Due diligence requirements for knowledge and recordkeeping

Paid tax return preparers must meet four specific due diligence requirements under Treasury Regulation section 1.6695-2 when preparing returns or refund claims involving:

Earned Income Tax Credit (EITC)
Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), Credit for Other Dependents (ODC)
American Opportunity Tax Credit (AOTC)
Head of household (HOH) filing status

This page focuses on two of these requirements:

What preparers must do

For each tax benefit claimed, you must:

Not know (or have reason to know) that any information used to determine eligibility or credit amounts is incorrect.
Not ignore facts or implications of what your client tells you.
Ask reasonable follow-up questions if information appears incorrect, inconsistent, or incomplete, based on what a well-informed preparer would conclude.

You must keep records showing how you satisfied due diligence, including:
A completed Form 8867, Paid Preparer's Due Diligence Checklist.
Copies of worksheets or computations used to figure the credit amounts.
Records of when, how, and from whom you obtained information (including anyone who provided documents).
Copies of any client documents you relied on.

These records help show you fulfilled due diligence.

In general, due diligence rules do not require paid preparers to request specific documentation from their clients.

The following client interview examples provide guidance on how to meet the knowledge and recordkeeping requirements. For more information see, Publication 4687, Paid Preparer Due Diligence PDF.

Interview the client and document questions asked and answers given.
Obtain background details on family living arrangements to understand why the nephew is in the client’s care.
Ask about where the children’s parents live and whether they lived with the parents over half the year.
Record what documents (if any) the client provided, and keep copies if relied upon.
Keep a copy of the completed Form 8867.

If relationship was verified in a prior year, generally no need to repeat—unless circumstances like adoption or foster changes may apply.
Always ask about residency each year, since living situations can change.
Document answers and keep copies of any supporting documents provided.
Retain the completed Form 8867.

Client wants to claim EITC without qualifying children, showing wages plus a net business loss.
Ask detailed questions to confirm there is an actual business.
If satisfied, help assist the client in a reasonable reconstruction of business income and expenses to complete Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
Educate the client on how to keep proper records going forward.