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Mastering Form 8867: A guide to maximize tax credits

Mastering Form 8867: A guide to maximize tax credits

This article is for informational purposes only and does not constitute legal or tax advice.

Always consult with a tax professional for your specific circumstances.

One crucial document that requires attention when navigating the complexities of the US tax system is Form 8867.

In this guide, we'll walk you through the ins and outs of Form 8867, providing valuable insights, tips, and detailed information to help you maximize your eligibility for tax credits.

Understanding Form 8867

Form 8867 serves as the Paid Preparer's Due Diligence Checklist to ensure that tax return preparers gather and document the necessary information to support claims for certain tax credits.

It helps prevent fraudulent claims and ensures compliance with IRS regulations.

As a US expat, familiarizing yourself with this form is essential to make the most of available tax credits.

Eligible tax credits

Form 8867 primarily focuses on three key tax credits:

1. Earned Income Credit (EIC)

The Earned Income Credit is designed to provide support to low-income individuals and families. It is a refundable credit, meaning it can reduce your tax liability and potentially result in a refund.

To qualify for the EIC, you must meet certain income limits and have earned income from employment or self-employment.

2. Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC)

The Child Tax Credit and Additional Child Tax Credit aim to reduce the tax burden for families with qualifying children. The CTC is a non-refundable credit, while the ACTC is refundable.

Both credits provide a significant benefit for eligible taxpayers, allowing them to claim a credit for each qualifying child under the age of 17.

3. American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit assists eligible students with educational expenses. It provides a credit for qualified tuition and related expenses incurred during the first four years of post-secondary education.

To qualify for the AOTC, the student must be pursuing a degree or recognized educational credential and meet certain income limits.

General instructions for Form 8867

Before diving into the specific instructions for filling out Form 8867, it's important to understand the general guidelines that apply to the form.

These instructions will provide you with a solid foundation for accurately completing the form and fulfilling your due diligence requirements as a tax return preparer.

Importance of due diligence

Due diligence is a critical component of tax preparation, particularly when claiming refundable tax credits.

It involves gathering accurate information, verifying eligibility, and maintaining meticulous records of your inquiries and the taxpayer's responses.

By following the due diligence requirements, you can confidently substantiate the credits claimed and minimize the risk of IRS penalties or audits.

Tax return preparer's responsibility

As a tax return preparer, it is your responsibility to understand and comply with the due diligence requirements outlined by the IRS.

This includes staying informed about the latest tax laws and regulations related to the EIC, CTC/ACTC, and AOTC, and effectively communicating with your clients to collect accurate information.

Record retention

Apart from completing Form 8867, it is essential to maintain records related to due diligence for a minimum of three years from the tax return's due date (excluding extensions) or the filing date, whichever is later.

These records may include interview notes, supporting documents, and any other relevant information that demonstrates your compliance with the due diligence requirements.

Specific instructions for completing Form 8867

Form 8867 (revised Nov. 2023) is structured into six detailed sections, each designed to ensure tax preparers adhere to IRS requirements when claiming specific tax credits and filing statuses on behalf of taxpayers.

Here's a streamlined interpretation of how to navigate each section:

Section I: Due Diligence Requirements

Check the relevant boxes to indicate which credits or Head of Household (HOH) filing status you're claiming.

This section sets the foundation for the form, guiding preparers on which parts to complete based on the credits being claimed, including EIC, CTC/ACTC/ODC, AOTC, and HOH.

Question 1: Confirm that the tax return is prepared using information provided by the taxpayer or obtained through reasonable means.

Question 2: Verify completion of necessary worksheets and schedules for each credit claimed, following instructions from forms such as the 1040 series or Schedule 8812.

Question 3: Ensure you've met the knowledge requirement by interviewing the taxpayer and reviewing information to confirm their eligibility for the credits and/or HOH status.

Question 4: Address any information that seems incorrect, incomplete, or inconsistent. If "Yes," further inquiries must be made to clarify such information, and these inquiries must be documented.

Question 5: Maintain records of your due diligence, including documentation of inquiries made, the Form 8867 itself, any worksheets used, and documents provided by the taxpayer that influenced the eligibility determination.

Section II: EIC Specific Questions

Focuses on the Earned Income Credit, asking preparers to confirm the taxpayer's eligibility based on the number of qualifying children or if claiming without a qualifying child.

It also includes verifying living arrangements and explaining tiebreaker rules for when a child qualifies for more than one person.

Section III: CTC/ACTC/ODC Specific Questions

Queries about the Child Tax Credit, Additional Child Tax Credit, and Credit for Other Dependents, ensuring each qualifying person is a dependent who meets certain residency criteria.

It also covers explanations provided to the taxpayer regarding living requirements and rules for children of divorced or separated parents.

Section IV: AOTC Specific Questions

Asks if substantiation was provided for the American Opportunity Tax Credit claims, such as Form 1098-T or receipts for qualified expenses.

Section V: HOH Specific Questions

Verifies that the taxpayer qualifies for Head of Household filing status based on marital status and financial contributions to household maintenance.

Section VI: Eligibility Certification

Summarizes the due diligence process, emphasizing the importance of interviewing the taxpayer, accurately completing Form 8867, submitting it as required, and retaining specified records for three years.

This section culminates in a certification that all information provided is true and correct to the best of the preparer's knowledge.

Final Certification (Question 15): The preparer certifies that all responses on Form 8867 are accurate, completing the due diligence process.

This overview simplifies the completion of Form 8867, ensuring tax preparers can confidently comply with IRS due diligence requirements for claiming tax credits and filing statuses.

Form 8867 preview

Additional tips and reminders

  1. Accuracy: Double-check all the information entered on Form 8867 to ensure its accuracy. Mistakes or incorrect information can lead to delays in processing the tax return or potential issues with tax credits.
  2. Documentation: Keep all supporting documents and records related to the claimed credits. Retain these records for at least three years from the due date of the tax return or the filing date, whichever is later.
  3. Professional assistance: If you have any doubts or questions while completing Form 8867, consider seeking assistance from a qualified tax pro. They can provide guidance and ensure that you meet the necessary requirements and properly claim the available tax credits.

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Bottom line

Remember - completing Form 8867 accurately and providing the required information is crucial to determine the taxpayer's eligibility for tax credits and to comply with the IRS regulations.

By carefully following the specific instructions for each part and line, you can ensure that your tax return is prepared correctly and minimize the risk of errors or audits.

Ines Zemelman, EA
Founder of TFX