[Code of Federal Regulations]
[Title 26, Volume 13]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR]

[Page 529-530]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Procedure and Administration--Table of Contents
 
Sec.  1.6695-2  Preparer due diligence requirements for determining 
earned income credit eligibility.

    (a) Penalty for failure to meet due diligence requirements. A person 
who is an income tax return preparer (preparer) of an income tax return 
or claim for refund under subtitle A of the Internal Revenue Code with 
respect to determining the eligibility for, or the amount of, 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 of $100 for each such failure. However, no penalty will be 
imposed under section 6695(g) on a person who is an income tax return 
preparer solely by reason of--
    (1) Section 301.7701-15(a)(2) and (b) of this chapter, on account of 
having given advice on specific issues of law; or
    (2) Section 301.7701-15(b)(3) of this chapter, on account of having 
prepared the return solely because of having prepared another return 
that affects amounts reported on the return.
    (b) Due diligence requirements. A preparer must satisfy the 
following due diligence requirements:
    (1) Completion of eligibility checklist. (i) The preparer must 
either--
    (A) Complete Form 8867, ``Paid Preparer's Earned Income Credit 
Checklist,'' or such other form and such

[[Page 530]]

other information as may be prescribed by the Internal Revenue Service 
(IRS) (Eligibility Checklist); or
    (B) Otherwise record in the preparer's paper or electronic files the 
information necessary to complete the Eligibility Checklist (Alternative 
Eligibility Record). The Alternative Eligibility Record may consist of 
one or more documents containing the required information.
    (ii) The preparer's completion of the Eligibility Checklist or 
Alternative Eligibility Record must be based on information provided by 
the taxpayer to the preparer or otherwise reasonably obtained by the 
preparer.
    (2) Computation of credit. (i) The preparer must either--
    (A) Complete the Earned Income Credit Worksheet in the Form 1040 
instructions or such other form and such other information as may be 
prescribed by the IRS (Computation Worksheet); or
    (B) Otherwise record in the preparer's paper or electronic files the 
preparer's EIC computation, including the method and information used to 
make the computation (Alternative Computation Record). The Alternative 
Computation Record may consist of one or more documents containing the 
required information.
    (ii) The preparer's completion of the Computation Worksheet or 
Alternative Computation Record must be based on information provided by 
the taxpayer to the preparer or otherwise reasonably obtained by the 
preparer.
    (3) Knowledge. The preparer must not know, or have reason to know, 
that any information used by the preparer in determining the taxpayer's 
eligibility for, or the amount of, the EIC is incorrect. The preparer 
may not ignore the implications of information furnished to, or known 
by, the preparer, and must make reasonable inquiries if the information 
furnished to, or known by, the preparer appears to be incorrect, 
inconsistent, or incomplete.
    (4) Retention of records. (i) The preparer must retain--
    (A) A copy of the completed Eligibility Checklist or Alternative 
Eligibility Record;
    (B) A copy of the Computation Worksheet or Alternative Computation 
Record; and
    (C) A record of how and when the information used to complete the 
Eligibility Checklist or Alternative Eligibility Record and the 
Computation Worksheet or Alternative Computation Record was obtained by 
the preparer, including the identity of any person furnishing the 
information.
    (ii) The items in paragraph (b)(4)(i) of this section must be 
retained for three years after the June 30th following the date the 
return or claim for refund was presented to the taxpayer for signature, 
and may be retained on paper or electronically in the manner prescribed 
in applicable regulations, revenue rulings, revenue procedures, or other 
appropriate guidance (see Sec.  601.601(d)(2) of this chapter).
    (c) Exception to penalty. The section 6695(g) penalty will not be 
applied with respect to a particular income tax return or claim for 
refund if the preparer can demonstrate to the satisfaction of the IRS 
that, considering all the facts and circumstances, the preparer's normal 
office procedures are reasonably designed and routinely followed to 
ensure compliance with the due diligence requirements of paragraph (b) 
of this section, and the failure to meet the due diligence requirements 
of paragraph (b) of this section with respect to the particular return 
or claim for refund was isolated and inadvertent.
    (d) Effective date. This section applies to income tax returns and 
claims for refund due on or after October 17, 2000.

[T.D. 8905, 65 FR 61269, Oct. 17, 2000]