Paid Preparer's Due Diligence Checklist (Form 8867)

2016

Instructions for Form 8867

Department of the Treasury
Internal Revenue Service

Paid Preparer’s Due Diligence Checklist for the Earned Income Credit (EIC), the
Child Tax Credit (CTC)/Additional Child Tax Credit (ACTC), and/or the American
Opportunity Tax Credit (AOTC)
Section references are to the Internal Revenue Code unless
otherwise noted.

Future Developments

For the latest information about developments related to Form 8867
and its instructions, such as legislation enacted after they were
published, go to www.irs.gov/form8867.

What’s New

Form 8867 expanded and revised. Due to changes in the law, the
paid tax return preparer EIC due diligence requirements have been
expanded to also cover the CTC/ACTC and the AOTC.
Form 8867 has been modified to account for these changes. In
addition, Form 8867 has been streamlined. Completing the form is
not a substitute for actually performing the necessary due diligence
and completing all required forms and schedules when preparing
the return.
Penalty now indexed for inflation. The paid tax return preparer
due diligence penalty is now indexed for inflation. Therefore, the
penalty for failure to meet the due diligence requirements with
respect to returns and claims for refund filed in 2017 is $510 per
credit per return.
Refunds issued after February 15, 2017. Due to changes in the
law, the IRS cannot issue refunds before February 15, 2017, for
returns that claim the EIC or the ACTC. This applies to the entire
refund, not just the portion associated with these credits. You should
inform the taxpayer if his or her return includes a claim for the EIC
and/or the ACTC.

Reminders

No retroactive claims of the EIC. Due to changes in the law, if the
taxpayer didn't have an SSN by the due date of his/her 2016 return
(including extensions), he/she can't claim the EIC on either an
original or an amended 2016 return, even if he/she later gets an
SSN. Also, if a child didn't have an SSN by the due date of the
taxpayer's return (including extensions), the taxpayer can't count
that child as a qualifying child in figuring the EIC on either an original
or an amended 2016 return, even if that child later gets an SSN.
No retroactive claims of the CTC/ACTC or the AOTC. Due to
changes in the law, if the taxpayer didn't have an SSN (or ITIN) by
the due date of his/her 2016 return (including extensions), he/she
can't claim the CTC/ACTC or the AOTC on either an original or an
amended 2016 return, even if he/she later gets an SSN (or ITIN).
Also, no CTC/ACTC or AOTC is allowed on an original or an
amended 2016 return with respect to a child who didn't have an
SSN, ATIN, or ITIN by the due date of the return (including
extensions), even if that child later gets one of those numbers.
If the taxpayer applies for an ATIN or an ITIN on or before the due
date of his/her 2016 return (including extensions) and the IRS issues
the taxpayer an ATIN or an ITIN as a result of the application, the
IRS will consider the ATIN or ITIN as issued on or before the due
date of the return.

General Instructions
Form 8867 covers the EIC, the CTC/ACTC, and/or the AOTC. You
should only complete columns corresponding to credits actually
claimed on the taxpayer’s return that you prepared.

Nov 22, 2016

Only paid tax return preparers should complete this form. If
you were paid to prepare a return for any taxpayer claiming the EIC,
the CTC/ACTC, and/or the AOTC, you must complete Form 8867
and meet the other due diligence requirements described in
Purpose of Form, later.
Form 8867 must be filed with the return. Form 8867 must be
filed with the taxpayer’s return or amended return claiming the EIC,
the CTC/ACTC, and/or the AOTC.
Signing tax return preparers.
If you are the paid tax return preparer signing the return and you
are filing the return electronically, file the completed Form 8867
electronically with the return.
If you are the paid tax return preparer signing the return and you
are not electronically filing the return, provide the completed Form
8867 to the taxpayer with instructions to file this form with his or her
return.
If you are the paid tax return preparer signing the return and you
are mailing the return to the IRS for the taxpayer (which should only
be done after the taxpayer has reviewed and signed the paper
return), mail the completed Form 8867 to the IRS with the return.
Nonsigning tax return preparers. If you are the paid tax return
preparer for any of the credits covered by Form 8867 but you are not
required to sign the return as preparer, provide the signing tax return
preparer the completed form in either electronic or paper format.
You can find rules regarding who is a signing tax return preparer
and a nonsigning tax return preparer in Regulation section
301.7701-15. If you are the only paid tax return preparer for the
taxpayer’s return, you are the signing tax return preparer and must
sign the return as preparer. Failure to sign the return when required
may subject you to a penalty.
Multiple Forms 8867 for one return. Form 8867 must be
completed by a paid tax return preparer responsible for a taxpayer's
claim of the EIC, the CTC/ACTC and/or the AOTC; therefore, there
may be multiple Forms 8867 for one return or amended return. Only
one Form 8867 may be filed. If there are multiple Forms 8867, file
the Form 8867 prepared by the signing tax return preparer. If there
are multiple Forms 8867, but none were prepared by the signing
return preparer, file the Form 8867 covering the EIC, or if none, the
CTC. All Forms 8867 must be retained as provided in Document
Retention.
Example 1. Paid tax return preparer A determined taxpayer T's
eligibility for, and amount of, the EIC claimed on T's return. Paid
preparer B determined T's eligibility for, and amount of, the AOTC
claimed on T's return and also signs the return as the signing tax
return preparer. Two Forms 8867 must be completed, one prepared
by A for the EIC, and one prepared by B for the AOTC. The Form
8867 completed by B as the signing preparer should be filed with T's
return.
Example 2. The facts are the same as Example 1, except B
does not sign the return as the signing tax return preparer. The Form
8867 completed by A, which covers the EIC, should be filed with T's
return.

