Tax Return Preparer Due Diligence Penalty Under Section 6695(g), 87444-87448 [2016-28993]

Download as PDF 87444 Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Rules and Regulations FONSI is also available to view online at www.regulations.gov. Executive Order 13132, Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial direct compliance costs on state and local governments or is not required by statute, or the rule preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This final rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments nor preempt state law within the meaning of the Executive Order. Catalog of Federal Domestic Assistance The Catalog of Federal Domestic Assistance number for the Public Housing program is 14.872. List of Subjects 24 CFR Part 965 Government procurement, Grant programs-housing and community development, Lead poisoning, Loan programs-housing and community development, Public housing, Reporting and recordkeeping requirements, Utilities. 24 CFR Part 966 Grant programs-housing and community development, Public housing, Reporting and recordkeeping requirements. Accordingly, for the reasons stated in the preamble, HUD amends 24 CFR parts 965 and 966 as follows: PART 965—PHA-OWNED OR LEASED PROJECTS—GENERAL PROVISIONS 1. The authority citation for 24 CFR part 965 continues to read as follows: ■ 2. Add subpart G to read as follows: sradovich on DSK3GMQ082PROD with RULES Subpart G—Smoke-Free Public Housing Sec. 965.651 Applicability. 965.653 Smoke-free public housing. 965.655 Implementation. Subpart G—Smoke-Free Public Housing § 965.651 Applicability. This subpart applies to public housing units, except for dwelling units in a mixed-finance project. Public housing is defined as low-income housing, and all necessary VerDate Sep<11>2014 15:57 Dec 02, 2016 Jkt 241001 § 965.653 Smoke-free public housing. (a) In general. PHAs must design and implement a policy prohibiting the use of prohibited tobacco products in all public housing living units and interior areas (including but not limited to hallways, rental and administrative offices, community centers, day care centers, laundry centers, and similar structures), as well as in outdoor areas within 25 feet from public housing and administrative office buildings (collectively, ‘‘restricted areas’’) in which public housing is located. (b) Designated smoking areas. PHAs may limit smoking to designated smoking areas on the grounds of the public housing or administrative office buildings in order to accommodate residents who smoke. These areas must be outside of any restricted areas, as defined in paragraph (a) of this section, and may include partially enclosed structures. Alternatively, PHAs may choose to create additional smoke-free areas outside the restricted areas or to make their entire grounds smoke-free. (c) Prohibited tobacco products. A PHA’s smoke-free policy must, at a minimum, ban the use of all prohibited tobacco products. Prohibited tobacco products are defined as: (1) Items that involve the ignition and burning of tobacco leaves, such as (but not limited to) cigarettes, cigars, and pipes. (2) To the extent not covered by paragraph (c)(1) of this section, waterpipes (hookahs). § 965.655 Authority: 42 U.S.C. 1547, 1437a, 1437d, 1437g, and 3535(d). Subpart H is also issued under 42 U.S.C. 4821–4846. ■ appurtenances (e.g., community facilities, public housing offices, day care centers, and laundry rooms) thereto, assisted under the U.S. Housing Act of 1937 (the 1937 Act), other than assistance under section 8 of the 1937 Act. § 966.4 Lease requirements. * * * * * (f) * * * (12) * * * (i) To assure that no tenant, member of the tenant’s household, or guest engages in: (A) Criminal activity. (1) Any criminal activity that threatens the health, safety or right to peaceful enjoyment of the premises by other residents; (2) Any drug-related criminal activity on or off the premises; or (B) Civil activity. For any units covered by 24 CFR part 965, subpart G, any smoking of prohibited tobacco products in restricted areas, as defined by 24 CFR 965.653(a), or in other outdoor areas that the PHA has designated as smoke-free. (ii) To assure that no other person under the tenant’s control engages in: (A) Criminal activity. (1) Any criminal activity that threatens the health, safety or right to peaceful enjoyment of the premises by other residents; (2) Any drug-related criminal activity on the premises; or (B) Civil activity. For any units covered by 24 CFR part 965, subpart G, any smoking of prohibited tobacco products in restricted areas, as defined by 24 CFR 965.653(a), or in other outdoor areas that the PHA has designated as smoke-free. * * * * * Dated: November 28, 2016. ´ Julian Castro, Secretary. [FR Doc. 2016–28986 Filed 12–2–16; 8:45 am] BILLING CODE 4210–67–P DEPARTMENT OF THE TREASURY Implementation. (a) Amendments. PHAs are required to implement the requirements of this subpart by amending each of the following: (1) All applicable PHA plans, according to the provisions in 24 CFR part 903. (2) Tenant leases, according to the provisions of 24 CFR 966.4. (b) Deadline. All PHAs must be in full compliance, with effective policy amendments, by July 30, 2018. PART 966—PUBLIC HOUSING LEASE AND GRIEVANCE PROCEDURE 3. The authority section for 24 CFR part 966 continues to read as follows: ■ Authority: 42 U.S.C. 1437d and 3535(d). PO 00000 4. In § 966.4, revise paragraphs (f)(12)(i) and (ii) to read as follows: ■ Frm 00036 Fmt 4700 Sfmt 4700 Internal Revenue Service 26 CFR Parts 1 and 602 [TD 9799] RIN 1545–BN61 Tax Return Preparer Due Diligence Penalty Under Section 6695(g) Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. AGENCY: This document contains temporary regulations that modify existing regulations related to the penalty under section 6695(g) of the Internal Revenue Code (Code) relating to SUMMARY: E:\FR\FM\05DER1.SGM 05DER1 Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Rules and Regulations tax return preparer due diligence. These temporary regulations implement recent law changes that expand the tax return preparer due diligence penalty under section 6695(g) so that it applies to the child tax credit (CTC), additional child tax credit (ACTC), and the American Opportunity Tax Credit (AOTC), in addition to the earned income credit (EIC). The temporary regulations affect tax return preparers. The substance of the temporary regulations is included in the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register. DATES: Effective Date: These regulations are effective on December 5, 2016. Applicability Date: For dates of applicability, see § 1.6695–2T(e). FOR FURTHER INFORMATION CONTACT: Rachel L. Gregory, 202–317–6845 (not a toll-free number). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in these temporary and final regulations is in §§ 1.6695–2(b) and 1.6695–2T(b) and is reported on Form 8867, ‘‘Paid Preparer’s Due Diligence Checklist.’’ Responses to this collection of information are mandatory. The collection of information in current § 1.6695–2 was previously reviewed and approved under control number 1545– 1570. Control number 1545–1570 was discontinued in 2014, as the burden for the collection of information contained in § 1.6695–2 is reflected in the burden on Form 8867 under control number 1545–1629. sradovich on DSK3GMQ082PROD with RULES Background This document contains amendments to 26 CFR parts 1 and 602 under section 6695(g) of the Code, imposing a penalty on tax return preparers who fail to comply with the due diligence requirements imposed by the Secretary by regulations with respect to determining the eligibility for, or the amount of, the EIC. Section 6695(g) was added to the Code because Congress believed more thorough efforts by tax return preparers are important to improving EIC compliance. H.R. Rep. No. 105–148, 105th Cong. 1st Sess., p. 512 (June 24, 1997). Enacted by section 1085(a)(2) of the Taxpayer Relief Act of 1997, Public Law 105–34 (11 Stat. 788, 955 (1997)), and effective for taxable years beginning after December 31, 1996, section 6695(g) originally imposed a $100 penalty on an income tax return preparer who failed to meet the EIC due diligence requirements set forth in regulations prescribed by the VerDate Sep<11>2014 15:57 Dec 02, 2016 Jkt 241001 Secretary. Section 8246 of the Small Business and Work Opportunity Tax Act of 2007, Public Law 110–28 (121 Stat. 112, 200 (2007)) amended the penalty to apply