Episode Two- Navigating Due Diligence for Tax Preparers

LEGAL THOUGHTS – Navigating Due Diligence for Tax Preparers

COLEMAN JACKSON, ATTORNEY & LEGAL COUNSEL | Transcription of Legal Thoughts        Posted on June 24, 2024

Topic: Tax Return Preparer Due Diligence


Attorney Introduction:

■My name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, contracts, litigation and immigration law firm based in Dallas, Texas.

■In addition to myself, we have Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.

■On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will continue interviewing me in a new Legal Thoughts podcast series that we have entitled : “Tax Return Preparer Due Diligence and Preparer Penalties. ”   This is episode two in this series of Legal Thoughts podcasts.  We urge our audience to follow our podcast and invite all their neighbors, friends and acquaintances to  please tune in to this series of Legal Thoughts Podcasts on Apple Podcast, Google Podcast, Spotify or wherever you listen to podcasts.

–The  intended five episodes in our Tax Return Preparer Penalty Case Series are as follows:
1. Attorney’s Key Take Aways

  1. Navigating Due Diligence Requirements by Paid Tax Return Preparers
  2. Failure to Comply – Potential Consequences for Paid Tax Return Preparers
  3. Managing IRS Due Diligence Investigations
  4. Strategies for Compliance and Risk Mitigation


Interviewer Introduction:

Hi everyone, my name is Mlaah Singh and I am a Law Clerk at the tax, business structuring, contracts, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas, 75206.  Our English phone number is 214-599-0431 and our dedicated Spanish language line is 214-599-0432.

■Good afternoon Attorney; thank you for allowing me to interview you once again for Episode 2 of our Paid Tax Return Preparer Diligence Requirements and this apparent uptick in IRS examinations and investigations of Paid Tax Return Preparers. Today, I hope to ask a couple of  questions designed to navigate our way through these tax preparation procedures or requirements and potential consequences for tax preparers and their customers.

Mr. Jackson, considering the information we have shared in Episode One in this series of Legal Thoughts Podcasts a few weeks ago, our audience has been alerted to the IRS due diligence  requirements related to The Child Tax Credit, Additional Child Tax Credit, American Opportunity Credit, Head of Household Filing Status, and the Earned Income Tax Credit tax positions. I believe it would be beneficial for our audience to hear a step-by-step process regarding how exactly to comply with these due diligence requirements.  So I intend to navigate our trip through this by posing a few questions to you today.  My questions; I hope, will help our Legal Thoughts Podcast audience in understanding this complex maze of  federal tax requirements better.

Question Number One:

So, Mr. Jackson, if a taxpayer has one or more children, or one or more dependents, what tax credits would this individual qualify for? And what steps should paid tax return preparers  take in compliance with –

No. 1:  The Child Tax Credit;

No. 2:  The Additional Child Tax Credit; and

No. 3:  The Earned Income Tax Credit ?

Attorney please navigate our audience through each one of these tax positions one by one.


Interviewee: Coleman Jackson, Lawyer


Excellent Question Mlaah and I like the navigating approach you have introduced here.  The very first step paid tax return preparer’s need to take is to make sure they are very familiar with Schedule 8812 and the Instructions to Schedule 8812.  The Instructions to Schedule 8812 is used to determine whether a taxpayer qualifies for the child tax credit, other dependent credit, additional child tax credit and the earned income tax credit.  The Instructions to Schedule 8812 has worksheets and tables to compute each one of these credits.  The Instructions for Schedule 8812 should be completed annually and kept in the paid tax preparer’s records.  So Mlaah, let’s navigate our way through the Instructions for Schedule 8812. Note the rules and computations associated with these tax positions may change from year to year.  For example the amounts I am using for post of this podcast discussion is for 2023 tax returns; these amounts and eligibility requirements could be different for 2024 and subsequent tax periods.  So any actual amounts and limitations are for illustration purposes only. Our audience should seek competent tax advisors for any specific matters pertaining to their particular situation or circumstances.

