EITC Due Diligence: How to Avoid the $650 per-Failure Penalty

If you prepare a return that claims the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) or Additional Child Tax Credit (ACTC), the American Opportunity Tax Credit (AOTC), or Head of Household status, Form 8867 is mandatory. The 2025 penalty is $650 per failure per return.

A return that claims all four credits could cost you $2,600 in penalties if you fail on each. Repeat violations can lead the IRS to suspend or ban a preparer from filing returns that claim these credits.

What due diligence requires

Form 8867 is not a checkbox. It is a documented record of a series of inquiries, the answers, and the supporting evidence. The IRS expects you to:

1. Make reasonable inquiries when the information seems inconsistent or incomplete
2. Document every answer in the client file
3. Keep all records for at least 3 years
4. Not rely on assumptions or rote answers

Required questions for EITC and CTC

• Where did each qualifying child live during the year? With whom?
• For how many months did the child live with the taxpayer?
• What is the relationship between the taxpayer and each child?
• Did any child have income? How much?
• Did anyone else claim or attempt to claim any of the children?
• For HOH: is the taxpayer unmarried, or considered unmarried under the IRS rule?
• For HOH: did the taxpayer pay more than half the cost of keeping up a home for the qualifying person?

Required questions for AOTC

• Is the student in their first four years of higher education?
• Has the AOTC been claimed for this student in any prior 4 tax years?
• Was the student enrolled at least half-time for at least one academic period?
• Has the student been convicted of a felony drug offense?
• Do you have Form 1098-T from the institution?

The most common deficiency we see is preparers who ask the questions but do not document the answers. The IRS audits the documentation, not the conversation.

2025 EITC quick numbers

• 3+ qualifying children: max credit $8,046; max income $56,838 (single) or $63,948 (MFJ)
• 2 children: max credit $7,152; max income $52,918 / $60,028
• 1 child: max credit $4,328; max income $46,560 / $53,670
• No children: max credit $649; max income $19,104 / $26,214
• Investment income limit: $11,950

Recordkeeping checklist

• Completed Form 8867 in the file
• Notes from the client interview, dated
• Copies of supporting documents (school records, lease, custody agreement when relevant)
• For self-employment income (relevant to EITC): backup documentation of gross receipts and expenses
• Form 8879 (e-file authorization) signed by the taxpayer

Kreyol summary

Fòm 8867 obligatwa pou EITC, CTC, AOTC, ak HOH. Pénalize $650 pa fay pou 2025. Mande TOUT kesyon yo, dokimante chak repons, epi kenbe dosye yo pandan omwen 3 ane. Repeti vyolasyon yo ka fè IRS sispann ou.

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