Internal Revenue Bulletin 2018-32 (PDF rendition): IRS Revenue Rulings

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HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Income Tax
Rev. Rul. 2018–21, page 282.
Federal rates; adjusted federal rates; adjusted federal long-
term rate, the long-term exempt rate, and the blended annual
rate. For purposes of sections 42, 382, 1274, 1288, 7872
and other sections of the Code, tables set forth the rates for
August 2018.
REG–103474–18, page 284.
This item contains proposed regulations that amend portions
of previously proposed regulations related to the tax return
preparer penalty under section 6695(g) of the Internal Revenue
Code (Code). These amendments to the previously proposed
regulations are necessary to implement a recent law change
that expands the scope of the tax return preparer due diligence
penalty under section 6695(g) so that it applies with respect to
eligibility to file a return or claim for refund as head of house-
hold.
Finding Lists begin on page ii.
Bulletin No. 2018–32
August 6, 2018

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
August 6, 2018Bulletin No. 2018–32

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 1274.—Determina-
tion of Issue Price in the
Case of Certain Debt
Instruments Issued for
Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7872.)
Rev. Rul. 2018–21
This revenue ruling provides various
prescribed rates for federal income tax
purposes for August 2018 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted
applicable federal rates (adjusted AFR)
for the current month for purposes of sec-
tion 1288(b). Table 3 sets forth the ad-
justed federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-
income housing credit described in sec-
tion 42(b)(1) for buildings placed in ser-
vice during the current month. However,
under section 42(b)(2), the applicable per-
centage for non-federally subsidized new
buildings placed in service after July 30,
2008, shall not be less than 9%. Finally,
Table 5 contains the federal rate for de-
termining the present value of an annuity,
an interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
REV. RUL. 2018–21 TABLE 1
Applicable Federal Rates (AFR) for August 2018
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR2.42%2.41%2.40%2.40%
110% AFR2.67%2.65%2.64%2.64%
120% AFR2.91%2.89%2.88%2.87%
130% AFR3.15%3.13%3.12%3.11%
Mid-term
AFR2.80%2.78%2.77%2.76%
110% AFR3.08%3.06%3.05%3.04%
120% AFR3.37%3.34%3.33%3.32%
130% AFR3.64%3.61%3.59%3.58%
150% AFR4.21%4.17%4.15%4.13%
175% AFR4.93%4.87%4.84%4.82%
Long-term
AFR2.95%2.93%2.92%2.91%
110% AFR3.25%3.22%3.21%3.20%
120% AFR3.55%3.52%3.50%3.49%
130% AFR3.85%3.81%3.79%3.78%
REV. RUL. 2018–21 TABLE 2
Adjusted AFR for August 2018
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted AFR1.84%1.83%1.83%1.82%
Mid-term adjusted AFR2.12%2.11%2.10%2.10%
Long-term adjusted AFR2.23%2.22%2.21%2.21%
August 6, 2018Bulletin No. 2018–32
282

REV. RUL. 2018–21 TABLE 3
Rates Under Section 382 for August 2018
Adjusted federal long-term rate for the current month2.23%
Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)
2.32%
REV. RUL. 2018–21 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for August 2018
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings
placed in service after July 30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.66%
Appropriate percentage for the 30% present value low-income Housing credit3.28%
REV. RUL. 2018–21 TABLE 5
Rate Under Section 7520 for August 2018
Applicable federal rate for determining the present value of an annuity, an interest for life or a term
of years, or a remainder or reversionary interest
3.4%
Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of August 2018. See Rev.
Rul. 2018 –21, page 282.
Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Section 482.—Allocation of
Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2018. See Rev. Rul. 2018 –21, page 282.
Section 7520.—Valuation
Tables
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Section 7872.—Treatment
of Loans With Below-
Market Interest Rates
The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of August
2018. See Rev. Rul. 2018 –21, page 282.
Bulletin No. 2018–32August 6, 2018
283