Purpose of Form

As a paid tax return preparer, you are required to exercise due
diligence when preparing any client’s return or claim for refund. As
part of exercising due diligence, you must interview the client, ask
adequate questions, and obtain appropriate and sufficient
information to determine the correct reporting of income, claiming of

Cat. No. 59407V

tax benefits (such as deductions and credits), and compliance with
the tax laws.

for Forms 1040SS and 1040PR. You can find the AOTC worksheet
in the instructions for Form 8863. Completion of these forms,
schedules, and worksheets assists you in determining the
taxpayer’s eligibility for the credit and the correct amount of the
credit and is required under the due diligence requirements set forth
in Treasury Regulations.

As a paid tax return preparer, you also must meet specific due
diligence requirements set forth in Treasury Regulations when you
prepare returns and claims for refund involving the EIC, the CTC/
ACTC, or the AOTC. To meet these due diligence requirements, you
may need to ask additional questions and obtain additional
information to determine eligibility for, and the amount of, the EIC,
the CTC/ACTC, or the AOTC. Failure to meet the EIC, CTC/ACTC,
or the AOTC due diligence requirements could result in a $510
penalty for each failure. See section 6695(g) and Regulation section
1.6695-2(b).

Lines 3 and 4

As a paid tax return preparer, when determining the taxpayer’s
eligibility for, or the amount of, a credit claimed on a return or claim
for refund, you must not use information that you know, or have
reason to know, is incorrect. You may not ignore the implications of
information provided to, or known by you, and you must make
reasonable inquiries if the information provided to you appears to be
incorrect, inconsistent, or incomplete. You must make reasonable
inquiries if a reasonable and well-informed tax return preparer,
knowledgeable in the tax law, would conclude that the information
provided to you appears to be incorrect, inconsistent, or incomplete.
You must also contemporaneously document in your files any
reasonable inquiries made and the responses to these inquiries.

You have complied with the due diligence requirements set
forth in Treasury Regulations for the EIC, the CTC/ACTC or the
AOTC claimed on a return or claim for refund if you:
1. Complete Form 8867 truthfully and accurately and complete
the actions described on Form 8867 for each credit claimed for
which you are the paid tax return preparer.
2. Submit Form 8867 in the manner required.
3. Meet the knowledge requirement by interviewing the
taxpayer, asking adequate questions, contemporaneously
documenting the questions and the taxpayer’s responses in your
notes, reviewing adequate information to determine if the taxpayer is
eligible to claim the credit(s) and in what amount(s), and
4. Keep all five of the following records for three years from the
latest of the dates specified later, in Document Retention:
a. A copy of Form 8867,
b. The applicable worksheet(s) or your own worksheet(s) for
any credits claimed (see Due Diligence Requirements, later),
c. Copies of any documents provided by the taxpayer on which
you relied to determine eligibility for, and the amount of, the credit(s),
d. A record of how, when, and from whom the information used
to prepare Form 8867 and worksheet(s) was obtained, and
e. A record of any additional questions you may have asked to
determine eligibility for, and amount of, the credits, and the
taxpayer’s answers.

