SEE-3 - Filing Process (16% of the exam) - Section 4.1

Apply the preparer's accuracy and record-retention obligations, including the EITC due diligence requirements of Form 8867 and the records a preparer must keep.

Apply the preparer's duty to file accurate returns supported by adequate records, including the Section 6695 due diligence requirements for the EITC, Child Tax Credit, American Opportunity Credit, and head of household status documented on Form 8867. Recognise the retention rules - keeping the completed Form 8867 and computation worksheets for three years - and the records a taxpayer should maintain to substantiate filed positions.

Form 8867EITC due diligenceRecord retentionSection 6695(g)Substantiation

Practice question for this objective

Free sampleFiling Processmedium

Which statement correctly describes the scope of the paid-preparer due diligence requirements that Form 8867 documents?

AThey apply to the earned income credit, the child tax credit with the additional child tax credit and the credit for other dependents, the American opportunity credit, and head of household filing status. Correct
BThey apply to the earned income credit alone, so a preparer claiming the child tax credit or the American opportunity credit has no due diligence duty to record under the rules.
CThey apply to every refundable credit a preparer claims on a return, including the premium tax credit and the recovery rebate amounts, because each one carries a risk of an improper refund.
DThey apply to the child tax credit and the American opportunity credit, but head of household status is a filing choice rather than a credit and so falls outside the documented duty.

Recognise that paid-preparer due diligence under Form 8867 covers the earned income credit, the child tax credit family, the American opportunity credit, and head of household status. Congress widened the due diligence duty beyond the earned income credit so that the same documented checks apply to the child tax credit and its companions, the American opportunity credit, and head of household status, because each carries a comparable risk of an erroneous claim.

Why A is correct: Form 8867 due diligence covers exactly these four credits and the head of household filing status, so this correctly states the full scope of the requirement.

Why B is wrong: The earned income credit was the original focus, which makes this tempting, but the duty now extends well beyond it, so limiting Form 8867 to that one credit understates the rule and is wrong.

Why C is wrong: Refund risk does run across many credits, but the due diligence rule is limited to a named set and does not reach the premium tax credit or rebate amounts, so casting it over all refundable credits is incorrect.

Why D is wrong: Head of household is indeed a filing status rather than a credit, which makes the exclusion sound logical, but the rule expressly brings that status within the duty, so leaving it out is wrong.

See more SEE-3 practice questions, answers explained.

Exam traps in Filing Process

Answers that look right on this material and are not. Each one is a distractor from a different question in the SEE-3 bank for this domain.

Obtain a signed engagement letter, verify the client's identity with photo identification, request prior-year returns, and store all of these items for the statutory retention period.
Why it is wrong: These are sensible practice-management steps, and identity checks feel like diligence, but none of them is one of the four statutory requirements, so this list describes good habits rather than the rule and is wrong.
The knowledge requirement, because keeping a file is the means by which a preparer demonstrates that reasonable inquiries were actually made at the time the return was prepared.
Why it is wrong: The knowledge requirement and recordkeeping are related, but Genevieve did make and complete the inquiries at preparation; her failure was not in inquiring but in retaining the records, which is a distinct fourth requirement.
Bartholomew faces a Section 6695(g) penalty automatically, because the credit was disallowed on examination and any disallowed refundable credit makes the preparer liable for the due-diligence penalty.
Why it is wrong: Linking the penalty to the outcome is tempting, but the penalty is assessed for failing a due-diligence requirement, not for a disallowed credit; a preparer who met all four requirements is not penalised merely because the credit was later disallowed.

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