Part IV. Items of General Interest
Tax Return Preparer Due
Diligence Penalty Under
Section 6695(g)
REG–103474–18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing, partial withdrawal of notice of pro-
posed rulemaking.
SUMMARY: This document contains
proposed regulations that amend portions
of previously proposed regulations related
to the tax return preparer penalty under
section 6695(g) of the Internal Revenue
Code (Code). These amendments to the
previously proposed regulations are nec-
essary to implement a recent law change
that expands thescope of the tax return
preparer due diligence penalty under section
6695(g) so that it applies with respect to
eligibility to file a return or claim for refund
as head of household. The proposed regula-
tions affect tax return preparers.
DATES: Written or electronic comments
and requests for a public hearing must be
received by August 17, 2018.
ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG–103474 –18), room
5207, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044.Submissions may be hand de-
livered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to: CC:PA:
LPD:PR(REG–103474 –18),Courier’s
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, NW, Washington, DC
20224, or sent electronically, via the Federal
eRulemaking Portal at www.regulations.
gov (IRS REG–103474 –18).
FOR FURTHER INFORMATION CON-
TACT:Concerning the proposed regula-
tions, Marshall French, 202-317-6845;
concerning submissions of comments and
requests for a public hearing, Regina
Johnson, 202-317-6901 (not toll-free
numbers).
Paperwork Reduction Act
The collection of information in cur-
rent § 1.6695–2 was previously reviewed
and approved under control number 1545-
1570. Control number 1545-1570 was dis-
continued in 2014, as the burden for the
collection of information contained in
§ 1.6695–2 is reflected in the burden for
Form 8867, “Paid Preparer’s Due Dili-
gence Checklist,” under control number
1545-1629.
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section
6695(g) of the Code regarding the tax
return preparer due diligence require-
ments.
Prior to 2016, section 6695(g) imposed
a penalty on tax return preparers who fail
to comply with due diligence require-
ments set forth in regulations prescribed
by the Secretary with respect to determin-
ing eligibility for, or the amount of, the
earned income credit (EIC). For tax years
beginning after December 31, 2015, the
scope of section 6695(g) was expanded to
apply the penalty to tax return preparers
who fail to comply with due diligence
requirements with respect to determining
eligibility for, or the amount of, the child
tax credit (CTC)/additional child tax
credit (ACTC) and the American oppor-
tunity tax credit (AOTC). See section 207
of the Protecting Americans from Tax
Hikes Act of 2015, Div. Q of Pub. L.
114 –113 (129 Stat. 2242, 3082 (2015))
(PATH Act). On December 5, 2016, final
and temporary regulations (TD 9799, 81
FR 87444) with cross-referencing pro-
posed regulations (REG–102952–16, 81
FR 87502) (2016 proposed regulations)
were published in theFederal Registerto
reflect these changes.
Effective for tax years beginning after
December 31, 2017, section 6695(g) was
amended to further expand the scope of
the penalty to tax return preparers who fail
to comply with due diligence require-
ments with respect to determining eligi-
bility to file as head of household (as
defined in section 2(b)). See section
11001(b) of “An Act to provide for rec-
onciliation pursuant to titles II and V of
the concurrent resolution on the budget
for fiscal year 2018,” Pub. L. 115–97 (131
Stat. 2054, 2058 (2017)) (Act). This doc-
ument contains proposed regulations to
reflect this change.
Explanation of Provisions
The proposed regulations contained in
this document withdraw paragraphs (a),
(b)(3), and (e) of § 1.6695–2 of the 2016
proposed regulations and propose in their
place new paragraphs (a), (b)(3), and (e)
of § 1.6695–2 (amended paragraphs). The
amended paragraphs update the 2016 pro-
posed regulations to reflect the recent
change in the law that expands the tax
return preparer due diligence require-
ments under section 6695(g) to apply to
determining eligibility to file as head of
household. Accordingly, the proposed
regulations contained in this document
amend paragraphs (a) and (b)(3) of
§ 1.6695–2 of the 2016 proposed regula-
tions by adding a reference to determining
eligibility to file as head of household
where reference is made to determining
eligibility for, or the amount of, the EIC,
the CTC/ACTC and/or the AOTC. In ad-
dition, Example 5 in paragraph (b)(3)(ii)
of § 1.6695–2 of the 2016 proposed reg-
ulations is revised to demonstrate how
head of household due diligence require-
ments are intertwined with the rules for
determining a taxpayer’s eligibility for the
CTC.
A new example is also added to
§ 1.6695–2(a)(2) to illustrate how the pen-
alty applies if there is a failure to satisfy
the due diligence requirements with re-
spect to determining eligibility to file as
head of household in addition to a failure
to satisfy the due diligence requirements
with respect to one of the applicable cred-
its. As explained in the preamble of the
2016 temporary regulations, the prepara-
tion of one return or claim for refund may
result in the imposition of more than one
penalty under section 6695(g). That is be-
cause under section 6695(g), each failure
to comply with the due diligence require-
ments set forth in regulations prescribed
August 6, 2018Bulletin No. 2018–32
284

