The IRS has issued proposed regulations (REG-103474-18) to implement the Tax Cuts and Jobs Act changes made to IRC §6695(g), expanding the preparer due diligence rules and penalty to cover qualification for head of household filing status.
Congress in recently years has decided that having preparers be required to do more work inquiring about taxpayer’s qualifications for various tax benefits has proven useful, so they have expanded the due diligence from being limited to the earned income tax credit, to cover additional items.
IRC §6695(g), as amended by the Tax Cuts and Jobs Act, reads:
(g) Failure to be diligent in determining eligibility for certain tax benefits
Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining—
(1) eligibility to file as a head of household (as defined in section 2(b)) on the return, or
(2) eligibility for, or the amount of, the credit allowable by section 24, 25A(a)(1), or 32,
shall pay a penalty of $500 for each such failure.
The Tax Cuts and Jobs Act added the provision at IRC §6695(g)(1) to now require due diligence procedures for any client claiming head of household status.
To qualify for head of household filing status, IRC §2(b)requires the following:
(b) Definition of head of household
(1) In general
For purposes of this subtitle, an individual shall be considered a head of a household if, and only if, such individual is not married at the close of his taxable year, is not a surviving spouse (as defined in subsection (a)), and either—
(A) maintains as his home a household which constitutes for more than one-half of such taxable year the principal place of abode, as a member of such household, of—
(i) a qualifying child of the individual (as defined in section 152(c), determined without regard to section 152(e)), but not if such child—
(I) is married at the close of the taxpayer’s taxable year, and
(II) is not a dependent of such individual by reason of section 152(b)(2) or 152(b)(3), or both, or
(ii) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such person under section 151, or
(B) maintains a household which constitutes for such taxable year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such father or mother under section 151.
For purposes of this paragraph, an individual shall be considered as maintaining a household only if over half of the cost of maintaining the household during the taxable year is furnished by such individual.
(2) Determination of status
For purposes of this subsection—
(A) an individual who is legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married;
(B) a taxpayer shall be considered as not married at the close of his taxable year if at any time during the taxable year his spouse is a nonresident alien; and
(C) a taxpayer shall be considered as married at the close of his taxable year if his spouse (other than a spouse described in subparagraph (B)) died during the taxable year.
Notwithstanding paragraph (1), for purposes of this subtitle a taxpayer shall not be considered to be a head of a household—
(A) if at any time during the taxable year he is a nonresident alien; or
(B) by reason of an individual who would not be a dependent for the taxable year but for—
(i) subparagraph (H) of section 152(d)(2), or
(ii) paragraph (3) of section 152(d)
The new regulations will require preparers to make inquiries of the client regarding meeting these qualifications and, in some case, obtain additional corroborating information to confirm the qualification.
The proposed regulations use much the same standard as applied to the items previously subject to the due diligence rules, simply now covering filing status as well.
The basic knowledge and documentation rule is found in Proposed Reg. §1.6995-2(b)(3)(i) which reads:
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.
The preamble notes that this penalty applies in addition to any other due diligence penalty that may apply, so if the preparer has a taxpayer that both failed to qualify for the child tax credit and head of household filing status, two separate §6695(g) penalties apply. That is true even if the same issue (such as inability to claim the child as a dependent) created both errors on the return.
An example of the knowledge necessary for the preparer to have met his/her due diligence obligations for head of household status is provided in Example 5 at Reg. §1.6695-2(b)(3)(ii):
Example 5. In 2019, S engages Preparer E to prepare his 2018 federal income tax return. During Preparer E’s standard intake interview, S states that he has never been married and that his niece and nephew lived with him for part of the 2018 taxable 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. 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.
The preamble notes that the IRS is expected to modify Form 8867 to add the head of household due diligence matters prior to the start of the 2019 filing season.