to all tax return preparers. Section 501(a) of the United States-Korea Free Trade Agreement Implementation Act, Public Law 112–41 (125 Stat. 428, 459 (2011)), amended section 6695(g) to increase the amount of the penalty to $500, effective for returns required to be filed after December 31, 2011. Section 208(c), Div. B of the Tax Increase Prevention Act of 2014, Public Law 113–295 (128 Stat. 4010, 4073 (2014)) (2014 Act), added section 6695(h), which indexes the penalty amount for inflation, effective for returns or claims for refund filed after December 31, 2014. Section 1.6695–2 implements section 6695(g) by imposing due diligence requirements on persons who are tax return preparers under section 7701(a)(36) with respect to determining eligibility for, or the amount of, the EIC. The due diligence requirements set forth in § 1.6695–2(b) are that the preparer must: (1) Complete and submit Form 8867, ‘‘Paid Preparer’s Earned Income Credit Checklist;’’ (2) complete the Earned Income Credit Worksheet (Worksheet), as contained in the Form 1040 instructions or record the preparer’s computation of the credit, including the method and information used to make the computation; (3) not know or have reason to know that any information used by the preparer in determining eligibility for, and the amount of, the EIC is incorrect and make reasonable inquiries when required, documenting those inquiries and responses contemporaneously (knowledge requirement); and (4) retain, for three years from the applicable date, the Form 8867, the Worksheet (or alternative records), and the record of how and when the information used to determine eligibility for, and the amount of, the EIC was obtained by the preparer, including the identity of any person furnishing information and a copy of any document relied on by the preparer. To comply with the knowledge requirement under § 1.6695–2(b)(3), 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 the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. Examples in § 1.6695–2(b)(3)(ii) illustrate this requirement. This knowledge requirement is consistent with the verification requirement imposed on all tax return preparers with respect to PO 00000 Frm 00037 Fmt 4700 Sfmt 4700 87445 preparation of any tax return or claim for refund under the accuracy-related standards set forth in § 1.6694–1(e). A tax return preparer is required to submit the Form 8867 to the IRS when the preparer electronically files the tax return. If a tax return preparer required to complete the Form 8867 is not electronically filing the taxpayer’s return with the IRS, § 1.6695–2(b)(1) provides rules for submission of the form. If the tax return preparer required to complete the Form 8867 is not the signing tax return preparer, the preparer satisfies the submission requirement by providing a copy of the completed Form 8867 to the signing tax return preparer. If the tax return preparer required to complete the Form 8867 is the signing tax return preparer but the taxpayer is not electronically filing the return, the preparer must provide a copy of the completed Form 8867 to the taxpayer to be attached to the return being filed with the IRS. Section 1.6695–2(c) provides that a firm that employs a tax return preparer subject to a penalty under section 6695(g) is also subject to a penalty if certain conditions apply. Under this rule, a firm will be subject to a penalty if and only if one or more members of principal management (or principal officers) of the firm or branch participated in, or prior to the time the return was filed, knew of the failure to comply with the due diligence requirements; the firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements; or, through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) the firm disregarded its own reasonable and appropriate compliance procedures. A firm subject to a section 6695(g) penalty under this section is not eligible for the exception to the penalty in § 1.6695–2(d). Under this exception, the penalty will not be applied if the tax return preparer can demonstrate to the satisfaction of the IRS that, considering all of the facts and circumstances, the tax return preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements, and the failure to meet the due diligence requirements with respect to the particular tax return or claim for refund was isolated and inadvertent. Section 207, Div. Q of the Protecting Americans from Tax Hikes Act of 2015, Public Law 114–113 (129 Stat. 2242, 3082 (2015)) (PATH Act) amended section 6695(g) by expanding the scope E:\FR\FM\05DER1.SGM 05DER1 87446 Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES of the due diligence requirements to also include claims of the CTC/ACTC under section 24 and the AOTC under section 25A(a)(1), effective for taxable years beginning after December 31, 2015. These temporary regulations reflect the changes made to section 6695(g) by the PATH Act by expanding the due diligence requirements to the CTC/ ACTC and the AOTC. These temporary regulations also conform the regulation to the 2014 Act, reflecting that the penalty is to be adjusted for inflation. Explanation of Provisions The temporary regulations amend § 1.6695–2 to implement the changes made by the PATH Act that extend the preparer due diligence requirements to returns or claims for refund including claims of the CTC/ACTC and/or AOTC in addition to the EIC. As a result of these changes, one return or claim for refund may contain claims for more than one credit subject to the due diligence requirements. Pursuant to the statute, each failure to comply with the due diligence requirements set forth in regulations prescribed by the Secretary results in a penalty. The section 6695(g) requirements apply to each credit claimed, meaning more than one penalty could apply to a single return or claim for refund. The temporary regulations provide examples to show how multiple penalties could apply when one return or claim for refund is filed. The Form 8867 has been revised for the 2016 tax year and is a single checklist to be used for all applicable credits (EIC, CTC/ACTC, and/or AOTC) on the return or claim for refund subject to the section 6695(g) due diligence requirements. The Form 8867 was streamlined to eliminate unnecessary redundancy with other forms and schedules. These changes were intended to reduce burden while increasing the utility of the Form 8867 as a checklist for tax return preparers to more accurately determine taxpayer eligibility for credits, thereby reducing errors and increasing compliance by preparers and taxpayers. The temporary regulations clarify § 1.6695–2(b)(1)(ii) to illustrate that the completion of Form 8867 can be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained or previously known by the preparer. The examples provided in § 1.6695– 2(b)(3)(ii) have been updated to provide more insight into when a tax return preparer has satisfied the due diligence knowledge requirement, including for purposes of the CTC and AOTC. The updates to the examples in § 1.6695– VerDate Sep<11>2014 15:57 Dec 02, 2016 Jkt 241001 2T(b)(3)(ii) illustrate that the knowledge requirement for purposes of due diligence can be satisfied in conjunction with a tax return preparer’s informationgathering activities done for the purpose of accurately completing other aspects of a tax return or claim for refund. New examples, Example 2 and Example 4, have also been added to illustrate that in certain circumstances a tax return preparer may satisfy the knowledge requirement based on existing knowledge without having to make additional reasonable inquiries. Another new example, Example 7, provides an example of due diligence for purposes of the AOTC. Section 1.6695–2(a) is amended by the temporary regulations to reflect the changes made by section 208(c) of the 2014 Act, requiring the IRS to index the penalty for inflation for returns or claims for refund filed after December 31, 2014. In addition, § 1.6695–2T(c)(3) clarifies the parenthetical therein by removing the words ‘‘or ascertained.’’ Special Analyses Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory assessment is not required. For applicability of the Regulatory Flexibility Act, please refer to the crossreference notice of proposed rulemaking published elsewhere in this issue of the Federal Register. