Getting in Shape for Tax Season: New Due-Diligence Requirements and Individual and Business Provisions Promise a Workout for Completing 2016 Returns

The good news for practitioners this year is that they do not have many "extenders" to worry about as they get in shape for tax season. Uncertainty about the fate of extender provisions, that raft of incentives that taxpayers rely on and Congress continually renews for a year or two at a time, often hampers tax season preparation. In late 2015, however, many of the most popular extenders were made permanent, in some cases in modified form, or extended through 2019 by the Protecting Americans From Tax Hikes (PATH) Act of 2015, part of the Consolidated Appropriations Act, 2016, PL. 114-113. (For more on these extensions, see "Congress Extends Expired Tax Provisions and Makes Some Permanent, JofA, Feb. 2016, tinyurl.com/hlwokx9). However, the PATH Act and other legislation enacted in 2015 imposed new procedural or technical requirements for taxpayers and preparers, some of them related to the extended provisions. CPAs should take a moment to review those changed requirements, which include new due-diligence provisions, with potential preparer penalties attached. PRACTICE AND PROCEDURE ISSUES Tax practice data security While it has long been sounding warnings to taxpayers about the threat of identity theft tax fraud, throughout the summer and fall of 2016, the IRS sought to make preparers more vigilant in taking cybersecurity measures as well. Not only have most practitioners increasingly in recent years had to deal with this scourge afflicting their clients, but they themselves, with troves of taxpayer data in their care, have come under attack, the IRS says. The Service has urged preparers to monitor recorded use of their preparer tax identification numbers (PTINs) and warned of phishing schemes targeting tax practices. Thieves have attempted to hack into preparers' computers and gain access to systems and records including through such deceptions as emails with links masquerading as tax software updates. The IRS's "Protect Your Clients; Protect Yourself" campaign webpage collects these tips at tinyurl.com/zsx478q. Vigilance should be part of any practitioner's training and preparation for the current tax season (see also "Tax Practice Corner: Keeping Clients' Tax Data Secure," JofA, Oct. 2016, tinyurl.com/zhyb5ov). More tax credits subject to due diligence The PATH Act also instituted provisions effective with the 2016 tax year for practitioners, requiring due diligence in claiming certain tax credits. In making permanent both the American opportunity tax credit and the higher refundable amount of the child tax credit, the PATH Act modified those credits to include requirements similar to already existing ones for the earned income tax credit (EITC). Sec. 6695(g), as amended, requires tax return preparers to comply with due-diligence requirements for determining eligibility for and amounts of the American opportunity tax credit, the child tax credit, the additional child tax credit, or the EITC claimed on a return or a claim for refund, or pay a $510 penalty (for returns filed in 2017) for each failure to do so, effective for tax years beginning after Dec. 31,2015. Temporary and proposed regulations (T.D. 9799 and REG-102952-16) provided guidance on these new requirements. T provides the due-diligence requirements for the credits, reflecting this change. The IRS also has modified Form 8867, Paid Preparer's Due Diligence Checklist, formerly designated only for the EITC, for this purpose.  provides that preparers must not know or have reason to know any information used in determining the credits is incorrect; may not ignore the implications of information furnished to them; and must make reasonable inquiries regarding any information that appears to be incorrect, inconsistent, or incomplete. Preparers must also contemporaneously document any such inquiries and responses in their files. …

Field of study: Business