General Instructions:

The requirements that I am now about to list applies to all of the tax positions that we are going to be discussing in a few minutes for 2023:

A.The taxpayer must have a Tax Identification Number by the due date of their annual federal tax return.  If you or your spouse, if filing jointly does not have a Social Security Number or ITIN issued on or before the due date of your annual return, you cannot claim the Child Tax Credit, Other Dependent Credit, Additional Child Tax Credit on either your original return or an amended annual tax return.

B.Each of your qualifying children must have a Social Security Number that is valid for employment and the child’s SSN must be issued before the due date of your annual tax return, including extensions.

C.Taxpayer’s who erroneously claimed the CTC, ACTC or ODC where the IRS determined that the error was due to reckless or intentional disregard of the tax laws governing eligibility, will be prohibited from claiming any of these tax positions for two years even if the taxpayer is otherwise eligible to claim the tax position.  If the IRS determine that a taxpayer fraudulently claimed one of these credits, the taxpayer is not allowed to claim the CTC, ACTC or ODC for ten years.  Civil penalties could also be assessed against the taxpayer.  If computation errors occurred in the past while claiming CTC, ACTC or ODC its very likely that the taxpayer must file Form 8862 when claiming these credits in subsequent years.

D.Qualifying Children claimed as dependents must be under 17 years of age at the end of the annual tax year, say end of 2023; and the child must qualify as your dependent.  An adopted child is treated the same as a your own child for the purposes of claiming the CTC, ACTC or ODC.

E.Note that if the child is 17 at the end of the year or older, the taxpayer may still be able to claim the Other Dependent Credit.

F.Limitations applies to the CTC and ODC.  First, if the amount on Line 18 of your 1040 series tax return is less than the CTC and ODC , you might not qualify for the tax positions, and second, if the taxpayer’s modified adjusted gross income (AGI) is more than $400,00 for joint filers or $200,000 for other types of tax filers, the taxpayer does not qualify for the CTC  and ODC.  Look at the computation amounts on Line 3 of Schedule 8812.  The computation worksheets must be completed accurately.

The Instructions for Schedule 8812 gives detailed guidance to the paid tax return preparer with respect to every last one of these general instructions.  So I repeat what I said from the beginning; the tax return preparer should become very familiar with Form 8812, its instructions and the worksheets for each tax position.

Let’s now navigate to the Specific Instructions in Schedule 8812 for the CTC (ODC), ACTC and EITC tax positions.

First Specific Instructions applicable to the Child Tax Credit & Other Dependent Credit-

Follow the step by step guide and use the worksheets in the Schedule 8812 Instructions to complete the appropriate lines on the series 1040 tax return.  These instructions are the paid tax return preparer’s best friend in determining eligibility and the correct amount of the CTC and ODC.

Note that the Tax Cuts and Jobs Act of 2017 changed the rules and refund amounts back in 2017.

In the tax year ending December 31, 2023, the CTC amount was $2,000 per qualifying child; and $500 nonrefundable credit was allowed in 2023 for qualifying dependents.  Note you cannot double dip; that means you cannot check the child tax credit box and the credit for other dependent for the same person.  Remember even negligent or none intentional violations of the CTC and ODC can result in your customer being banned from claiming CTC and ODC for two years.  Be very careful when checking eligibility and exercise care when computing the amount of the CTC and ODC.

The maximum refund for 2023 was  $1,400 per qualifying child .

The CTC and ODC is claimed on Form 1040.  Insert the correct number of dependents on column 4 on Form 1040 and follow the instructions on the form.  Do the exact same thing in column 4 on Form 1040 for OTC and put the results on Line 6.  Remember don’t double dip.

Always compute the credit limitations by using Worksheet A and Worksheet B when instructed by the Instruction to Schedule 8812.

Second Specific Instructions applicable to the Additional Child Tax Credit-

Follow the step by step instructions to Schedule 8812 for the ACTC Part II-A.

Refundable part of the credit is worth up to $1,600 per qualifying child in 2023.  These amounts can change from year-to-year.  I am using 2023 for illustration purposes as to how these tax credits and positions.  We are using them merely navigate through the process of determining eligibility and computational amounts for the credits.