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact on small businesses. Drafting Information The principal author of this regulation is Rachel L. Gregory, Office of the Associate Chief Counsel (Procedure & Administration). List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 602 Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding a new ■ PO 00000 Frm 00038 Fmt 4700 Sfmt 4700 entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.6695–2T is also issued under 26 U.S.C. 6695(g). * * * * * Par. 2. Section 1.6695–2 is amended by revising the section heading and paragraphs (a), (b)(1)(i) introductory text, (b)(1)(ii), (b)(2), (b)(3)(i) and (ii), (b)(4)(i)(B) and (C), and (c)(3) to read as follows: ■ § 1.6695–2 Tax return preparer due diligence requirements for certain credits. (a) [Reserved]. For further guidance regarding the penalty for failure to meet due diligence requirements with respect to certain credits, see § 1.6695–2T(a). (b) * * * (1) * * * (i) [Reserved]. For further guidance regarding the completion of Form 8867, see § 1.6695–2T(b)(1)(i). * * * * * (ii) [Reserved]. For further guidance regarding the information used to complete the Form 8867, see 1.6695– 2T(b)(1)(ii). (2) [Reserved]. For further guidance regarding computation, see § 1.6695– 2T(b)(2). (3) * * * (i) [Reserved]. For further guidance regarding the knowledge requirement, see § 1.6695–2T(b)(3)(i). (ii) [Reserved]. For current examples, see § 1.6695–2T(b)(3)(ii). (4) * * * (i) * * * (B) [Reserved]. For further guidance on the retention of records, see § 1.6695–2T(b)(4)(i)(B). (C) [Reserved]. For further guidance on the retention of records, see § 1.6695–2T(b)(4)(i)(C). * * * * * (c) * * * (3) [Reserved]. For further guidance on the special rule for firms, see § 1.6695–2T(c)(3). * * * * * ■ Par. 3. Section 1.6695–2T is added to read as follows: § 1.6695–2T Tax return preparer due diligence requirements for certain credits (Temporary). (a) Penalty for failure to meet due diligence requirements—(1) In general. A person who is a tax return preparer (as defined in section 7701(a)(36)) of a tax return or claim for refund under the Internal Revenue Code with respect to determining the eligibility for, or the amount of, the child tax credit (CTC) and additional child tax credit (ACTC) under section 24, the American E:\FR\FM\05DER1.SGM 05DER1 Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Rules and Regulations opportunity tax credit (AOTC) under section 25A(i), or the earned income credit (EIC) under section 32 and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty as prescribed in section 6695(g) (indexed for inflation under section 6695(h)) for each failure. A separate penalty applies with respect to each credit claimed on a return or claim for refund for which the due diligence requirements of this section are not satisfied and for which the exception to penalty provided by paragraph (d) of this section does not apply. (2) Examples. The provisions of paragraph (a)(1) of this section are illustrated by the following examples: sradovich on DSK3GMQ082PROD with RULES Example 1. Preparer A prepares a federal income tax return for a taxpayer claiming the CTC and the AOTC. Preparer A did not meet the due diligence requirements under this section with respect to the CTC or the AOTC claimed on the taxpayer’s return. Unless the exception to penalty provided by paragraph (d) of this section applies, Preparer A is subject to two penalties under section 6695(g): One for failure to meet the due diligence requirements for the CTC and a second penalty for failure to meet the due diligence requirements for the AOTC. Example 2. Preparer B prepares a federal income tax return for a taxpayer claiming the CTC and the AOTC. Preparer B did not meet the due diligence requirements under this section with respect to the CTC claimed on the taxpayer’s return, but Preparer B did meet the due diligence requirements under this section with respect to the AOTC claimed on the taxpayer’s return. Unless the exception to penalty provided by paragraph (d) of this section applies, Preparer B is subject to one penalty under section 6695(g) for the failure to meet the due diligence requirements for the CTC. Preparer B is not subject to a penalty under section 6695(g) for failure to meet the due diligence requirements for the AOTC. (b) [Reserved]. For further guidance, see § 1.6695–2(b). (1) Completion and submission of Form 8867. (i) The tax return preparer must complete Form 8867, ‘‘Paid Preparer’s Due Diligence Checklist,’’ or such other form and such other information as may be prescribed by the Internal Revenue Service (IRS), and— (A) through (C) [Reserved]. For further guidance, see § 1.6695–2(b)(1)(i)(A) through (C). (ii) The tax return preparer’s completion of Form 8867 must be based on information provided by the taxpayer to the tax return preparer or otherwise reasonably obtained or known by the tax return preparer. (2) Computation of credit or credits. (i) When computing the amount of a credit described in paragraph (a) of this section to be claimed on a return or VerDate Sep<11>2014 15:57 Dec 02, 2016 Jkt 241001 claim for refund, the tax return preparer must either— (A) Complete the worksheet in the Form 1040, 1040A, 1040EZ, and/or Form 8863 instructions or such other form including such other information as may be prescribed by the IRS applicable to each credit described in paragraph (a) of this section claimed on the return or claim for refund; or (B) Otherwise record in one or more documents in the tax return preparer’s paper or electronic files the tax return preparer’s computation of the credit or credits claimed on the return or claim for refund, including the method and information used to make the computations. (ii) The tax return preparer’s completion of an applicable worksheet described in paragraph (b)(2)(i)(A) of this section (or other record of the tax return preparer’s computation of the credit or credits permitted under paragraph (b)(2)(i)(B) of this section) must be based on information provided by the taxpayer to the tax return preparer or otherwise reasonably obtained or known by the tax return preparer. (3) Knowledge—(i) In general. 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 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 files any inquiries made and the responses to those inquiries. (ii) Examples. The provisions of paragraph (b)(3)(i) of this section are illustrated by the following examples: Example 1. In 2018, Q, a 22 year-old taxpayer, engages Preparer C to prepare Q’s 2017 federal income tax return. Q completes Preparer C’s standard intake questionnaire and states that she has never been married and has two sons, ages 10 and 11. Based on the intake sheet and other information that Q provides, including information that shows that the boys lived with Q throughout 2017, Preparer C believes that Q may be eligible to claim each boy as a qualifying child for purposes of the EIC and the CTC. However, Q provides no information to Preparer C, and Preparer C does not have any information from other sources, to verify the relationship PO 00000 Frm 00039 Fmt 4700 Sfmt 4700 87447 between Q and the boys. To meet the knowledge requirement in paragraph (b)(3) of this section, Preparer C must make reasonable inquiries to determine whether each boy is a qualifying child of Q for purposes of the EIC and the CTC, including reasonable inquiries to verify Q’s relationship to the boys, and Preparer C must contemporaneously document these inquiries and the responses. Example 2. Assume the same facts as in Example 1 of this paragraph (b)(3)(ii). In addition, as part of preparing Q’s 2017 federal income tax return, Preparer C made sufficient reasonable inquiries to verify that the boys were Q’s legally adopted children. In 2019, Q engages Preparer C to prepare her 2018 federal income tax return. When preparing Q’s 2018 federal income tax return, Preparer C is not required to make additional inquiries to determine the boys relationship to Q for purposes of the knowledge requirement in paragraph (b)(3) of this section. Example 3. In 2018, R, an 18 year-old taxpayer, engages Preparer D to prepare R’s 2017 federal income tax return. R completes Preparer D’s standard intake questionnaire and states that she has never been married, has one child, an infant, and that she and her infant lived with R’s parents during part of the 2017 tax year. R also provides Preparer D with a Form W–2 showing that she earned $10,000 during 2017. R provides no other documents or information showing