Due diligence requirements for tax preparers

Due diligence is about asking the right questions, evaluating the answers, keeping thorough records, and protecting your practice. Following these steps will help you comply with the law and avoid costly penalties.

For paid tax preparers

How recent tax laws changed your due diligence responsibilities

Tax Cuts and Jobs Act (TCJA) of 2017:

Expanded the due diligence rules under IRC § 6695(g) to include verifying eligibility for the head of household filing status.
Modified the child tax credit (CTC) to add a $500 nonrefundable credit for other dependents (ODC). This ODC is treated the same as the CTC for due diligence.

As a result, for tax years 2018 through 2025, you must meet due diligence requirements if you determine a client’s eligibility to claim:

Head of household filing status
The child tax credit or other dependent credit

PATH Act of 2015:

Extended due diligence rules to returns and refund claims that include:

Earned income tax credit (EITC)
Child tax credit (CTC)/additional child tax credit (ACTC)
American opportunity tax credit (AOTC)

This means for returns from tax year 2016 onward, you must follow these rules when determining eligibility for or the amount of these credits.

What records you must keep

As a preparer, you are required to maintain for three years:

A copy of Form 8867, Paid Preparer’s Due Diligence Checklist
Worksheets showing how you computed the EITC, CTC/ACTC/ODC, or AOTC
Any client documents you relied on to determine eligibility or credit amounts
Notes of how, when, and from whom you received the information
Records of any extra questions you asked and your client’s answers

The three-year period starts from the latest of:

The due date of the return
The date you e-filed
The date you handed a paper return to your client for signature
The date you submitted your part of the return to the signing preparer if you’re a non-signing preparer

Keep these securely, on paper or electronically, to protect client privacy.

Using professional judgement in addition to tax software

Due diligence requires you to make additional inquiries if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information you receive from your client appears to be incorrect, inconsistent, or incomplete.

Your tax preparation software helps, but it cannot replace your professional judgment or responsibility under the law. You still must:

Ask reasonable questions
Evaluate whether the information makes sense
Follow up on anything inconsistent, incomplete, or suspicious

Asking questions about the source and amount of income used to support a family for due diligence has several purposes such as:

Ensuring your client is reporting all income to compute the correct adjusted gross income (AGI) for the EITC
Ensuring the child is not the qualifying child of another person for the EITC or the CTC/ACTC/ODC
Determining the total cost of maintaining your client’s home to assist in determining whether your client paid more than half of the total cost of maintaining the home

You must use your professional judgment regarding the credibility of your client and the answers you receive. If you are not comfortable with the answers or the credibility of the client, then due diligence dictates you do not prepare the return until you receive satisfactory information to resolve your concerns.

You may also want to present your client with the Publication 4717, Help Your Tax Preparer Get Your Tax Return Right PDF PDF. This publication explains a paid tax preparer’s due diligence requirements and the consequences of not filing an accurate return.

If a client won’t report all business expenses

Under the law, taxpayers must claim allowable business expenses to correctly compute self-employment income. This reduces their earned income, which may lower credits like the EITC—but it’s required. If you suspect a client is underreporting expenses to boost a credit, you must:

Ask additional questions
Request documentation if needed
Decline to prepare the return if you’re not satisfied with the answers

Clients may always decide not to finish preparing a return with you. If you suspect they might file an improper claim elsewhere, refer to the IRS’s fraud reporting guidance.

If the preparer wants to report a taxpayer whom he or she thinks will erroneously claim a tax benefit with another preparer, use the process described in the Fraud section of the frequently asked questions.

For employers of tax preparers

How firms can be penalized

Your firm can be fined if your employees fail to meet due diligence requirements. The IRS can assess penalties if:

A member of your management was involved in or aware of the failure.
Your firm lacked proper compliance procedures.
Your firm ignored its procedures through willful neglect or reckless disregard.

How to protect your firm

Develop and enforce clear office procedures that address all due diligence requirements.
Provide annual training or use IRS online training in English or Spanish.
Regularly review employee understanding and conduct spot checks on their work.
Ensure all records are kept securely and completely.

Due diligence law, regulations and requirements

Tax preparer due diligence rules

Preparer compliance - Focused and tiered

Knock and talk

Letters or phone calls about due diligence and filing errors

Barring non-compliant EITC return preparers from filing tax returns

Due diligence requirements for knowledge and recordkeeping

Paid preparer due diligence videos

Tax preparer toolkit