You must know the tax law for each credit claimed on a return or
claim for refund you prepare and use that knowledge to ask your
client the right questions to get all the relevant facts to determine
your client’s eligibility for the credit(s) and the correct amount of the
credit(s).
Example. Taxpayer X engages Preparer C to prepare his
federal income tax return. During the intake interview, Taxpayer X
states he is 25 years old, has never been married, and has two sons
ages 12 and 10. X also states that he was self-employed, earned
$12,000 from his lawn care business, and had no business
expenses or other income. Preparer C believes that X may be
eligible for the EIC and ACTC. However, in order to meet the
knowledge requirement, Preparer C must make additional inquiries.
The ages of the children seem inconsistent with the age of the
taxpayer. Additionally, the taxpayer's claim that he has no business
expenses seems inconsistent with his income. Reasonable inquiries
could include:
Are these your foster sons, adopted sons? If so, were the children
placed in your home by an adoption or foster care agency?
How long did the children live with you during 2016?
If the taxpayer is not the parent, did any other relative also reside
with these children for more than half the year in 2016?
How much did you charge to do each lawn?
Do you have records of the amount of money you received from
lawn work?
Did you have any expenses for lawn mowing equipment, fuel or
other supplies for your business? If not, how did you provide lawn
care services?
How many lawns did you take care of?

Specific Instructions
Enter the taxpayer’s name as it appears on the return and enter the
taxpayer identification number (TIN) for the taxpayer (primary TIN, if
filing a joint return).
Enter the name and preparer tax identification number (PTIN) of the
paid tax return preparer who determined the taxpayer's eligibility for,
or the amount of, the credit(s) for which Form 8867 is being
completed, even if that preparer is not the tax return preparer
signing the tax return.

Line 5

Keep copies of any documents provided by the taxpayer on which
you relied to determine the taxpayer’s eligibility for the credit(s) and
to compute the amount of the credit(s) and list the documents in the
space provided. See Document Retention, for more information on
the due diligence recordkeeping requirements.

Due Diligence Requirements

Complete the appropriate column for each credit for which you were
the paid tax return preparer determining the taxpayer’s eligibility for,
and amount of, the credit. Columns for credits for which you were
not the paid tax return preparer should be left blank.

The following are examples of documents that you may rely on to
determine taxpayers' eligibility for the credits or the amount of the
credit. This list is not all-inclusive.

Line 1

You should prepare the 2016 return based on information related to
the 2016 tax year only, as situations may change from year to year.
If you are preparing a late or amended return or claim for refund, you
should prepare the return based on the information related to the tax
year of the return or claim for refund.

Residency of a Qualifying Child
School records or statement
Landlord or a property management statement
Health care provider statement
Medical records
Child care provider records
Placement agency statement
Social service records or statement
Place of worship statement
Indian tribal official statement
Employer statement

Line 2

You must complete the applicable IRS worksheet for the EIC, the
CTC/ACTC, and/or the AOTC (or your own worksheet that provides
the same information), as well as all required forms and schedules
for each credit claimed on the return for which you are the paid tax
return preparer. You can find the worksheets for the EIC and the
CTC/ACTC in the instructions for Forms 1040, 1040A, 1040EZ, and
1040NR. The ACTC worksheet can also be found in the instructions

Disability of Qualifying Child
Doctor statement
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Other health care provider statement
Social services agency or program statement

If the parents file a joint return together and can claim the child as
a qualifying child, the child is treated as the qualifying child of both of
the parents.
If the parents do not file a joint return together but both parents
claim the child as a qualifying child, the child is treated as the
qualifying child of the parent with whom the child lived for the longer
period of time during the year. If the child lived with each parent for
the same amount of time, the child is treated as the qualifying child
of the parent who had the higher adjusted gross income (AGI) for the
year.
If no parent can claim the child as a qualifying child, the child is
treated as the qualifying child of the person who had the highest AGI
for the year.
If a parent can claim the child as a qualifying child but no parent
does so, the child is treated as the qualifying child of the person who
had the highest AGI for the year, but only if that person's AGI is
higher than the highest AGI of any of the child’s parents who can
claim the child.
Subject to the rules just described, the taxpayer and the other
person(s) may be able to choose which of them treats the child as a
qualifying child. If the taxpayer allows another person to treat the
child as a qualifying child, the taxpayer is not eligible to claim EIC for
the same child. Also, EIC claims must be consistent with claims for
other credits and child-related benefits, such as the dependency
exemption. For examples and details, see Pub. 596.
In many cases, the taxpayer should be able to tell you whether
his or her AGI is higher than the AGI of the child’s parents or other
person who might also claim the child.