that R earned any other income during the tax year. Based on the intake sheet and other information that R provides, Preparer D believes that R may be eligible to claim the infant as a qualifying child for the EIC and the CTC. To meet the knowledge requirement in paragraph (b)(3) of this section, Preparer D must make reasonable inquiries to determine whether R is eligible to claim these credits, including reasonable inquiries to verify that R is not a qualifying child of her parents (which would make R ineligible to claim the EIC) or a dependent of her parents (which would make R ineligible to claim the CTC), and Preparer D must contemporaneously document these inquiries and the responses. Example 4. The facts are the same as the facts in Example 3 of this paragraph (b)(3)(ii). In addition, Preparer D previously prepared the 2017 joint federal income tax return for R’s parents. Based on information provided by R’s parents, Preparer D has determined that R is not eligible to be claimed as a dependent or as a qualifying child for purposes of the EIC or CTC on R’s parents’ return. Therefore, for purposes of the knowledge requirement in paragraph (b)(3) of this section, Preparer D is not required to make additional inquiries to determine that R is not her parents’ qualifying child or dependent. Example 5. In 2018, S engages Preparer E to prepare his 2017 federal income tax return. During Preparer E’s standard intake interview, S states that he has never been married and his niece and nephew lived with him for part of the 2017 tax year. Preparer E believes S may be eligible to claim each of these children as a qualifying child for purposes of the EIC and the CTC. To meet the E:\FR\FM\05DER1.SGM 05DER1 87448 Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES knowledge requirement in paragraph (b)(3) of this section, Preparer E must make reasonable inquiries to determine whether each child is a qualifying child for purposes of the EIC and the CTC, including reasonable inquiries about the children’s parents and the children’s residency, and Preparer E must contemporaneously document these inquiries and the responses. Example 6. W engages Preparer F to prepare her federal income tax return. During Preparer F’s standard intake interview, W states that she is 50 years old, has never been married, and has no children. W further states to Preparer F that during the tax year she was self-employed, earned $10,000 from her business, and had no business expenses or other income. Preparer F believes W may be eligible for the EIC. To meet the knowledge requirement in paragraph (b)(3) of this section, Preparer F must make reasonable inquiries to determine whether W is eligible for the EIC, including reasonable inquiries to determine whether W’s business income and expenses are correct, and Preparer F must contemporaneously document these inquiries and the responses. Example 7. Y, who is 32 years old, engages Preparer G to prepare his federal income tax return. Y completes Preparer G’s standard intake questionnaire and states that he has never been married. As part of Preparer G’s client intake process, Y provides Preparer G with a copy of the Form 1098–T Y received showing that University M billed $4,000 of qualified tuition and related expenses for Y’s enrollment or attendance at the university and that Y was at least a half-time undergraduate student. Preparer G believes that Y may be eligible for the AOTC. To meet the knowledge requirements in paragraph (b)(3) of this section, Preparer G must make reasonable inquiries to determine whether Y is eligible for the AOTC, as Form 1098–T does not contain all the information needed to determine eligibility for the AOTC or to calculate the amount of the credit if Y is eligible, and contemporaneously document these inquiries and the responses. complete Form 8867 and/or an applicable worksheet required under paragraph (b)(2)(i)(A) of this section (or other record of the tax return preparer’s computation permitted under paragraph (b)(2)(i)(B) of this section). (ii) through (iii) [Reserved]. For further guidance, see § 1.6695–2(b)(4)(ii) through (iii). (c) [Reserved]. For further guidance, see § 1.6695–2(c). (1) through (2) [Reserved]. For further guidance, see § 1.6695–2(c)(1) through (2). (3) The firm disregarded its reasonable and appropriate compliance procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate) in the preparation of the tax return or claim for refund with respect to which the penalty is imposed. (d) [Reserved]. For further guidance, see § 1.6695–2(d). (e) Applicability date. This section applies to tax returns and claims for refund prepared on or after December 5, 2016 with respect to tax years beginning after December 31, 2015. For returns and claims for refund prepared before December 5, 2016 with respect to tax years beginning before January 1, 2016, the rules that apply are contained in § 1.6695–2 in effect prior to December 5, 2016. (See 26 CFR part 1 revised as of April 2016). (f) Expiration date. This section will expire on December 5, 2019. (4) Retention of records. (i) [Reserved]. For further guidance, see § 1.6695–2(b)(4)(i). (A) [Reserved]. For further guidance, see § 1.6695–2(b)(4)(i)(A). (B) A copy of each completed worksheet required under paragraph (b)(2)(i)(A) of this section (or other record of the tax return preparer’s computation permitted under paragraph (b)(2)(i)(B) of this section); and (C) A record of how and when the information used to complete Form 8867 and the applicable worksheets required under paragraph (b)(2)(i)(A) of this section (or other record of the tax return preparer’s computation permitted under paragraph (b)(2)(i)(B) of this section) was obtained by the tax return preparer, including the identity of any person furnishing the information, as well as a copy of any document that was provided by the taxpayer and on which the tax return preparer relied to PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT VerDate Sep<11>2014 15:57 Dec 02, 2016 Jkt 241001 ■ Par. 4. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. § 602.101 [Amended] Par. 5. In § 602.101, paragraph (b) is amended by removing the entry for § 1.6695–2 from the table. ■ John M. Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: November 21, 2016. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2016–28993 Filed 12–2–16; 8:45 am] BILLING CODE 4830–01–P PO 00000 Frm 00040 Fmt 4700 Sfmt 4700 DEPARTMENT OF DEFENSE Office of the Secretary 32 CFR Part 208 [Docket ID: DOD–2013–OS–0021] RIN 0790–AJ01 National Security Education Program (NSEP) and NSEP Service Agreement Under Secretary of Defense for Personnel and Readiness, DoD. ACTION: Final rule. AGENCY: This final rule implements the responsibilities of the Secretary of Defense for administering the National Security Education Program (NSEP) and explains the responsibilities of the Under Secretary of Defense for Personnel and Readiness (USD(P&R)) for policy and funding oversight for NSEP. It discusses requirements for administering and executing the NSEP service agreement and; and assigns oversight of NSEP to the Defense Language and National Security Education Office (DLNSEO). DATES: This final rule is effective on January 4, 2017. FOR FURTHER INFORMATION CONTACT: Alison Patz, 571–256–0771. SUPPLEMENTARY INFORMATION: On November 9, 2015, the Department of Defense published a proposed rule titled, ‘‘National Security Education Program (NSEP) and NSEP Service Agreement,’’ (80 FR 69166–69171) for a 60-day public comment period. The public comment period closed on January 8, 2016. No public comments were received. After the 60-day public comment period for the proposed rule, minor administrative edits were made to provide clarity or remove outdated, unnecessary, or confusing language in the regulatory text due to an internal DoD re-organization. Offices and symbols have been updated to reflect the most current organizational structure. SUMMARY: Background The David L. Boren National Security Education Act of 1991 (Title VIII, Pub. L. 102–183), as amended, codified at 50 U.S.C. 1901 et seq. (NSEA), mandated that the Secretary of Defense create and sustain a program to award scholarships to U.S. undergraduate students, fellowships to U.S. graduate students, and grants to U.S. institutions of higher education. The NSEP is authorized through 50 U.S.C. 1901–1912 to award scholarships, fellowships, and grants to E:\FR\FM\05DER1.SGM 05DER1

