Most Recent IRS Due Diligence Regulations Under IRC § 6695(g) Continue to Pose Unique Challenges That Could Undermine Its Very Purpose

By Kevan P. McLaughlin¹

I. OVERVIEW

Few, if any, tax professionals would argue that due diligence requirements do not serve an important function in curbing problem-preparers and decreasing the risk of improper refunds to ineligible taxpayers. This is particularly true in the area of refundable credits because, unlike other credits that are limited to the amount of an individual’s income tax liability, refundable credits may result in a payment to a taxpayer beyond their tax liability. This characteristic presents an avenue for problem preparers and taxpayers seeking to defraud the IRS, recent examples of which are aplenty.²

However, although a powerful tool in combatting unscrupulous tax return preparers, IRC § 6695(g) has transformed into something which is nearly unnavigable to many preparers and those advising them. Moreover, some of the penalty’s structural problems may serve to undermine its very purpose. This concern is in part because of the current amount of the penalty, which in 2011 increased from $100 to $500 per return,³ and was further indexed to inflationary increases as a result of the Tax Increase Prevention Act of 2014.⁴ Moreover, the Protecting Americans from Tax Hikes Act of 2015 ("PATH Act") further extended the scope of the IRC § 6695(g) Earned Income Tax Credit ("EITC") penalty and due diligence requirements to other tax return items, including head of household filing status, the child tax credit (CTC)/additional child tax credit (ACTC) under IRC § 24, and the American opportunity tax credit (AOTC) under IRC § 25A(i).⁵