Schedule C
Business license
Forms 1099
Records of gross receipts provided by taxpayer
Taxpayer summary of income
Records of expenses provided by taxpayer
Taxpayer summary of expenses
Bank statements reconstruction

Line 6

If your client’s return is selected for audit, the IRS may ask your
client to provide documents to show eligibility for, and the amount of,
the credit(s) claimed on the return or claim for refund. The credit(s)
may not be allowed without this information. You can help your
clients be prepared to answer questions about their eligibility for the
credit(s) claimed and the correctness of the amount of the credit(s)
claimed if you help them understand that the IRS may ask for
underlying documentation regarding eligibility for and the
computation of the amount of the credit(s).

Line 7

Unless an exception applies, if the EIC claimed in a prior year was
denied for a reason other than a clerical or math error, a claim for the
EIC on the taxpayer’s 2016 return will be denied unless Form 8862
is attached to the return. See the Form 8862 instructions and Pub.
596 for more information.

Due Diligence Questions for Returns
Claiming the CTC/ACTC

Note. As a result of recent tax law changes, Form 8862 must be
attached to a taxpayer’s 2017 return if the CTC/ACTC and/or the
AOTC is reduced or disallowed on the taxpayer’s 2016 tax return for
a reason other than a clerical or math error.

As a paid tax return preparer you must exercise due diligence to
determine whether a taxpayer meets all of the eligibility
requirements for the CTC/ACTC. Lines 10a, 10b, and 10c only ask
three specific questions about eligibility for the CTC/ACTC.
However, your client must meet all of the eligibility requirements for
claiming the CTC/ACTC. Therefore, your client cannot claim the
CTC/ACTC if all of the eligibility requirements for these credits are
not satisfied, regardless of the answers to the questions on line 10.

Line 8

The EIC, the CTC/ACTC and the AOTC are determined using
information, that includes information about the kind and source of
income reported on a taxpayer’s return. For self-employed
individuals, this information is generally reported on Schedule C
(Form 1040) as income from self-employment. To exercise due
diligence when determining eligibility for, and the amount of, the EIC,
the CTC/ACTC, or the AOTC for a self-employed individual, you
may also be required to ask additional questions to determine
whether the Schedule C is correct and complete. Additional
guidance on Schedule C and the EIC is available as part of the EIC
Tax Preparer Toolkit at www.eitc.irs.gov.

Line 10

If the taxpayer is the custodial parent of the child claimed for the
credit, and he or she has completed Form 8332 or signed a similar
document containing the same information, releasing a claim to
exemption for the child in question, he or she is not entitled to claim
the CTC/ACTC.

If the taxpayer is not reporting self-employment income on
Schedule C, leave this line blank. Do not check any of the boxes on
this line.

If the taxpayer is the noncustodial parent and has a Form 8332
(or equivalent document) signed by the custodial parent, be sure to
ask if there is a more recent form revoking the release of the
exemption. See the instructions for Form 8332 for more information.

Specific Due Diligence Questions for
Returns Claiming the EIC

Due Diligence Questions for Returns
Claiming the AOTC

As a paid tax return preparer, you must exercise due diligence to
determine whether a taxpayer meets all of the eligibility
requirements for the EIC. Although lines 9a and 9b only ask two
specific questions related to claiming a qualifying child for the EIC,
your client must meet all of the eligibility requirements for claiming
the EIC. Therefore, your client may not claim the EIC if all of the
eligibility requirements for the EIC are not satisfied, even if you
answer “yes” to questions 9a and 9b.

As a paid tax return preparer you must exercise due diligence to
determine whether a taxpayer meets all of the eligibility
requirements for the AOTC. Although line 11 only asks about
substantiation of qualified tuition and related expenses, your client
may not meet all of the eligibility requirements for claiming the
AOTC. Therefore, your client cannot claim the AOTC if all of the
eligibility requirements for the AOTC are not satisfied, even if you
answer “yes” to the question on line 11.

Line 9

If your client is eligible to claim the EIC for taxpayers without a
qualifying child, answer “yes” to questions 9a and 9b.

Line 11
Only qualified tuition and related expenses taken into account.
For purposes of claiming the AOTC, only qualified tuition and related
expenses may be taken into account to determine the amount of the
credit a taxpayer may claim. Qualified tuition and related expenses
are tuition and certain related expenses required for enrollment or
attendance at an eligible educational institution. For more
information on determining when tuition and expenses meet the
definition of qualified tuition and related expenses, see Pub. 970.