Credit decreases as your gross income increases (for single income earners past $200,000 AGI; and  for joint filer income earners past $400,000 AGI the CTC and ODC reduces to zero)

None of these tax credits are allowed if the taxpayer has filed Form 2555 (foreign earned income)

The ACTC is claimed on  Form 1040, Schedule 8812 (Credits for qualifying children and other dependents).  This schedule should be  attached to the taxpayer’s tax return filed with the IRS.  The paid tax return preparer should maintain a copy of Schedule 8812 instructions and worksheets in its normal business records.

My general take away in terms of navigating the eligibility and computational aspects of the CTC, ODC and ACTC is that the Schedule 8812, instructions and worksheets should be understood, used and maintained by paid tax return preparers when advising taxpayers to tax these tax positions.  Schedule 8812 is a navigational tool.  It’s a map.  It’s a guidebook.

■Third Specific Instructions that applies to the Earned Income Credit

■Obtain a copy of IRS Publication 596 which contains an EIC Eligibility Checklist that provides a step-by-step navigational tool for determining a taxpayers eligibility and computation guidance for claiming the EIC.  Follow the instructions in Form 1040 for the EIC and Schedule 8812 instructions and Worksheet Earned Income Chart– Line 18a

■The EIC Checklist contains everything a return preparer should need to comply with the Due Diligence Requirements with respect to this particular tax position.  The checklist is updated each year in Publication 596.  Paid Tax Return Preparers should keep a copy of the completed checklist in their normal business records.

■The Earned Income Credit is claimed on Form 1040 or Form 1040-SR (US Tax Return for Seniors).  If the taxpayer has a qualifying child Schedule EIC must be completed and filed with the IRS as well.

INTERVIEWER: Mlaah Singh, Tax Law Clerk

Interviewer Comment:

■Thank you for explaining these complex tax matters so clearly Mr. Jackson. I hope your navigating through Form  8812, its instructions and worksheets have increased our Legal Thoughts Podcast’s audience understanding concerning the due diligence requirements expectations of paid tax return preparers when preparing annual tax returns where families are claiming the Child Tax Credit, Other Dependent Credit, Additional Child Tax Credit and Earned Income Credit.  It seems like errors by paid tax return preparers regarding eligibility and computation of these credits can really damage taxpayers who can really need these refunds to support their families.

■If I understood you correctly Mr. Jackson, merely accidentally taking the CTC, ODC and ACTC could result in the taxpayer becoming ineligible to claim the credit again for two years even if they are otherwise eligible for the credit. And you said if the IRS determines their was fraud in taking the CTC or ODC the taxpayer could be banned  from claiming the Child Tax Credit, Other Dependent Credit and Additional Child Tax Credit for ten years.  That is a very long-long time for a deserving family to be banned from receiving tax refunds that they would be otherwise eligible claim.  Your repeated emphasis on Schedule 8812, its instructions and worksheets is absolutely warranted!  These are potentially dire consequences for hardworking taxpayers and their families caused by mistakes of Paid Tax Return Preparers.

Question Number Two:

■So, my next question; with all these potentially serious outcomes resulting from paid preparers who don’t know the tax laws or fail to follow these due diligence rules; well my next question is this:  How about claiming the Head of Household filing status? I remember that this was one of the Paid Tax Return Preparer Due Diligence Requirements you mentioned in Episode One of our Legal Thoughts Podcast a few weeks ago.

■Attorney Jackson, when is a taxpayer eligible to claim Head of Household filing status and what are the potential consequences for getting it wrong?


Interviewee: Coleman Jackson, Lawyer


■Excellent Mlaah!  Very astute  observations.  Yes you heard me correctly.  Taxpayers can be banned from taking the Child Tax Credit, Additional Child Tax Credit and Other Dependent Credit for two years if the IRS finds that they erroneously claimed these credits in the past.  In the event of a finding of fraud, the taxpayer is indeed potentially banned for ten years from taking any of these tax positions.  Now I hope its becoming clear to our podcast audience that the IRS Paid Preparer Due Diligence Requirements and Penalties on paid preparers protects the integrity of the federal tax system by protecting innocent taxpayers who are harmed by tax return preparers who either don’t know the tax law or intentionally violate the law.  Over the years we have seen numerous taxpayers who were harmed by unsubstantiated tax positions due to their tax return preparer.  So in this sense, the perceived uptick in IRS Investigations of Paid Tax Return Preparers is a good development.

