a series of questions might be added to the organizer as to whether the taxpayer was single or legally separated for the last half of the year, that a qualifying dependent lived with the taxpayer for at least half the year (unless the dependent is a parent), and that the taxpayer provided more than half the costs of maintaining a home where the taxpayer and dependent lived. Organizers are completed directly by the taxpayer and such assertions may provide protection from any preparer due diligence penalty. Alternatively, the preparer might have a standard memo to file that memorializes a conversation with the taxpayer that shows that the taxpayer qualifies for the benefit or status.