PAID PREPARER
Due Diligence
more than a check mark on a form
DUE DILLIGENCE MUST DO’S
By law, you must meet four specific due diligence requirements if you are
paid to prepare a tax return or claim for refund claiming any of these tax
benefits. Failing to meet the four due diligence requirements can result in
penalties assessed against you under Internal Revenue Code §6695(g).
1
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
2
3
4
DUE DILIGENCE REQUIRES YOU TO:
These requirements under Treasury Regulation §1.6695-2 focus on
accurately determining your client’s eligibility for each credit and head of
household filing status and computing the amount of each credit. Know
the EITC, CTC/ACTC/ODC, AOTC, and HOH tax laws thoroughly, and care-
fully evaluate each client’s personal situation, information and eligibility.
Know the Facts
Compute the Credits Based on the Facts
Complete Form 8867
Keep Records for Three Years
Ask all the right questions to get the relevant facts.
If you have a reason to doubt or question any information provided to you or known to
you to determine your client’s eligibility for the credit(s) or HOH ling status or to compute
the amount of the credit(s) you must:
•
Ask your client additional questions if a reasonable and well-informed tax return
preparer, knowledgeable in the law, would conclude the information furnished seems
incorrect, inconsistent, or incomplete.
•
Not know or have a reason to know the information provided is incorrect, inconsistent
or incomplete.
•
Document in your les at the time of the interview the questions you asked and your
client’s answers (see Keep Records below).
Based on the facts, complete the applicable worksheet(s) or your own worksheet(s) to
compute the EITC, CTC/ACTC/ ODC or AOTC claimed on the return or claim for refund.
Most professional tax return preparation software includes the appropriate worksheets.
KNOWLEDGE
CREDIT COMPUTATION
Complete Form 8867, Paid Preparer’s Due Diligence Checklist, and submit it to the IRS
with every electronic or paper return or claim for refund you prepare claiming the EITC,
CTC/ACTC/ODC, AOTC, or HOH ling status.
•
Make sure your software includes Form 8867 and le the completed form with every
electronic return or claim for refund or provide the completed form with every paper
return or claim for refund you prepare that claims the EITC, CTC/ACTC/ODC, AOTC,
or HOH ling status.
• Answer each question on the form based on information from your client and infor
-
mation you know is true.
• You must also personally complete Part VI, Eligibility Certication.
Keep a record of the following:
• Form 8867 (see Form 8867 above)
• Applicable worksheet(s) (see Credit Computation above)
• A record of how, when, and from whom the information used to prepare Form 8867
and the applicable worksheet(s) was obtained
• Any taxpayer documents provided to you that you relied on to determine eligibility
for the credit(s) or HOH ling status or to compute the amount of the credit(s). Due
diligence rules do not require you to review specic client documents. However, if
any were provided to you and you relied on them, you must keep copies of them.
The records can be kept in electronic or paper format, and you must produce the records if the IRS requests them.
You should keep a backup of these records in a separate, secure location.
FORM 8867
KEEP RECORDS
Keep these records for three years from the latest of:
• The date the return is due (without extensions)
• The date the return or claim for refund was electronically led
• The date the return or claim for refund was presented to your client for signature, if
not led electronically
• The date you submitted to the signing return preparer the part of the return or claim
for which you were responsible, if you are a non-signing return preparer
A rm employing a preparer may be penalized for an employee’s failure to exercise due
diligence if any of the following apply:
•
A member of the rm’s principal management participated in or, prior to the time the
return was led, knew of the failure to comply with the due diligence requirements.
• The rm failed to establish reasonable and appropriate procedures to ensure com
-
pliance with due diligence requirements.
• The rm disregarded its reasonable and appropriate compliance procedures in the
preparation of the return or claim for refund through willfulness, recklessness, or
gross indifference. This includes ignoring facts that would lead a person of reasonable
prudence and competence to investigate further.
FIRMS EMPLOYING
PREPARERS
POTENTIAL
CONSEQUENCES
If you fail to comply with the due diligence requirements, the IRS can assess a $500 pen-
alty (adjusted annually for ination) against you and if applicable, against your employer
for each failure. The IRS can assess up to four penalties for a return or claim for refund
that claims all three credits and HOH ling status.
If the IRS examines your client’s return and it is found to be incorrect, the IRS can assess
accuracy or fraud penalties against your client. The IRS can also ban your client from
claiming the EITC, CTC/ACTC/ODC, or AOTC for 2 or 10 years if the facts and circum-
stances indicate reckless or intentional disregard of rules and regulations or fraud.
Examples: knowledge requirement
You must carefully consider and understand all relevant information for each tax benet
claimed, such as the facts about your client’s income, personal living and household
circumstances and any post-secondary education undertaken. Inquire further if any
information you obtain or know, or have reason to know, seems incorrect, inconsistent,
or incomplete, and document your additional inquiries and the client’s responses.
For each of the following examples, you must make a clear record of whether and what
supporting client documentation was provided and keep a copy of any client document
you relied on, including the identity of any person furnishing the information. Keep a
copy of the completed Form 8867.
A client wants to claim his niece and nephew
for the EITC and CTC.
This information seems incomplete because it is common
for a child to live with at least one parent. You must make
reasonable inquiries to get the facts about your client’s
living circumstances, such as nding out who the chil-
dren’s parents are and where they lived, whether anyone
else can claim the children as dependents/qualifying
children and the dates the children lived with your client.