Agencies

[Federal Register Volume 81, Number 233 (Monday, December 5, 2016)]
[Rules and Regulations]
[Pages 87444-87448]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28993]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9799]
RIN 1545-BN61


Tax Return Preparer Due Diligence Penalty Under Section 6695(g)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains temporary regulations that modify 
existing regulations related to the penalty under section 6695(g) of 
the Internal Revenue Code (Code) relating to

[[Page 87445]]

tax return preparer due diligence. These temporary regulations 
implement recent law changes that expand the tax return preparer due 
diligence penalty under section 6695(g) so that it applies to the child 
tax credit (CTC), additional child tax credit (ACTC), and the American 
Opportunity Tax Credit (AOTC), in addition to the earned income credit 
(EIC). The temporary regulations affect tax return preparers. The 
substance of the temporary regulations is included in the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on December 5, 
2016.
    Applicability Date: For dates of applicability, see Sec.  1.6695-
2T(e).

FOR FURTHER INFORMATION CONTACT: Rachel L. Gregory, 202-317-6845 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these temporary and 
final regulations is in Sec. Sec.  1.6695-2(b) and 1.6695-2T(b) and is 
reported on Form 8867, ``Paid Preparer's Due Diligence Checklist.'' 
Responses to this collection of information are mandatory. The 
collection of information in current Sec.  1.6695-2 was previously 
reviewed and approved under control number 1545-1570. Control number 
1545-1570 was discontinued in 2014, as the burden for the collection of 
information contained in Sec.  1.6695-2 is reflected in the burden on 
Form 8867 under control number 1545-1629.

