Due diligence is not optional for tax preparers. Under IRC Section 6695(g), preparers who claim certain tax credits on behalf of clients are required to meet specific documentation and inquiry standards. Failing to meet them can result in penalties of over $600 per return, per credit.
The credits that trigger due diligence requirements are the Earned Income Tax Credit, the Child Tax Credit and Other Dependent Credit, the American Opportunity Tax Credit, and Head of Household filing status.
What Due Diligence Actually Requires
The IRS standard requires preparers to make reasonable inquiries when information provided by a client appears incorrect, inconsistent, or incomplete. It is not enough to simply fill out a form. You are expected to ask questions, document the answers, and keep records.
Specifically, IRS regulations require preparers to:
- Complete and retain Form 8867 for every applicable return
- Ask all required questions and document the client responses
- Keep records of all documents reviewed during the preparation process
- Not ignore information that appears inconsistent or contradictory
The Most Common Mistakes
- Failing to complete Form 8867 or completing it without actually reviewing the underlying information
- Accepting client statements at face value when the situation warrants follow-up questions
- Not retaining documentation for the required three-year period
- Claiming Head of Household without verifying that the taxpayer meets the qualifying person and cost-of-home tests
The IRS can audit due diligence compliance separately from the return itself. A preparer can face penalties even if the client's return is completely accurate.
A Simple Habit That Protects You
Treating due diligence as a documentation exercise rather than a compliance checkbox is what separates preparers who get through audits cleanly from those who do not. The Client Due Diligence Intake Form at Profit Edge Tax is a free tool built specifically for this purpose.