by the Secretary results in a separate pen-
alty. To illustrate this point, a new exam-
ple, Example 3, is added to proposed
§ 1.6695–2(a)(2) contained in this docu-
ment.
The applicability date in § 1.6695–2(e)
is also updated to reflect the effective date
of the addition of determining eligibility
to file as head of household to the due
diligence requirements. Accordingly, pro-
posed § 1.6695–2(e) contained in this doc-
ument provides that § 1.6695–2 applies to
tax returns and claims for refund for tax-
able years beginning after December 31,
2015, that are prepared on or after the date
of publication of the Treasury decision
adopting the proposed rules as final regu-
lations in theFederal Register. However,
the rules relating to the determination of a
taxpayer’s eligibility to file as head of
household under section 2(b) apply to tax
returns and claims for refund for taxable
years beginning after December 31, 2017,
that are prepared on or after the date of
publication of the Treasury decision
adopting the proposed rules as final regu-
lations in theFederal Register.
As part of satisfying the due dili-
gencerequirements, the regulations under
§ 1.6695–2 require tax return preparers to
complete the Form 8867, “Paid Preparer’s
Due Diligence Checklist,” and, in most
cases, attach it to the relevant return or
claim for refund as part of satisfying the
section 6695(g) due diligence require-
ments. The Form 8867 underwent signif-
icant revisions for the 2016 tax year and is
currently a single checklist to be used for
all applicable credits (namely, the EIC,
the CTC/ACTC, and the AOTC) on the
return or claim for refund subject to the
section 6695(g) due diligence require-
ments. It is anticipated that the IRS will
revise the Form 8867 to include the head
of household filing status in time for the
2019 filing season.
Proposed Applicability Dates
Proposed § 1.6695–2(e) provides that
the rules in this notice of proposed rule-
making with respect to determining eligi-
bility to file as head of household under
section 2(b) will apply to tax returns and
claims for refund for taxable years begin-
ning after December 31, 2017, that are
prepared on or after the date the final
regulations are published in theFederal
Register.
Special Analyses
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Department of the Treasury and the Office
of Management and Budget regarding re-
view of tax regulations. Under the Regu-
latory Flexibility Act (RFA) (5 U.S.C.
chapter 6), it is hereby certified that these
proposed rules, if adopted, would not have
a significant economic impact on a sub-
stantial number of small entities. When an
agency issues a notice of proposed rule-
making, the RFA requires the agency to
“prepare and make available for public
comment an initial regulatory flexibility
analysis” that will “describe the impact of
the proposed rule on small entities.” (5
U.S.C. 603(a)). Section 605 of the RFA
provides an exception to this requirement
if the agency certifies that the proposed
rulemaking will not have a significant
economic impact on a substantial number
of small entities.
The proposed rules affect paid tax re-
turn preparers who determine a taxpayer
is eligible to file as head of household, in
addition to those tax return preparers who
determine eligibility for, or the amount of,
the EIC, the CTC/ACTC, and/or the
AOTC. The North American Industry
Classification System (NAICS) code that
relates to tax return preparation services
(NAICS code 541213) is the appropriate
code for tax return preparers subject to
this notice of proposed rulemaking. Enti-
ties identified as tax return preparation
services are considered small under the
Small Business Administration size stan-
dards (13 CFR 121.201) if their annual
revenue is less than $20.5 million. The
IRS estimates that approximately 75 to 85
percent of the 505,000 persons who work
at firms or are self-employed tax return
preparers are operating as or employed by
small entities. The IRS has therefore de-
termined that these proposed rules will
have an impact on a substantial number of
small entities.
The IRS has further determined, how-
ever, that the economic impact on entities
affected by the proposed rules will not be
significant. The current final and tempo-
rary regulations under section 6695(g) al-
ready require tax return preparers to com-
plete the Form 8867 when a return or
claim for refund includes a claim of the
EIC, the CTC/ACTC, and/or the AOTC.
Tax return preparers also must currently
maintain records of the checklists and
computations, as well as a record of how
and when the information used to com-
pute the credits was obtained by the tax
return preparer. The information needed
to document a taxpayer’s eligibility to file
as head of household is information the
preparer must gather to file the return.
Even if certain preparers are required to
maintain the checklists and complete
Form 8867 for the first time, the IRS es-
timates that the total time required should
be minimal for these tax return preparers.
Further, the IRS does not expect that the
requirements in these proposed regula-
tions would necessitate the purchase of
additional software or equipment in order
to meet the additional information reten-
tion requirements.
Based on these facts, the IRS hereby
certifies that the collection of information
contained in this notice of proposed rule-
making will not have a significant eco-
nomic impact on a substantial number of
small entities. Accordingly, a Regulatory
Flexibility Analysis is not required.
Pursuant to section 7805(f) of the In-
ternal Revenue Code, this notice of pro-
posed rulemaking has been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on the impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written and electronic
comments that are timely submitted to the
IRS as prescribed in this preamble under
theADDRESSESheading. The Treasury
Department and the IRS request com-
ments on all aspects of the proposed rules.
All comments will be available at www.
regulations.gov or upon request.
A public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hear-
Bulletin No. 2018–32August 6, 2018
285