Background

    This document contains amendments to 26 CFR parts 1 and 602 under 
section 6695(g) of the Code, imposing a penalty on tax return preparers 
who fail to comply with the due diligence requirements imposed by the 
Secretary by regulations with respect to determining the eligibility 
for, or the amount of, the EIC. Section 6695(g) was added to the Code 
because Congress believed more thorough efforts by tax return preparers 
are important to improving EIC compliance. H.R. Rep. No. 105-148, 105th 
Cong. 1st Sess., p. 512 (June 24, 1997).
    Enacted by section 1085(a)(2) of the Taxpayer Relief Act of 1997, 
Public Law 105-34 (11 Stat. 788, 955 (1997)), and effective for taxable 
years beginning after December 31, 1996, section 6695(g) originally 
imposed a $100 penalty on an income tax return preparer who failed to 
meet the EIC due diligence requirements set forth in regulations 
prescribed by the Secretary. Section 8246 of the Small Business and 
Work Opportunity Tax Act of 2007, Public Law 110-28 (121 Stat. 112, 200 
(2007)) amended the penalty to apply to all tax return preparers. 
Section 501(a) of the United States-Korea Free Trade Agreement 
Implementation Act, Public Law 112-41 (125 Stat. 428, 459 (2011)), 
amended section 6695(g) to increase the amount of the penalty to $500, 
effective for returns required to be filed after December 31, 2011. 
Section 208(c), Div. B of the Tax Increase Prevention Act of 2014, 
Public Law 113-295 (128 Stat. 4010, 4073 (2014)) (2014 Act), added 
section 6695(h), which indexes the penalty amount for inflation, 
effective for returns or claims for refund filed after December 31, 
2014.
    Section 1.6695-2 implements section 6695(g) by imposing due 
diligence requirements on persons who are tax return preparers under 
section 7701(a)(36) with respect to determining eligibility for, or the 
amount of, the EIC. The due diligence requirements set forth in Sec.  
1.6695-2(b) are that the preparer must: (1) Complete and submit Form 
8867, ``Paid Preparer's Earned Income Credit Checklist;'' (2) complete 
the Earned Income Credit Worksheet (Worksheet), as contained in the 
Form 1040 instructions or record the preparer's computation of the 
credit, including the method and information used to make the 
computation; (3) not know or have reason to know that any information 
used by the preparer in determining eligibility for, and the amount of, 
the EIC is incorrect and make reasonable inquiries when required, 
documenting those inquiries and responses contemporaneously (knowledge 
requirement); and (4) retain, for three years from the applicable date, 
the Form 8867, the Worksheet (or alternative records), and the record 
of how and when the information used to determine eligibility for, and 
the amount of, the EIC was obtained by the preparer, including the 
identity of any person furnishing information and a copy of any 
document relied on by the preparer.
    To comply with the knowledge requirement under Sec.  1.6695-
2(b)(3), 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 the information furnished to the tax 
return preparer appears to be incorrect, inconsistent, or incomplete. 
Examples in Sec.  1.6695-2(b)(3)(ii) illustrate this requirement. This 
knowledge requirement is consistent with the verification requirement 
imposed on all tax return preparers with respect to preparation of any 
tax return or claim for refund under the accuracy-related standards set 
forth in Sec.  1.6694-1(e).
    A tax return preparer is required to submit the Form 8867 to the 
IRS when the preparer electronically files the tax return. If a tax 
return preparer required to complete the Form 8867 is not 
electronically filing the taxpayer's return with the IRS, Sec.  1.6695-
2(b)(1) provides rules for submission of the form. If the tax return 
preparer required to complete the Form 8867 is not the signing tax 
return preparer, the preparer satisfies the submission requirement by 
providing a copy of the completed Form 8867 to the signing tax return 
preparer. If the tax return preparer required to complete the Form 8867 
is the signing tax return preparer but the taxpayer is not 
electronically filing the return, the preparer must provide a copy of 
the completed Form 8867 to the taxpayer to be attached to the return 
being filed with the IRS.
    Section 1.6695-2(c) provides that a firm that employs a tax return 
preparer subject to a penalty under section 6695(g) is also subject to 
a penalty if certain conditions apply. Under this rule, a firm will be 
subject to a penalty if and only if one or more members of principal 
management (or principal officers) of the firm or branch participated 
in, or prior to the time the return was filed, knew of the failure to 
comply with the due diligence requirements; the firm failed to 
establish reasonable and appropriate procedures to ensure compliance 
with the due diligence requirements; or, through willfulness, 
recklessness, or gross indifference (including ignoring facts that 
would lead a person of reasonable prudence and competence to 
investigate or ascertain) the firm disregarded its own reasonable and 
appropriate compliance procedures. A firm subject to a section 6695(g) 
penalty under this section is not eligible for the exception to the 
penalty in Sec.  1.6695-2(d). Under this exception, the penalty will 
not be applied if the tax return preparer can demonstrate to the 
satisfaction of the IRS that, considering all of the facts and 
circumstances, the tax return preparer's normal office procedures are 
reasonably designed and routinely followed to ensure compliance with 
the due diligence requirements, and the failure to meet the due 
diligence requirements with respect to the particular tax return or 
claim for refund was isolated and inadvertent.
    Section 207, Div. Q of the Protecting Americans from Tax Hikes Act 
of 2015, Public Law 114-113 (129 Stat. 2242, 3082 (2015)) (PATH Act) 
amended section 6695(g) by expanding the scope

[[Page 87446]]

of the due diligence requirements to also include claims of the CTC/
ACTC under section 24 and the AOTC under section 25A(a)(1), effective 
for taxable years beginning after December 31, 2015.
    These temporary regulations reflect the changes made to section 
6695(g) by the PATH Act by expanding the due diligence requirements to 
the CTC/ACTC and the AOTC. These temporary regulations also conform the 
regulation to the 2014 Act, reflecting that the penalty is to be 
adjusted for inflation.

Explanation of Provisions

    The temporary regulations amend Sec.  1.6695-2 to implement the 
changes made by the PATH Act that extend the preparer due diligence 
requirements to returns or claims for refund including claims of the 
CTC/ACTC and/or AOTC in addition to the EIC. As a result of these 
changes, one return or claim for refund may contain claims for more 
than one credit subject to the due diligence requirements. Pursuant to 
the statute, each failure to comply with the due diligence requirements 
set forth in regulations prescribed by the Secretary results in a 
penalty. The section 6695(g) requirements apply to each credit claimed, 
meaning more than one penalty could apply to a single return or claim 
for refund. The temporary regulations provide examples to show how 
multiple penalties could apply when one return or claim for refund is 
filed.
    The Form 8867 has been revised for the 2016 tax year and is a 
single checklist to be used for all applicable credits (EIC, CTC/ACTC, 
and/or AOTC) on the return or claim for refund subject to the section 
6695(g) due diligence requirements. The Form 8867 was streamlined to 
eliminate unnecessary redundancy with other forms and schedules. These 
changes were intended to reduce burden while increasing the utility of 
the Form 8867 as a checklist for tax return preparers to more 
accurately determine taxpayer eligibility for credits, thereby reducing 
errors and increasing compliance by preparers and taxpayers. The 
temporary regulations clarify Sec.  1.6695-2(b)(1)(ii) to illustrate 
that the completion of Form 8867 can be based on information provided 
by the taxpayer to the preparer or otherwise reasonably obtained or 
previously known by the preparer.
    The examples provided in Sec.  1.6695-2(b)(3)(ii) have been updated 
to provide more insight into when a tax return preparer has satisfied 
the due diligence knowledge requirement, including for purposes of the 
CTC and AOTC. The updates to the examples in Sec.  1.6695-2T(b)(3)(ii) 
illustrate that the knowledge requirement for purposes of due diligence 
can be satisfied in conjunction with a tax return preparer's 
information-gathering activities done for the purpose of accurately 
completing other aspects of a tax return or claim for refund. New 
examples, Example 2 and Example 4, have also been added to illustrate 
that in certain circumstances a tax return preparer may satisfy the 
knowledge requirement based on existing knowledge without having to 
make additional reasonable inquiries. Another new example, Example 7, 
provides an example of due diligence for purposes of the AOTC.
    Section 1.6695-2(a) is amended by the temporary regulations to 
reflect the changes made by section 208(c) of the 2014 Act, requiring 
the IRS to index the penalty for inflation for returns or claims for 
refund filed after December 31, 2014. In addition, Sec.  1.6695-
2T(c)(3) clarifies the parenthetical therein by removing the words ``or 
ascertained.''

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory assessment is not 
required. For applicability of the Regulatory Flexibility Act, please 
refer to the cross-reference notice of proposed rulemaking published 
elsewhere in this issue of the Federal Register. Pursuant to section 
7805(f) of the Code, these regulations have been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on the impact on small businesses.

Drafting Information

    The principal author of this regulation is Rachel L. Gregory, 
Office of the Associate Chief Counsel (Procedure & Administration).

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding a 
new entry in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.6695-2T is also issued under 26 U.S.C. 6695(g).
* * * * *

0
Par. 2. Section 1.6695-2 is amended by revising the section heading and 
paragraphs (a), (b)(1)(i) introductory text, (b)(1)(ii), (b)(2), 
(b)(3)(i) and (ii), (b)(4)(i)(B) and (C), and (c)(3) to read as 
follows:


Sec.  1.6695-2  Tax return preparer due diligence requirements for 
certain credits.

