In recent years, the IRS has imposed preparer due diligence requirements for the earned income tax credit and penalized preparers who do not meet those requirements. This means you need to understand your clients’ due diligence obligations and what is required of them.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Can the custodial parent release head of household (HOH) status and the earned income tax credit (EIC) to the other parent?

A: No, only the custodial parent is eligible for HOH filing status and EIC.

Q: If a taxpayer receives in-home supportive services (IHSS) income that is excludable from taxation, can it still be included as earned income for EIC purposes?

A: Yes, IHSS income (primarily a California program) is similar to difficulty-of-care payments under Notice 2004-7 and is considered earned income for EIC purposes.

Q: What are BAH and BAS? Are they included in the calculation of EIC?

A: BAH (basic allowance for housing) and BAS (basic allowance for subsistence) are not included in earned income for EIC purposes.

Q: What documents should be requested if a child is under school age and has no doctor visits?

A: Acceptable documentation includes court documents or official correspondence addressed to the child at the taxpayer’s address. Statements from social services or similar agencies confirming the child’s residence may also be used. A report card can serve as supporting documentation but should not be the sole proof.

To learn more about the requirements for the earned income credit, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

Question: Fred is a minister who only receives a housing allowance as payment for his services. He heard he could request voluntary federal income tax withholding (FITW) from his pay to help offset the Self-Employed Contributions Act (SECA) tax he owes. He contacted his church and was told he could not take FITW from the housing allowance he received. Why was he not allowed FITW?

Answer: Fred was not allowed FITW because his housing allowance (sometimes called a parsonage allowance or a rental allowance) is not reported on Form W-2, Box 1.

Per IRS regulations, voluntary withholding agreements established under §3402(p)(3)(A) apply to amounts that must be included in an employee’s gross income under §61. If Fred only receives a housing allowance as income, it is excluded from gross income under §107(2) and does not qualify for voluntary FITW.

Because of these regulations, ministers cannot request voluntary FITW when they receive only a housing allowance. They must have some taxable income, including salary, wages or even an SECA equivalent. Fred would have been qualified if he had received other gross income, like health insurance premiums paid by the church on his behalf or reimbursement under a nonaccountable plan.

IRS transcripts are your client’s electronic tax records at the IRS. The information and types of IRS transcripts have remained generally unchanged for decades. However, with IRS modernization comes new types of transcripts and new enhancements to existing transcripts, all of which can provide tax professionals with more useful tools to serve their clients.

There has also been one recent, more significant change to an existing IRS transcript that can help taxpayers and tax professionals file accurate returns during tax season and avoid IRS income mismatch compliance notices.

IRS transcripts

Until recently, the IRS had only four major types of transcripts available through the IRS’s “Transcript Delivery System” (TDS). TDS is an electronic IRS application that provides transcripts to taxpayers and tax pros online. Taxpayers can access transcripts through their online account or request them to be mailed through the “Get Transcript” online ordering application. They could also use IRS Form 4506-T.

Tax pros can get clients’ online transcripts using two primary methods: online through IRS e-Services or through the Practitioner Priority Service (PPS) hotline. Tax pros need to be appropriately authorized with Form 2848, Power-of-Attorney, or Form 8821, Tax Information Authorization. With the authorization on file with the IRS’s Centralized Authorization File (CAF) system, tax pros can access the transcripts on-demand through their IRS e-Services account. Tax pros can also contact and request PPS to upload the transcripts (up to 30 per call) into the tax pro’s e-Services mailbox (called the “Secure Object Repository”).

The four types of transcripts that have been traditionally available include the following:

Type	Description	Forms Available	Years Available
Account transcript (“AT”)	Transactions and activity by year	All forms and separate assessments	All (taxpayers only have limited availability online)
Tax return transcript (“RT”)	Electronic copy of return	1040, 1065, 1120 series	Current and processed in past three years
Wage/income transcript (“W&I”)	W-2s, 1099s, etc., reported to IRS by Taxpayer Identification Number	1040 filers online Business: request by phone until new online release in 2025	Current and past 9 years
Record of account	Combo of AT and RT	1040 only	Current and past three years

Taxpayers and tax pros rely on these transcripts to help file accurate tax returns and resolve issues and notices. For decades, the IRS has not enhanced or added new transcripts. With the additional modernization efforts accelerated by the Inflation Reduction Act funding in 2022, the IRS has enhanced some of its existing transcripts and added new transcripts for taxpayers and tax professionals.