ing will be published in theFederal Reg-
ister.
Drafting Information
The principal author of these regula-
tions is Rachel Gregory of the Office of
the Associate Chief Counsel (Procedure
and Administration).
*****
Partial Withdrawal of a Notice of
Proposed Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, § 1.6695–2(a), (b)(3), and
(e) of the notice of proposed rulemaking
(REG–102952–16) published in theFed-
eral Registeron December 5, 2016 (81
FR 87502) are withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.6695–2 is amended by
revising the section heading, and para-
graphs (a), (b)(3), and (e) to read as fol-
lows:
§ 1.6695–2 Tax return preparer due
diligence requirements for certain
returns and claims.
(a)Penalty for failure to meet due dil-
igence requirements—(1)In general.A
person who is a tax return preparer (as
defined in section 7701(a)(36)) of a tax
return or claim for refund under the Inter-
nal Revenue Code who determines the
taxpayer’s eligibility to file as head of
household under section 2(b), or who de-
termines the taxpayer’s eligibility for, or
the amount of, the child tax credit (CTC)/
additional child tax credit (ACTC) under
section 24, the American opportunity tax
credit (AOTC) under section 25A(i), or
the earned income credit (EIC) under sec-
tion 32, and who fails to satisfy the due
diligence requirements of paragraph (b) of
this section will be subject to a penalty as
prescribed in section 6695(g) (indexed for
inflation under section 6695(h)) for each
failure. A separate penalty applies to a tax
return preparer with respect to the head of
household filing status determination and
to each applicable credit claimed on a
return or claim for refund for which the
due diligence requirements of this section
are not satisfied and for which the excep-
tion to penalty provided by paragraph (d)
of this section does not apply.
(2)Examples. The provisions of para-
graph (a)(1) of this section are illustrated
by the following examples:
Example 1. Preparer A prepares a federal income
tax return for a taxpayer claiming the CTC and
the AOTC. Preparer A did not meet the due diligence
requirements under this section with respect to the
CTC or the AOTC claimed on the taxpayer’s return.
Unless the exception to penalty provided by para-
graph (d) of this section applies, Preparer A is sub-
ject to two penalties under section 6695(g): one for
failure to meet the due diligence requirements for the
CTC and a second penalty for failure to meet the due
diligence requirements for the AOTC.
Example 2. Preparer B prepares a federal income
tax return for a taxpayer claiming the CTC and
the AOTC. Preparer B did not meet the due diligence
requirements under this section with respect to the
CTC claimed on the taxpayer’s return, but Preparer
B did meet the due diligence requirements under this
section with respect to the AOTC claimed on the
taxpayer’s return. Unless the exception to penalty
provided by paragraph (d) of this section applies,
Preparer B is subject to one penalty under section
6695(g) for the failure to meet the due diligence
requirements for the CTC. Preparer B is not subject
to a penalty under section 6695(g) for failure to meet
the due diligence requirements for the AOTC.
Example 3. Preparer C prepares a federal income
tax return for a taxpayer using the head of household
filing status and claiming the CTC and the AOTC.
Preparer C did not meet the due diligence require-
ments under this section with respect to the head of
household filing status and the CTC claimed on the
taxpayer’s return. Preparer C did meet the due dili-
gence requirements under this section with respect to
the AOTC claimed on the taxpayer’s return. Unless
the exception to penalty provided by paragraph (d)
of this section applies, Preparer C is subject to two
penalties under section 6695(g) for the failure to
meet the due diligence requirements: one for the
head of household filing status and one for the CTC.
Preparer C is not subject to a penalty under section
6695(g) for failure to meet the due diligence require-
ments for the AOTC.
(b)***
(3)Knowledge—(i)In general. The tax
return preparer must not know, or have
reason to know, that any information used
by the tax return preparer in determining
the taxpayer’s eligibility to file as head of
household or in determining the taxpay-
er’s eligibility for, or the amount of, any
credit described in paragraph (a) of this
section and claimed on the return or claim
for refund is incorrect. The tax return pre-
parer may not ignore the implications of
information furnished to, or known by, the
tax return preparer, and must make rea-
sonable inquiries if a reasonable and well-
informed tax return preparer knowledge-
able in the law would conclude that the
information furnished to the tax return
preparer appears to be incorrect, inconsis-
tent, or incomplete. The tax return pre-
parer must also contemporaneously docu-
ment in the preparer’s paper or electronic
files any inquiries made and the responses
to those inquiries.
(ii)Examples. The provisions of para-
graph (b)(3)(i) of this section are illus-
trated by the following examples:
Example 1. In 2018, Q, a 22 year-old taxpayer,
engages Preparer C to prepare Q’s 2017 federal
income tax return. Q completes Preparer C’s stan-
dard intake questionnaire and states that she has
never been married and has two sons, ages 10 and
11. Based on the intake sheet and other information
that Q provides, including information that shows
that the boys lived with Q throughout 2017, Preparer
C believes that Q may be eligible to claim each boy
as a qualifying child for purposes of the EIC and the
CTC. However, Q provides no information to Pre-
parer C, and Preparer C does not have any informa-
tion from other sources, to verify the relationship
between Q and the boys. To meet the knowledge
requirement in paragraph (b)(3) of this section, Pre-
parer C must make reasonable inquiries to determine
whether each boy is a qualifying child of Q for
purposes of the EIC and the CTC, including reason-
able inquiries to verify Q’s relationship to the boys,
and Preparer C must contemporaneously document
these inquiries and the responses.
Example 2. Assume the same facts as inExample
1of this paragraph (b)(3)(ii). In addition, as part of
preparing Q’s 2017 federal income tax return, Pre-
parer C made sufficient reasonable inquiries to verify
that the boys were Q’s legally adopted children. In
2019, Q engages Preparer C to prepare her 2018
federal income tax return. When preparing Q’s 2018
federal income tax return, Preparer C is not required
to make additional inquiries to determine the boys
relationship to Q for purposes of the knowledge
requirement in paragraph (b)(3) of this section.
Example 3. In 2018, R, an 18 year-old tax-
payer, engages Preparer D to prepare R’s 2017
federal income tax return. R completes Preparer
D’s standard intake questionnaire and states that
she has never been married, has one child, an
infant, and that she and her infant lived with R’s
parents during part of the 2017 tax year. R also
provides Preparer D with a Form W–2 showing
that she earned $10,000 during 2017. R provides
no other documents or information showing that R
earned any other income during the tax year.
Based on the intake sheet and other information
that R provides, Preparer D believes that R may be
eligible to claim the infant as a qualifying child for
the EIC and the CTC. To meet the knowledge
August 6, 2018Bulletin No. 2018–32
286

