People who come to you, a tax return preparer, expect you to know the tax law and prepare an accurate return. Further, if you are paid to prepare returns claiming the earned income tax credit (EITC), the child tax credit (CTC), the additional child tax credit (ACTC), the credit for other dependents (ODC), the American opportunity tax credit (AOTC) or the head of household (HOH) filing status, you must meet specific due diligence requirements. Refer to our Refundable Credit Due Diligence and Head of Household Law and Regulation page for more information on the requirements. There are consequences of not meeting your due diligence requirements for you, for your client, and if you are an employee, your employer.
Incorrect Refundable Credits and Head of Household Filing Status Returns Affect Your Clients, You and Your Employer
If we examine your client's return and deny all or a part of the EITC, the CTC, the AOTC, or HOH filing status, your client:
- must pay back any amount in error with interest;
- may be subject to the 20 percent accuracy-related penalty and the 75 percent fraud penalty
- may need to file Form 8862, Information To Claim Certain Refundable Credits After Disallowance;
- may be banned from claiming one or more of the credits for the next two years if we find the error is because of reckless or intentional disregard of the rules;
- may be banned from claiming one or more of the credits for the next ten years if we find the error is because of fraud.
If we examine the EITC, CTC, AOTC or HOH filing status claims you prepared and we find you did not meet all four due diligence requirements, the consequences for you are:
- a $500* penalty (indexed for inflation) for each failure to comply with your due diligence requirements (reference: IRC section 6695(g) and (h))
- A minimum penalty of $1,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to an unreasonable position (reference: IRC section 6694(a))
- A minimum penalty of $5,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to your willful, reckless or intentional disregard of rules or regulations (reference: IRC 6694(b))
IRS can also penalize an employer or employing firm if an employee fails to comply with the due diligence requirements. There are specific circumstances when an employer is subject to the due diligence penalty (reference: Treasury Regulations 1.6695.2(c)). See our Due Diligence FAQs for the circumstances and ways an employer can prevent penalties.
*Indexed for inflation, the penalty per failure for returns prepared after 2018 is $520 for each credit or HOH filing status claimed on a return. This could mean up to four due diligence penalties per return when the return claims for the EITC, the CTC, the AOTC and HOH filing status. For a tax tax return prepared after 2018, the penalty can be $2,080.
If you receive a return-related penalty, you can also face:
- Suspension or expulsion of you or your firm from IRS e-file
- Disciplinary action by the IRS Office of Professional Responsibility
- Criminal penalties for filing fraudulent returns
- Injunctions barring you from preparing tax returns or imposing conditions on the tax returns you may prepare
Additional Due Diligence Topics