IRS Enforcing Due Diligence Rules Against Return Preparers

The IRS imposes specific due diligence requirements on paid tax return preparers under IRC Section 6695(g), requiring reasonable care before claiming certain refundable credits and head of household filing status on behalf of clients. Covered claims include the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), American Opportunity Tax Credit (AOTC), and head of household filing status. For each covered claim, preparers must complete Form 8867 (Paid Preparer's Due Diligence Checklist), maintain records supporting eligibility determinations, apply a knowledge standard—asking follow-up questions when client answers seem inconsistent—and retain records for three years. Failure to comply results in a penalty of $620 per failure (2024 amount, adjusted annually), which accumulates rapidly for high-volume preparers. The IRS has increasingly prioritized due diligence enforcement through both correspondence audits and in-person preparer compliance visits, making proactive compliance preparation essential.

The IRS employs multiple enforcement strategies targeting return preparers who claim EITC, CTC, AOTC, and head of household status for clients. Compliance visits—sometimes unannounced during filing season—are conducted by Revenue Agents who review office procedures, client interview practices, and how Form 8867 is completed. Preparer audits may also be triggered by data analytics identifying patterns of anomalous credit claims, unusually high refund amounts, or returns with characteristics inconsistent with the client population. During an examination, preparers can expect requests for all due diligence records related to a sample of returns, including interview notes, documents collected from clients, and copies of Forms 8867. Penalties are assessed per return and per credit claimed without proper due diligence. The IRS can also refer egregious cases to the Office of Professional Responsibility for disciplinary action, including suspension or disbarment from tax practice—consequences that underscore the importance of proactive compliance.

The knowledge standard under IRS due diligence rules requires paid return preparers to not know, or have reason to know, that any information used to determine a client's eligibility for a covered credit is incorrect, inconsistent, or incomplete. This standard goes beyond simply accepting whatever a client provides—preparers must apply the judgment of a reasonable, knowledgeable tax professional. If information seems inconsistent—for example, claimed income appears unusually low relative to the lifestyle expenses described—the preparer must ask additional questions and document the responses. Preparers cannot turn a blind eye to potential ineligibility. Practically, this means maintaining interview records that document what questions were asked, what the client responded, and what documents were reviewed or requested. The IRS has made clear that mechanically completing Form 8867 without genuine inquiry does not satisfy the knowledge standard. Standardized question checklists, client interview records, and consistent documentation practices are the foundations of knowledge-standard compliance for any tax preparation practice.

Paid tax return preparers must retain specific records for each return on which a covered credit or head of household status is claimed. Required records include a copy of the completed Form 8867 for each return, associated worksheets or software computations used to determine the credit amount, a record of how and when client information was obtained (including interview notes), and copies of any client-provided supporting documents such as birth certificates, school records, or childcare provider information. Records must be retained for three years from the latest of the return due date, the filing date, or the date the return was presented to the client. These records do not need to be attached to the filed return but must be available for IRS inspection within 72 hours of a request. Preparers using software that generates and stores Form 8867 electronically must ensure those files are accessible and backed up for the full retention period, as missing records in an examination are treated as a due diligence failure regardless of actual compliance.

Tax preparation firms serving high volumes of EITC, CTC, AOTC, and head of household clients should treat due diligence compliance as a formal program. Best practices begin with standardized client intake questionnaires capturing all information needed to evaluate eligibility, administered consistently by every preparer in the firm. Electronic systems requiring completion of Form 8867 before a return can be transmitted create a built-in compliance checkpoint. Training all preparers—including seasonal staff—on the knowledge standard, documentation requirements, and eligibility red flags is essential before each filing season opens. Supervisory review of a sample of returns involving covered credits helps catch systemic gaps before an IRS visit does. Firms should also maintain a written due diligence policy document articulating firm-wide standards that can be produced during a compliance visit. Preparers who are well-documented, consistently trained, and systematic in their client interview process are far better positioned to defend their practices and avoid the substantial per-return penalties that IRS enforcement can generate.