requirement in paragraph (b)(3) of this section,
Preparer D must make reasonable inquiries to de-
termine whether R is eligible to claim these cred-
its, including reasonable inquiries to verify that R
is not a qualifying child of her parents (which
would make R ineligible to claim the EIC) or a
dependent of her parents (which would make R
ineligible to claim the CTC), and Preparer D must
contemporaneously document these inquiries and
the responses.
Example 4. The facts are the same as the facts in
Example 3of this paragraph (b)(3)(ii). In addition,
Preparer D previously prepared the 2017 joint fed-
eral income tax return for R’s parents. Based on
information provided by R’s parents, Preparer D has
determined that R is not eligible to be claimed as a
dependent or as a qualifying child for purposes of the
EIC or CTC on R’s parents’ return. Therefore, for
purposes of the knowledge requirement in paragraph
(b)(3) of this section, Preparer D is not required to
make additional inquiries to determine that R is not
her parents’ qualifying child or dependent.
Example 5. In 2019, S engages Preparer E to
prepare his 2018 federal income tax return. During
Preparer E’s standard intake interview, S states that
he has never been married and that his niece and
nephew lived with him for part of the 2018 taxable
year. Preparer E believes S may be eligible to file as
head of household and claim each of these children
as a qualifying child for purposes of the EIC and the
CTC. To meet the knowledge requirement in para-
graph (b)(3) of this section, Preparer E must make
reasonable inquiries to determine whether S is eligi-
ble to file as head of household and whether each
child is a qualifying child for purposes of the EIC
and the CTC, including reasonable inquiries about
the children’s residency, S’s relationship to the chil-
dren, the children’s income, the sources of support
for the children, and S’s contribution to the payment
of costs related to operating the household, and pre-
parer E must contemporaneously document these
inquiries and the responses.
Example 6. W engages Preparer F to prepare her
federal income tax return. During Preparer F’s stan-
dard intake interview, W states that she is 50 years
old, has never been married, and has no children. W
further states to Preparer F that during the tax year
she was self-employed, earned $10,000 from her
business, and had no business expenses or other
income. Preparer F believes W may be eligible for
the EIC. To meet the knowledge requirement in
paragraph (b)(3) of this section, Preparer F must
make reasonable inquiries to determine whether W is
eligible for the EIC, including reasonable inquiries to
determine whether W’s business income and ex-
penses are correct, and Preparer F must contempo-
raneously document these inquiries and the re-
sponses.
Example 7. Y, who is 32 years old, engages
Preparer G to prepare his federal income tax return.
Y completes Preparer G’s standard intake question-
naire and states that he has never been married. As
part of Preparer G’s client intake process, Y provides
Preparer G with a copy of the Form 1098 –T Y
received showing that University M billed $4,000 of
qualified tuition and related expenses for Y’s enroll-
ment or attendance at the university and that Y was
at least a half-time undergraduate student. Preparer
G believes that Y may be eligible for the AOTC. To
meet the knowledge requirements in paragraph
(b)(3) of this section, Preparer G must make reason-
able inquiries to determine whether Y is eligible for
the AOTC, as Form 1098 –T does not contain all the
information needed to determine eligibility for the
AOTC or to calculate the amount of the credit if Y is
eligible, and contemporaneously document these in-
quiries and the responses.
*****
(e)Applicability date. The rules of this
section apply to tax returns and claims for
refund for taxable years beginning after
December 31, 2015, that are prepared on
or after the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
However, the rules relating to the deter-
mination of a taxpayer’s eligibility to file
as head of household under section 2(b)
apply to tax returns and claims for refund
for taxable years beginning after Decem-
ber 31, 2017, that are prepared on or after
the date of publication of the Treasury
decision adopting these rules as final reg-
ulations in theFederal Register.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
(Filed by the Office of the Federal Register on July 13, 2018,
4:15 p.m., and published in the issue of the Federal Register
for July 18, 2018, 83 F.R. 33875)
Bulletin No. 2018–32August 6, 2018
287