IRS releases new transcripts

There is now a fifth type of IRS transcript. In June 2024, the IRS created and released a new business transcript: the “Business Entity” transcript. The IRS released two versions of the business entity transcript:

• The “complete” version is the most helpful to tax pros in understanding the business’s filing requirements and status with the IRS. It includes:
  • Employer identification number (EIN), business name and address on file with the IRS
  • Current filing requirements
  • IRS establishment date and closing date (if applicable)
  • Single or multiple member LLC status
  • North American Industry Classification Code (NAICS)
  • Parent company EIN (if applicable)
  • Elections (like S-corp election)
  • Exempt organization information such as status, ruling date, and type of exempt organization.
• The “modified” version offers very limited information, including the EIN and name/address on file with the IRS

The complete version provides helpful information to the tax pro regarding filing requirements, elections and determining the company’s start date. However, many tax pros do not know the complete version is available because the IRS requires a “specific use” authorization to request it. As a practical application, specific use authorizations can only access transcripts through a phone call to the IRS’s PPS. To order this transcript, the tax pro must list “business entity transcript” or “ENMOD” (IRS computer command code for the “entity information” on file with the IRS) on the authorization (in the tax matters in Section 3). With the specific use authorization, the tax pro contacts PPS, sends the authorization to the IRS PPS representative while on the call (via fax or upload, if available), and requests the complete business entity transcript to be uploaded to their e-Services mailbox.

Tax pros can request modified versions in a manner similar to that of tax pros currently using TDS to access online transcripts. The tax pro simply files and records their Form 2848 with the IRS CAF and uses IRS e-Services to download the modified version. A specific use authorization is not required.

Most tax pros agree that the current modified version has limited value. The IRS is seeking a future capability for tax professionals to be authorized to access the complete version without requiring a specific use authorization.

New tax return transcripts

In October 2024, the IRS added additional tax return transcripts for the Forms 94X series (i.e., Forms 940, 941, 943, 944, 945). These new 94X return transcripts also include information on amendments to the original return. The 94X return transcripts are only available for payroll forms filed for 2023 and after. Business tax account users can also see the new versions of this transcript.

Sample of Page 1 of new Form 941, Tax Return Transcript

The IRS also released new tax return transcripts for Forms 1041, Income Tax Return for Estates and Trusts, (released on Jan. 14, 2025) and Form 990-T, Exempt Organization Business Income Tax Return (released on Jan. 31, 2025).

This year, the IRS also plans to release additional tax-exempt entity tax return transcripts in the Form 990 series, including the 990, 990-EZ, and Form 990-PF. Also, the IRS plans to release more tax return transcripts for the Form 1120 series (1120-PC, 1120-POL and 1120-REIT), Form 1041 series (1041-A and 1041-QFT), Form 706 series (706, 706-NA, 706-GS(D) and 706-GS(T)), excise tax returns (2290, 720 and 709), and the international Form 1042 withholding return.

The big change: new Wage and Income Transcript release dates and changes

The IRS is making two major changes to the wage and income information (i.e., Forms W-2, 1099, etc.) provided to taxpayers and their tax professionals:

• The individual Wage and Income transcript release date
• A future release of the new business income transcript

Traditionally, the IRS Wage and Income transcript was only available to taxpayers and tax pros in late May each year (i.e., the 2023 tax year Wage and Income transcript was available on May 26, 2024). With the May release date, tax pros could not use the income information reported to the IRS to assist in filing a client’s return on or before the April 15 deadline. This year, the IRS announced that the Wage and Income transcript for individuals is available to download starting March 30. This represents an opportunity for tax pros that they never had in the past. Tax pros will be able to use the income information as a starting point to complete the tax return. This will lower the burden on their clients and help avoid unreported income notices (IRS CP2000 notices).

Tax pros should use the Wage and Income transcript information cautiously, not as a complete substitute for thoroughly reviewing their client’s tax information and income sources. The March 30 version may not include some information returns such as paper-filed Forms 1099, Forms 5498 for IRA contribution information, Forms 1099-B for stock sales and other late-filed forms.

The IRS also provides more business income information for instant download and use in return preparation. The IRS plans to release “business income transcripts” soon. Income items reported under an EIN will be available through TDS sometime in 2025. In the past, tax pros needed to contact PPS directly to get this information, and the PPS representative would fax it to the tax pro.

Next steps for tax pros

Since 2019, tax pros have significantly increased their use of IRS transcripts. Tax pro transcript downloads are quickly trending to 1 billion annual downloads.

Transcripts are an excellent source of client IRS information and can cut down on unnecessary calls to the IRS. With the recent downsizing of personnel at the IRS, tax pros should seek to use transcripts more in lieu of calling the IRS for information on their clients. Recent enhancements and new transcripts will provide the tax pro with even more client information. The “within tax season” release of the IRS’s Wage and Income transcripts for individuals will also put the tax pro in a proactive position to better file accurate returns before the April 15 deadline.

If the IRS maintains these modernization efforts, it can provide tax pros with even more information in future releases. Tax pros can gain on-demand access to their clients’ IRS transcripts by filing an annual Form 8821, Tax Information Authorization, for each client and using their e-Services TDS capability to obtain transcripts electronically.