■Let’s address the first part of your  question regarding head of household eligibility.  Who is eligible to claim head of household filing status?

■A taxpayer qualifies for the head of household status if they meet all of these requirements:

1.The taxpayer is unmarried or considered unmarried (married persons who are separated and residing in a separate household) on the last day of the tax year; and

2.The taxpayer paid more than half of the expenses to maintain a household for the tax year; and

3.With the exception of a full time student and parent, a qualifying person, which can be practically any familial relatives, residing in the household for more than half of the tax year. Temporary absences, such as, those by students do not stop them from being a “qualifying person” for head of household status filing purposes.

■Non-resident aliens do  not qualify for head of household, but a non-resident alien may elect to be treated as a resident alien for tax purposes.  A resident alien can qualify for head of household filing status if they file the proper election form to be taxed as a resident alien.

■Head of Household is election is made on Form 1040 US Individual Income Tax Return.

■How to a taxpayer prove that they paid more than half the household expenses?  A taxpayer must be able to prove through additional documentation that they paid more than half of the household expenses (rent, groceries, repairs, maintenance and like items that benefit the occupants of the household as a whole.  Personal items and effects are not qualified items in determining household expenses for Head of Household purposes.

■Best practices in documenting and accumulating evidence of household expenses are for the paid tax return preparer  to complete  Form 886—HOH which identifies and organizes the Supporting Documents to Prove Head of  Household Filing Status.  This form may be requested by IRS examiners during a Paid Tax Return Preparer Penalty Investigation.  It could also be requested from the affected taxpayer during an IRS examination.  This form is an excellent checklist for head of household filing status determinations and documentation.  It helps organize and document the HOH tax position.

■Let’s now navigate to the second part of your question:  What are the potential consequences for erroneously claiming head of household filing status?

First: the consequences for the paid tax return preparer is potential assessment of a preparer due diligence penalty in the amount of about $560 as I discussed in Episode One of this series of podcast a few weeks ago.  The paid tax return preparer will need to maintain contemporaneous documentation of the HOH tax position and present it to the IRS Agent upon request during a Paid Tax Return Preparer Due Diligence Investigation.

Second: the consequences for the taxpayer could result in an IRS examination or audit of the taxpayers tax returns for the last three years. If  the IRS determines that the a taxpayer is not eligible to elect head of household filing status, the taxpayer can be made to  pay back the amount along with civil penalties and interest.  Again this could result in audit examinations that goes back for multiple open tax years.  The IRS can look back three years and make tax adjustments to previously erroneously filed tax returns.  Taxpayers are liable for tax positions taken on their tax returns regardless of erroneous advice provided by their tax return preparer.  Word to the wise:  Taxpayers must select their tax return preparers after careful consideration of their credentials, training and experience in federal tax preparation.

INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Thank you, Mr. Jackson. That certainly cleared it up for me. Taxpayers and Paid Tax Return Preparers need to know about these dangers  and the consequences for getting this wrong.  You have pointed all this out in very clear and understandable language for our Legal Thoughts Podcast audience in  this Episode No 2 and in Episode No. 1 published several weeks ago.  Any taxpayer making a mistake when claiming the CTC, ODC, ACTC and Head of Household filing status can be in for a rude awakening with very serious tax consequences along with their paid tax return preparer.

Any of our listeners are confused about any of this, please checkout the IRS.gov website where you can research these matters for yourself for free.

If you have questions that you desire our law firm to address in future podcasts; as always, send your inquires and suggestions to us.  You can call (214) 599-0431, email:  cj@cjacksonlaw.com or visit us online at www.cjacksonlaw.com for more information about this topic or you can read any of our blogs addressing various international tax, federal tax, state and local tax topics; contracts litigation; and various hot immigration topics as well.