Line 9a
Tiebreaker rules. These rules determine if a taxpayer may claim a
child as a qualifying child for the EIC when the child meets the
definition of a qualifying child for more than one person.
If only one of the persons is the child's parent, the child is treated
as the qualifying child of the parent.
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You must keep those records for three years from the latest of
the following dates.
The due date of the tax return (not including extensions).
The date the return was filed (if you are a signing tax return
preparer electronically filing the return).
The date the return was presented to the taxpayer for signature (if
you are a signing tax return preparer not electronically filing the
return).
The date you submitted to the signing tax return preparer the part
of the return for which you were responsible (if you are a nonsigning
tax return preparer).
These records may be kept on paper or electronically in the
manner described in Revenue Procedure 97-22 (or later update).
Revenue Procedure 97-22 is on page 9 of Internal Revenue Bulletin
1997-13, which is available at www.irs.gov/pub/irs-irbs/irb97-13.pdf.

Eligible educational institution. An eligible educational institution
is a school offering higher education beyond high school. It is any
college, university, vocational school, or other postsecondary
educational institution eligible to participate in a student aid program
run by the U.S. Department of Education. This term includes most,
but not all, accredited public, nonprofit and privately-owned–
for-profit postsecondary institutions and some foreign institutions.
Eligibility information should be available from the school. More
information, including a link to the list of most eligible schools, is
available at www.irs.gov/individuals/eligible-educational-inst.
Form 1098-T. Unless an exception to reporting applies, a student
enrolled or attending an eligible educational institution should
receive a Form 1098-T from the institution. In 2016, Form 1098-T
reports the amount billed by the institution, or the amount the
student paid to the institution, for qualified tuition and related
expenses during the calendar year, as well as certain refunds and
reimbursements and scholarships and grants processed and
administered by the school. A student may claim the AOTC only for
qualified tuition and related expenses actually paid during the
calendar year. The student may not be able to claim a credit for the
exact amount reported as paid or billed on Form 1098-T. For more
information on eligibility for the AOTC and on determining the
expenses that qualify for the AOTC, see Pub. 970, Form 8863, and
the instructions for Form 8863.

Additional Resources

1. Additional information regarding the eligibility rules for the
EIC may be found in section 32 and in Pub. 596.
2. Additional information regarding the eligibility rules for the
CTC/ACTC may be found in section 24 and in Pub. 972.
3. Additional information regarding the eligibility rules for the
AOTC may be found in section 25A, in Pub. 970, and on Form 8863
and the instructions for Form 8863.

Credit Eligibility Certification

Paperwork Reduction Act Notice. We ask for you to obtain the
information on this form to carry out the Internal Revenue laws of the
United States. You are required to obtain this information.

Line 12

Failure to meet the due diligence requirements for claiming the EIC,
the CTC/ACTC or the AOTC could result in a $510 penalty for each
failure. For example, if you are paid to prepare a return claiming the
EIC, the CTC/ACTC, and the AOTC, and you fail to meet the due
diligence requirements for all of these credits, you could be subject
to a penalty of $1,530.

You are not required to obtain the information requested on a
form that is subject to the Paperwork Reduction Act unless the form
displays a valid OMB control number. Books or records relating to a
form or its instructions must be retained as long as their contents
may become material in the administration of any Internal Revenue
law. Generally, tax returns and return information are confidential, as
required by Internal Revenue Code section 6103.

Document Retention

The time needed to complete and file this form will vary
depending on individual circumstances. The estimated average time
is:

To meet the due diligence requirements for the EIC, the CTC/ACTC
and the AOTC, you must keep all of the following records.
1. A copy of Form 8867;
2. The applicable worksheet(s) or your own worksheet(s) for
any credits claimed specified in Due Diligence Requirements,
earlier;
3. Copies of any documents provided by the taxpayer on which
you relied to determine eligibility for, and the amount of, the credit(s);
4. A record of how, when, and from whom the information used
to prepare Form 8867 and the worksheet(s) was obtained; and
5. A record of any additional questions you may have asked to
determine eligibility for, and the amount of, the credits, and the
taxpayer’s answers.

Learning about the law or the form . . . . . . .
Preparing and sending the form . . . . . . . . .

18 min.
1 hr., 49 min.

If you have comments concerning the accuracy of these time
estimates or suggestions for making this form simpler, we would be
happy to hear from you. See the instructions for the tax return with
which this form is filed.

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