By law, if you are paid to prepare a tax return or claim for a refund that includes the Earned Income Tax Credit, in addition to including Form 8867, Paid Preparer's Due Diligence Checklist with the return you also must keep records of your interaction with the taxpayer and ask the taxpayer questions, documenting their answers.
Here are some of the different kinds of questions you may want to ask.
If the taxpayer has income
Does the income that the taxpayer is reporting seem sufficient to support the taxpayer and the qualifying children that are being claimed? If no, you should ask additional questions pertaining to both the income and the children.
If the taxpayer has self-employment income
Ask your client:
- How long have you owned your business?
- Do you have any documentation to substantiate your business? e.g., business cards and stationery, a receipt book, a business or occupational license, advertising, other kinds of tax returns filed such as for sales tax.
- Who maintains the business records?
- Do you have separate banking accounts for personal and business transactions? If not, how do you differentiate between the two?
- Have you received a 1099-NEC or 1099-MISC to support the income?
- Did the client provide satisfactory records of all income and expenses? If yes, in what form? e.g., logs, receipt books, ledgers. If no, how was income and expense determined?
- Are the expenses being reported consistent with this type of business?
- In your opinion, is the amount of expenses being reported reasonable?
- Are there expenses missing that are otherwise typical for this kind of business?
If the taxpayer is claiming Head of Household status
Ask your client:
- Have you ever been married?
- Is your spouse deceased?
- If divorced, can you provided a copy of your divorce decree if requested by the IRS?
- If separated, can you provide a copy of a separate maintenance agreement if requested by the IRS?
- If married, did you live apart from your spouse for the last 6 months of the year and can document that if requested by the IRS?
- Did you maintain more than half of the cost of the home and can you document that if requested by the IRS? (Documentation would include bills for items such as utilities, groceries, maintenance, repairs, as well as receipts for items such as rent, mortgage, and property tax.
If the taxpayer has a qualifying child
Ensure you know the child meets the age, residency, relationship, and joint filing tests.
- Is there proof that the child lived with the taxpayer for more than half the year? e.g., records from a school, doctor, daycare, or social service agency.
- If the child is a student, can their attendance at a school be documented?
- If the child is disabled, can their disability be documented? e.g. disability payments, a letter from the child's doctor describing their disability and indicating it is permanent and total.
- If the child is not the taxpayer's son or daughter, can the relationship be documented? e.g., birth certificate and if needed a marriage certificate from their parent, or for a foster child a letter from the court or a placement agency, or for an adopted child a letter from the adoption agency.