    (a) [Reserved]. For further guidance regarding the penalty for 
failure to meet due diligence requirements with respect to certain 
credits, see Sec.  1.6695-2T(a).
    (b) * * *
    (1) * * *
    (i) [Reserved]. For further guidance regarding the completion of 
Form 8867, see Sec.  1.6695-2T(b)(1)(i).
* * * * *
    (ii) [Reserved]. For further guidance regarding the information 
used to complete the Form 8867, see 1.6695-2T(b)(1)(ii).
    (2) [Reserved]. For further guidance regarding computation, see 
Sec.  1.6695-2T(b)(2).
    (3) * * *
    (i) [Reserved]. For further guidance regarding the knowledge 
requirement, see Sec.  1.6695-2T(b)(3)(i).
    (ii) [Reserved]. For current examples, see Sec.  1.6695-
2T(b)(3)(ii).
    (4) * * *
    (i) * * *
    (B) [Reserved]. For further guidance on the retention of records, 
see Sec.  1.6695-2T(b)(4)(i)(B).
    (C) [Reserved]. For further guidance on the retention of records, 
see Sec.  1.6695-2T(b)(4)(i)(C).
* * * * *
    (c) * * *
    (3) [Reserved]. For further guidance on the special rule for firms, 
see Sec.  1.6695-2T(c)(3).
* * * * *

0
Par. 3. Section 1.6695-2T is added to read as follows:


Sec.  1.6695-2T  Tax return preparer due diligence requirements for 
certain credits (Temporary).

    (a) Penalty for failure to meet due diligence requirements--(1) In 
general. A person who is a tax return preparer (as defined in section 
7701(a)(36)) of a tax return or claim for refund under the Internal 
Revenue Code with respect to determining the eligibility for, or the 
amount of, the child tax credit (CTC) and additional child tax credit 
(ACTC) under section 24, the American

[[Page 87447]]

opportunity tax credit (AOTC) under section 25A(i), or the earned 
income credit (EIC) under section 32 and who fails to satisfy the due 
diligence requirements of paragraph (b) of this section will be subject 
to a penalty as prescribed in section 6695(g) (indexed for inflation 
under section 6695(h)) for each failure. A separate penalty applies 
with respect to each credit claimed on a return or claim for refund for 
which the due diligence requirements of this section are not satisfied 
and for which the exception to penalty provided by paragraph (d) of 
this section does not apply.
    (2) Examples. The provisions of paragraph (a)(1) of this section 
are illustrated by the following examples:

    Example 1.  Preparer A prepares a federal income tax return for 
a taxpayer claiming the CTC and the AOTC. Preparer A did not meet 
the due diligence requirements under this section with respect to 
the CTC or the AOTC claimed on the taxpayer's return. Unless the 
exception to penalty provided by paragraph (d) of this section 
applies, Preparer A is subject to two penalties under section 
6695(g): One for failure to meet the due diligence requirements for 
the CTC and a second penalty for failure to meet the due diligence 
requirements for the AOTC.
    Example 2.  Preparer B prepares a federal income tax return for 
a taxpayer claiming the CTC and the AOTC. Preparer B did not meet 
the due diligence requirements under this section with respect to 
the CTC claimed on the taxpayer's return, but Preparer B did meet 
the due diligence requirements under this section with respect to 
the AOTC claimed on the taxpayer's return. Unless the exception to 
penalty provided by paragraph (d) of this section applies, Preparer 
B is subject to one penalty under section 6695(g) for the failure to 
meet the due diligence requirements for the CTC. Preparer B is not 
subject to a penalty under section 6695(g) for failure to meet the 
due diligence requirements for the AOTC.

    (b) [Reserved]. For further guidance, see Sec.  1.6695-2(b).
    (1) Completion and submission of Form 8867. (i) The tax return 
preparer must complete Form 8867, ``Paid Preparer's Due Diligence 
Checklist,'' or such other form and such other information as may be 
prescribed by the Internal Revenue Service (IRS), and--
    (A) through (C) [Reserved]. For further guidance, see Sec.  1.6695-
2(b)(1)(i)(A) through (C).
    (ii) The tax return preparer's completion of Form 8867 must be 
based on information provided by the taxpayer to the tax return 
preparer or otherwise reasonably obtained or known by the tax return 
preparer.
    (2) Computation of credit or credits. (i) When computing the amount 
of a credit described in paragraph (a) of this section to be claimed on 
a return or claim for refund, the tax return preparer must either--
    (A) Complete the worksheet in the Form 1040, 1040A, 1040EZ, and/or 
Form 8863 instructions or such other form including such other 
information as may be prescribed by the IRS applicable to each credit 
described in paragraph (a) of this section claimed on the return or 
claim for refund; or
    (B) Otherwise record in one or more documents in the tax return 
preparer's paper or electronic files the tax return preparer's 
computation of the credit or credits claimed on the return or claim for 
refund, including the method and information used to make the 
computations.
    (ii) The tax return preparer's completion of an applicable 
worksheet described in paragraph (b)(2)(i)(A) of this section (or other 
record of the tax return preparer's computation of the credit or 
credits permitted under paragraph (b)(2)(i)(B) of this section) must be 
based on information provided by the taxpayer to the tax return 
preparer or otherwise reasonably obtained or known by the tax return 
preparer.
    (3) Knowledge--(i) In general. 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 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 files any inquiries made and the responses to those 
inquiries.
    (ii) Examples. The provisions of paragraph (b)(3)(i) of this 
section are illustrated by the following examples:

    Example 1.  In 2018, Q, a 22 year-old taxpayer, engages Preparer 
C to prepare Q's 2017 federal income tax return. Q completes 
Preparer C's standard intake questionnaire and states that she has 
never been married and has two sons, ages 10 and 11. Based on the 
intake sheet and other information that Q provides, including 
information that shows that the boys lived with Q throughout 2017, 
Preparer C believes that Q may be eligible to claim each boy as a 
qualifying child for purposes of the EIC and the CTC. However, Q 
provides no information to Preparer C, and Preparer C does not have 
any information from other sources, to verify the relationship 
between Q and the boys. To meet the knowledge requirement in 
paragraph (b)(3) of this section, Preparer C must make reasonable 
inquiries to determine whether each boy is a qualifying child of Q 
for purposes of the EIC and the CTC, including reasonable inquiries 
to verify Q's relationship to the boys, and Preparer C must 
contemporaneously document these inquiries and the responses.
    Example 2.  Assume the same facts as in Example 1 of this 
paragraph (b)(3)(ii). In addition, as part of preparing Q's 2017 
federal income tax return, Preparer C made sufficient reasonable 
inquiries to verify that the boys were Q's legally adopted children. 
In 2019, Q engages Preparer C to prepare her 2018 federal income tax 
return. When preparing Q's 2018 federal income tax return, Preparer 
C is not required to make additional inquiries to determine the boys 
relationship to Q for purposes of the knowledge requirement in 
paragraph (b)(3) of this section.
    Example 3.  In 2018, R, an 18 year-old taxpayer, engages 
Preparer D to prepare R's 2017 federal income tax return. R 
completes Preparer D's standard intake questionnaire and states that 
she has never been married, has one child, an infant, and that she 
and her infant lived with R's parents during part of the 2017 tax 
year. R also provides Preparer D with a Form W-2 showing that she 
earned $10,000 during 2017. R provides no other documents or 
information showing that R earned any other income during the tax 
year. Based on the intake sheet and other information that R 
provides, Preparer D believes that R may be eligible to claim the 
infant as a qualifying child for the EIC and the CTC. To meet the 
knowledge requirement in paragraph (b)(3) of this section, Preparer 
D must make reasonable inquiries to determine whether R is eligible 
to claim these credits, including reasonable inquiries to verify 
that R is not a qualifying child of her parents (which would make R 
ineligible to claim the EIC) or a dependent of her parents (which 
would make R ineligible to claim the CTC), and Preparer D must 
contemporaneously document these inquiries and the responses.
    Example 4.  The facts are the same as the facts in Example 3 of 
this paragraph (b)(3)(ii). In addition, Preparer D previously 
prepared the 2017 joint federal income tax return for R's parents. 
Based on information provided by R's parents, Preparer D has 
determined that R is not eligible to be claimed as a dependent or as 
a qualifying child for purposes of the EIC or CTC on R's parents' 
return. Therefore, for purposes of the knowledge requirement in 
paragraph (b)(3) of this section, Preparer D is not required to make 
additional inquiries to determine that R is not her parents' 
qualifying child or dependent.
    Example 5.  In 2018, S engages Preparer E to prepare his 2017 
federal income tax return. During Preparer E's standard intake 
interview, S states that he has never been married and his niece and 
nephew lived with him for part of the 2017 tax year. Preparer E 
believes S may be eligible to claim each of these children as a 
qualifying child for purposes of the EIC and the CTC. To meet the

[[Page 87448]]

knowledge requirement in paragraph (b)(3) of this section, Preparer 
E must make reasonable inquiries to determine whether each child is 
a qualifying child for purposes of the EIC and the CTC, including 
reasonable inquiries about the children's parents and the children's 
residency, and Preparer E must contemporaneously document these 
inquiries and the responses.
    Example 6.  W engages Preparer F to prepare her federal income 
tax return. During Preparer F's standard intake interview, W states 
that she is 50 years old, has never been married, and has no 
children. W further states to Preparer F that during the tax year 
she was self-employed, earned $10,000 from her business, and had no 
business expenses or other income. Preparer F believes W may be 
eligible for the EIC. To meet the knowledge requirement in paragraph 
(b)(3) of this section, Preparer F must make reasonable inquiries to 
determine whether W is eligible for the EIC, including reasonable 
inquiries to determine whether W's business income and expenses are 
correct, and Preparer F must contemporaneously document these 
inquiries and the responses.
    Example 7.  Y, who is 32 years old, engages Preparer G to 
prepare his federal income tax return. Y completes Preparer G's 
standard intake questionnaire and states that he has never been 
married. As part of Preparer G's client intake process, Y provides 
Preparer G with a copy of the Form 1098-T Y received showing that 
University M billed $4,000 of qualified tuition and related expenses 
for Y's enrollment or attendance at the university and that Y was at 
least a half-time undergraduate student. Preparer G believes that Y 
may be eligible for the AOTC. To meet the knowledge requirements in 
paragraph (b)(3) of this section, Preparer G must make reasonable 
inquiries to determine whether Y is eligible for the AOTC, as Form 
1098-T does not contain all the information needed to determine 
eligibility for the AOTC or to calculate the amount of the credit if 
Y is eligible, and contemporaneously document these inquiries and 
the responses.

    (4) Retention of records. (i) [Reserved]. For further guidance, see 
Sec.  1.6695-2(b)(4)(i).
    (A) [Reserved]. For further guidance, see Sec.  1.6695-
2(b)(4)(i)(A).
    (B) A copy of each completed worksheet required under paragraph 
(b)(2)(i)(A) of this section (or other record of the tax return 
preparer's computation permitted under paragraph (b)(2)(i)(B) of this 
section); and
    (C) A record of how and when the information used to complete Form 
8867 and the applicable worksheets required under paragraph 
(b)(2)(i)(A) of this section (or other record of the tax return 
preparer's computation permitted under paragraph (b)(2)(i)(B) of this 
section) was obtained by the tax return preparer, including the 
identity of any person furnishing the information, as well as a copy of 
any document that was provided by the taxpayer and on which the tax 
return preparer relied to complete Form 8867 and/or an applicable 
worksheet required under paragraph (b)(2)(i)(A) of this section (or 
other record of the tax return preparer's computation permitted under 
paragraph (b)(2)(i)(B) of this section).
    (ii) through (iii) [Reserved]. For further guidance, see Sec.  
1.6695-2(b)(4)(ii) through (iii).
    (c) [Reserved]. For further guidance, see Sec.  1.6695-2(c).
    (1) through (2) [Reserved]. For further guidance, see Sec.  1.6695-
2(c)(1) through (2).
    (3) The firm disregarded its reasonable and appropriate compliance 
procedures through willfulness, recklessness, or gross indifference 
(including ignoring facts that would lead a person of reasonable 
prudence and competence to investigate) in the preparation of the tax 
return or claim for refund with respect to which the penalty is 
imposed.
    (d) [Reserved]. For further guidance, see Sec.  1.6695-2(d).
    (e) Applicability date. This section applies to tax returns and 
claims for refund prepared on or after December 5, 2016 with respect to 
tax years beginning after December 31, 2015. For returns and claims for 
refund prepared before December 5, 2016 with respect to tax years 
beginning before January 1, 2016, the rules that apply are contained in 
Sec.  1.6695-2 in effect prior to December 5, 2016. (See 26 CFR part 1 
revised as of April 2016).
    (f) Expiration date. This section will expire on December 5, 2019.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
 Par. 4. The authority citation for part 602 continues to read as 
follows:

     Authority:  26 U.S.C. 7805.


 Sec.  602.101  [Amended]

0
Par. 5. In Sec.  602.101, paragraph (b) is amended by removing the 
entry for Sec.  1.6695-2 from the table.

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: November 21, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-28993 Filed 12-2-16; 8:45 am]
 BILLING CODE 4830-01-P