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example,modifiedand
supersededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE
—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Bulletin No. 2018–32August 6, 2018
i

Numerical Finding List
1
Bulletin 2018 –27 through 2018 –32
Announcements:
2018-09, 2018-28 I.R.B.206
2018-12, 2018-30 I.R.B.232
Notices:
2018-48, 2018-28 I.R.B.9
2018-56, 2018-27 I.R.B.3
2018-59, 2018-28 I.R.B.196
2018-60, 2018-31 I.R.B.275
2018-61, 2018-31 I.R.B.278
Proposed Regulations:
REG-103474-18, 2018-32 I.R.B.284
REG-106977-18, 2018-27 I.R.B.6
Revenue Procedures:
2018-35, 2018-28 I.R.B.204
2018-37, 2018-29 I.R.B.210
2018-38, 2018-31 I.R.B.280
Revenue Rulings:
2018-19, 2018-27 I.R.B.1
2018-20, 2018-28 I.R.B.8
2018-21, 2018-32 I.R.B.282
Treasury Decisions:
9834, 2018-31 I.R.B.233
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018 – 01 through 2018 –26 is in Internal Revenue Bulletin
2018 –26, dated June 27, 2018.
August 6, 2018Bulletin No. 2018–32
ii

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2018 –27 through 2018 –32
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018 – 01 through 2018 –26 is in Internal Revenue Bulletin
2018 –26, dated June 27, 2018.
Bulletin No. 2018–32August 6, 2018
iii

INTERNAL REVENUE BULLETIN
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