Auditing for Due Diligence Compliance

Audits for compliance with refundable credits, credit for other dependents and/or head of household (HOH) filing status due diligence requirements are another tier of our Preparer Compliance Program. We look at returns with a high chance of errors completed by the same preparer and use that information to select preparers for audits. We may have contacted the preparer using one of the other tiers of our Preparer Compliance Program, but we don't use all of them for every preparer. (See Preparer Compliance - Focused and Tiered for information on the other tiers).

Due Diligence Audit

Before the filing season begins, IRS employees conduct due diligence audits based on the prior year returns. We will contact you to schedule an appointment time for the audit and we expect you to schedule the appointment time within a reasonable time frame. 

During the filing season, we may conduct due diligence audits without advance notice, however, we would have previously sent you a letter regarding a potential audit. (See Reaching Out to Preparers for examples of the letters)

We may also audit your client returns. If this occurs, we notify you using Letter 5138.

What Happens During your Due Diligence Audit?

During your audit, the IRS employee will provide their official IRS identification. The employee will interview you about your business practices. If you are an employee of a tax preparation firm, the employee also contacts your employer for an interview. The employee is looking for compliance with all four due diligence requirements.

The examiner will look at least 25 returns reviewing the following documents:

  • Your due diligence records,
  • The probing questions you asked your client, and your client's responses,
  • All questionnaires, checklists, worksheets and
  • Copies of any client provided documents relied on to determine eligibility for head of household (HOH) filing status, or to determine eligibility for, or to compute the amount of, the earned income tax credit (EITC), child tax credit (CTC), including additional child tax credit (ACTC) and credit for other dependents (ODC), and American opportunity tax credit (AOTC).


If the employee identifies failures to meet due diligence on any of the returns, they may expand the audit to more returns.

During the audit, the employee looks for evidence showing that you met the knowledge standard. To meet the knowledge standard, you must:

  • Know the law
  • Ask the right questions, especially when your client gives information that appears incorrect, inconsistent or incomplete 
  • Document the questions asked and the responses given by your client
  • Get all the facts to make sure your client truly qualifies for EITC, CTC/ACTC/ODC, AOTC and/or HOH filing status

While auditing for due diligence, we also ensure that you are in compliance with the PTIN, (Preparer Tax Identification Number) requirements and your personal and business tax return filing requirements.  

What Happens if My Records Don't Show I Met the Due Diligence Requirements? 

We assess penalties when we find you did not comply with due diligence requirements. We continuously improve our audit selection process to find those preparers with a high likelihood of filing returns with errors. Using this process, we penalized over ninety percent of the preparers we selected for audit. We assess most penalties against preparers who did not meet the knowledge requirements.

The penalty for not meeting due diligence requirements is $520* for each credit (EITC, CTC/ACTC/ODC and AOTC), or HOH filing status claimed on a 2018 tax return.   

*The penalty amount is adjusted for cost of living under IRC Section 6695(h).

What if I Don't Agree with the Penalties?

See Appeal of Due Diligence Penalties

Are You a Certified Acceptance Agent?

To reduce the burden on preparers, IRS combines the due diligence audits with certified acceptance agent visits as needed.

Additional Resources

Return to main Refundable Credit Preparer Compliance page