International Tax Issues – FBAR, OVDP, FATCA & More

Withholding Tax Due Diligence

There are several tax credits that taxpayers may be eligible for when they do their taxes. While some legitimately qualify for these credits, others may provide insufficient or incorrect information that makes it appear as if they qualify. It is up to tax preparers to do their withholding tax due diligence to ensure their clients don’t claim a credit they are not entitled to.

This article will review what’s involved in withholding tax due diligence and how taxpayers and preparers can stay on the right side of the law. 

What Credits are Taxpayers Eligible For?

There are several credits taxpayers may be eligible for and preparers must do their due diligence to ensure they qualify. These include: 

  • Child Tax Credit (CTC): This credit allows taxpayers with children that qualify to earn tax deductions. 
  • Earned Income Tax Credit (EITC): This credit is for low- and middle-income families with children. 
  • American Opportunity Tax Credit: Certain students in their first four years of postsecondary education may be eligible for this credit. 
  • Additional Child Tax Credit (ACTC): This credit may provide refunds not allowed under the CTC.
  • Head of Household Filing: Taxpayers filing as head of household may have additional tax advantages. Due diligence tax preparer duties must be performed to ensure they qualify for this status. 

How Does a Tax Preparer Provide IRS Due Diligence? 

A tax preparer must be providing withholding tax due diligence by thoroughly interviewing their clients and collecting documentation that proves that they are eligible for the credit in question. The documentation must be stored in their records for at least three years. 

Additionally, the preparer must file IRS form 8867 on behalf of their clients. Form 8867 serves as documentation of a client’s responses and financial situation proving taxpayer qualification to the IRS. It also serves as proof that Withholding Tax Due Diligence has been performed. 

Form 1042 may also be integrated into the due diligence process. It is for foreigners who receive U.S. source income and are subject to withholding tax. It is used to report taxes withheld on any income from foreign assets. 

Preparers must also apply withholding tax due diligence for foreigners that may be eligible for a tax treaty benefit. A tax treaty will allow residents of foreign countries to be eligible for reduced tax rates or to be exempt from U.S. income tax on certain items received from a U.S. source. 

Do I Need an Attorney to Assist Me in the Withholding Tax Due Diligence Process?

In most cases, a tax preparer will walk a taxpayer through the due diligence process to ensure all the I’s are dotted and the T’s are crossed. However, tax preparers may want to consult with their attorneys to make sure they are fulfilling their due diligence obligations. They will also want legal aid by their side if any issues arise. 

If you need a lawyer to help you with the withholding tax due diligence process or any other tax-related legal needs, call Frost Law first. We have years of experience with tax controversy cases. We will see to it that your practice does not run into any legal issues so you can enjoy many successful years in business. 

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