Question Number Three:

So, Mr. Jackson, I have one last question that deals with the American Opportunity Tax Credit.  Many of our Legal Thoughts Podcast audience are likely university students from Southern Methodist University and other local, state and national universities around the country.  The American Opportunity Tax Credit was brought up in Episode One of this series of podcasts a few weeks ago and I think everyone should know more about it.

Interviewee: Coleman Jackson, Lawyer


Mlaah a taxpayer who pays qualified education expenses during the tax year may elect to claim an American Opportunity Credit for an eligible student.

The AOC is designed to help with the cost of higher education by reducing the taxpayers tax liability dollar for dollar on their tax return for qualified education expenses incurred during the tax year as a part of a degree, certificate or similar education program.  The student must carry, at least,  half of the normal full-time student course load.  And the course of study program must lead to a degree, certificate or similar academic achievement.

The AOC is worth $2,500 per year for qualified education expenses.  The AOC is available to a student, a taxpayer, or the taxpayer spouse or dependent.

The AOC is allowed only for the first four years of a postsecondary education.  That means that the AOC is typically not allowed for graduate work or attendance at a professional school, such as a law school or a medical school.

The AOC is phased out for taxpayers with annual Modified Adjusted Gross Income between $80,000 and $90,000 ($160,000 and $180,000 for a joint filer).  The phase out is based on a multiplier. I will not go into the mechanics of the phase out math here.

The AOC has refundable and nonrefundable rules that the tax return preparer must be aware and comply with when advising taxpayers in  claiming the AOC tax position on their return.

The AOC is claimed by completion of  Form 8863 which is attached to the completed tax return filed with the IRS.  The eligible students Social Security Number must be included on this form.  The student must have received tuition statement from their school by Jan 31 of the following tax year.

Taxpayers who erroneously claim the AOC can be banned for two years after the most recent tax year for which they recklessly or negligently claimed the AOC.  Furthermore, in the event the IRS finds that the taxpayer fraudulently claimed the AOC, the band can be for ten years.  The penalty for paid tax return preparers is about $560 for each instance of erroneously advising the taxpayer to claim the AOC.


INTERVIEWER WRAP-UP: MlaahSingh, Tax Law Clerk

Attorney, thank you for sitting with me today in our second podcast on this very important topic:  “Tax Return Preparer Due Diligence Requirements & IRS Paid Preparer Penalty Cases” I surely hope our audience will benefit from this Legal Thoughts series on tax preparer due diligence requirements and due diligence penalty cases.  Attorney in this Episode you have clearly explained how regular, hardworking, innocent taxpayers can also suffer grave financial lost when they erroneously claim credits or take tax positions for which they are not entitled.  Thanks Attorney for navigating us through this!  Folks, stay tune for upcoming Legal Thoughts Podcasts on this important federal tax topic!  We intend to publish Episode three in this series of podcast in about two weeks.

Our audience can send us inquires at www.cjacksonlaw.com if they have questions or wish to comment on our podcasts in this series or any of our Legal Thoughts podcasts, blogs, or Law Watch Videos posted on our U-tube Channel.  You can send an email directly to attorney at cj@cjacksonlaw.com and suggest other tax topics that you want us to discuss in future Legal Thoughts Podcast.  We are open to your ideas for topics in tax and business law.

Our listeners who want to hear more podcasts like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

■English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100



This is the end of “LEGAL THOUGHTS” for now

■Thank you all for giving us your ear today as we started our new Legal Thoughts Podcast Series dealing with the Paid Tax Return Preparer Due Diligence Requirements for Determining Eligibility for Certain Tax Benefits.  This was our second Episode in this series of podcast where we navigate through various tax positions, such as the CTC, ACTC, ODC, EIC and the Head of Household Filing Status Election.  We are basically talking about issues that can benefit our audience; especially, paid tax return preparers in our audience that frequently come up in IRS Paid Tax Preparer Penalty Cases.  Stay tune for future episodes in this series.

Until next time, take care.

If you want to see or hear more taxation, business structuring and contracts litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.  Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.


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