How to stay compliant when preparing EIC returns

The Earned Income Tax Credit (EIC) is a lifeline for millions of working families, offering one of the most generous benefits in the tax code. But for tax professionals, the EIC is also a high-stakes area where the margin for error is razor-thin and the consequences of noncompliance are steep. The IRS has made it clear: when something goes wrong, it’s not the taxpayer in their sight, it’s you, the preparer. 

That framework lives in Internal Revenue Code §6695(g) and Treasury Regulation §1.6695-2 and it’s more than just paperwork. Failing to comply means facing a $635 penalty per credit per return (for 2024), disciplinary action, and even referral to the Office of Professional Responsibility (OPR) or Criminal Investigation (CI). 

What the law requires

At the heart of §1.6695-2 are four essential due diligence obligations every tax preparer must meet when preparing returns claiming: 

• Earned Income Tax Credit (EIC)
• Child Tax Credit (CTC)
• Additional Child Tax Credit (ACTC)
• American Opportunity Tax Credit (AOTC)
• Head of Household (HOH) filing status
• Credit for Other Dependents (ODC)

Failure to meet any of these requirements means a penalty is assessed per issue, per return. That means if you miss due diligence on both the EIC and CTC on the same return, that’s two violations. 

The pillars of compliance

There are core requirements to take into account under compliance.

Complete and Submit Form 8867

Form 8867, known as the Paid Preparer’s Due Diligence Checklist, is required anytime one of the covered credits or statuses is claimed. You must complete the form based on information reasonably known or provided by the taxpayer, not assumptions.

Make sure the form is signed and included with the return. Missing or unsigned forms are a guaranteed penalty. 

Accurately compute the credits

The IRS expects preparers to calculate the credit using the methods described in the Form 1040 or Form 8863 instructions, or to document the alternative method used clearly. If you don’t use the IRS worksheet, you must retain a written record of how you arrived at the numbers. 

This may include calculations for income limits, qualifying child status, and disqualified investment income. 

Exercise the “knowledge” standard

 This is where many preparers fall short. The law says you must not know, or have reason to know, that the information provided by the taxpayer is false or incomplete. You are required to ask reasonable follow-up questions if any information seems inconsistent or implausible. 

Examples of red flags

• W-2 from an unfamiliar employer with no address
• A business on Schedule C that generates high EIC but has no evidence of actual operations
• A child claimed as a dependent who doesn’t live with the taxpayer

You must also document your inquiries and the taxpayer’s answers. This protects you if audited.

Retain records for three years for every EIC (or other applicable) return you prepare. Retain the following for three years:

• A completed and signed Form 8867
• Any worksheets used to compute credits
• Documentation of how and when you collected information
• Identification of who provided each piece of information
• Copies of supporting documents, such as birth certificates or proof of residency.

Note: Record retention is a critical safeguard in case the IRS comes calling. 

What firms and employers must do

Compliance doesn’t stop at the individual preparer. If you manage or supervise tax professionals, you’re also responsible for: 

• Establishing written procedures that ensure compliance with due diligence
• Training your staff annually and keeping certificates as proof
• Conducting periodic quality reviews of your employees' work
• Verifying that all returns contain signed Forms 8867 and supporting documentation
• Testing employee knowledge on due diligence standards

If the IRS determines your firm failed to implement or enforce procedures, the firm itself can be penalized even if only one preparer committed the error.

A culture of compliance

The EIC is not “optional audit territory.” The IRS has invested in multiple programs to catch improper claims: 

• Automated Underreported Program (AUR) – Compares income reported on returns with W-2s and 1099s.
• High Dollar Credit Review Program (HDCRP) – Flags high-dollar EIC claims by taxpayers and preparers.
•  Annual EIC registration requirements for all paid preparers.

Don’t wait for an audit to determine if your office is compliant. Create a checklist to review annually:

• Are Forms 8867 being completed and retained?
• Do we document follow-up questions and answers?
• Are current-year documents on file (not prior years)?
• Is there proof of due diligence training?
• Do we have procedures in writing?
• Are employee files reviewed periodically?

Why it matters

The IRS takes enforcement seriously. When problems are found, they escalate fast:

• Fines add up quickly: One preparer making 50 errors across two credits could face $63,500 in penalties.
• You may face disciplinary action from the OPR, including suspension or disbarment.
• You could lose your preparer tax identification number (PTIN), your professional license, and your reputation.

But compliance isn’t about fear, it’s about confidence. When your office meets its obligations, you protect yourself, your staff, and your clients.

Final thoughts

Due diligence isn’t just about filling out a form; it’s about practicing responsible tax preparation. The EIC gives families a boost but it demands careful handling. If you want to keep serving your community and avoid the IRS’s enforcement hammer, build systems that support every step of the process.

The IRS may see us as their first line of defense, but let’s make sure we’re also our own.