An 18-year-old client earned $8,000 and
states she lived with her parents during part
of the year. She wants to claim her newborn
biological child for the EITC and CTC.
You must ask additional questions to determine whether
your client or her baby is the qualifying child of your
client’s parents. Be sure to review all eligibility tests and
the tie-breaker rules to determine who is eligible to claim
each credit.
EITC AND CTC
A client has two qualifying children and wants
to claim the EITC. She tells you she earned
$20,000 in income from her Schedule C busi-
ness and had no business expenses.
This information appears incomplete because it can be
unusual for someone who is self-employed to have no
business expenses. You must ask additional reasonable
questions to determine whether your client is carrying
on a business and whether the information about her
income and expenses is correct.
A 22-year-old client wants to claim two sons,
ages 10 and 11, as qualifying children for the
EITC.
This information appears inconsistent because the chil-
dren’s ages are so close to the client’s age. You must
make additional reasonable inquiries about the children’s
relationship to your client.
EITC
A client wants to claim the ODC for his three
children. The children all have ITINs and lived
part of the year outside the United States.
Because ITINs are only issued to non-citizens, you must
ask additional questions to determine whether each child
meets the tests to be a resident of the United States.
Two clients who filed jointly last year state
they still live together with their two children,
ages 10 and 11. They are no longer married
but still share a bank account. Each client
wants to file as HOH.
The information appears incomplete or inconsistent so
far because it can be unusual for divorced individuals
who continue to live together to share a bank account.
You must ask more questions to determine whether they
have a divorce decree, and if so, after the date of the
divorce, nd out the amount each client paid towards
keeping up the home.
ODC
HOH
A new client who filed jointly with her spouse
last year states she is no longer married. For
the current tax year, she wants to file as head
of household because her niece and nephew
lived with her part of the year.
The information is incomplete so far. You must inquire
further to get a clear picture of the client’s personal living
circumstances such as who the children’s parents are
and where they lived, whether anyone else can claim
the children as dependents or as qualifying persons for
HOH, the dates the children lived with your client, who
else may have lived in the same home with your client
and the amount each person paid towards keeping up
the home.
HOH (CONT.)
Avoid Common Errors
• EITC claimed for a child who is not a qualifying child. Find out whether the
child meets the relationship, age, residency and joint return tests. Consider
tie-breaker rules if a child is the qualifying child of more than one taxpayer.
•
EITC claimed for a child who does not have a valid SSN. An SSN is valid
for the EITC unless it was issued after the due date of the return (including
extensions) or it was issued solely to apply for or receive a federally funded
benet and does not authorize the holder to work.
• Claiming the EITC when married. Ask questions to nd out if your client is
married under state law, including common law. If your married client does
not le a joint return make sure your client meets the additional rules to
claim the EITC.
•
Incorrectly reporting income or expenses. Has your client provided you with
all sources and amounts of income? Be alert for questionable Forms W-2.
Ask your self-employed client enough questions to make sure they have a
true business, and if so, that they report all business income and deduct all
allowable expenses.
• CTC or ACTC claimed for a child who does not meet the age requirement.
The child must be under the applicable age limit at the end of the tax year.
There are no exceptions.
•
CTC or ACTC claimed for a child who does not have the required SSN. The
SSN must be valid for employment and issued before the due date of the
tax return (including extensions). The only exception is for a dependent child
who was born and died before the end of the year.
• ODC claimed for an individual who does not have a taxpayer identication
number (SSN, ITIN or ATIN) issued on or before the due date of the tax return
(including extensions) unless applying for an ITIN or ATIN.
•
CTC, ACTC or ODC claimed for an individual who does not meet the depen-
dency requirements. The individual must meet all the eligibility rules for a
dependent (unless the special rule for divorced or separated parents applies)
and be claimed as a dependent on your client’s return. Consider tie-breaker
rules if a dependent is the qualifying child of more than one taxpayer.
•
CTC, ACTC or ODC claimed for a non-citizen dependent who does not meet
the residency requirement. A non-citizen individual claimed must be a U.S.
national or resident.
• AOTC claimed for a student for more than four tax years.
•
AOTC claimed for attendance after the year the individual completed four years of
post-secondary education.
•
Student didn’t attend an eligible educational institution. The AOTC is for
post-secondary education, which may include a college, university or tech-
nical school. To be eligible, a school must be able to participate in the U.S.
Department of Education student aid program.
•
Student didn’t pay qualifying educational expenses. Expenses must be paid
or considered paid by your client, your client’s spouse, or a student claimed
as a dependent on the tax return. Only amounts paid for tuition, required fees
and course materials for an academic period beginning in the tax year or the
rst three months of the following tax year are qualied expenses.
•
Student was not enrolled at least half-time in a program leading to a degree or
other recognized educational credential. If the student did not attend at least
half time or was not pursuing a degree or other credential, your client cannot
claim the AOTC on behalf of the student. Consider your client’s eligibility to
claim the lifetime learning credit rather than the AOTC.
• HOH claimed for a client who did not pay more than half the cost of keeping
up a home. Did charities, the government, or others contribute to the cost
of keeping up the home? Only an individual who paid over half the upkeep
costs can claim HOH ling status.
•
HOH claimed when your client’s correct ling status is married ling jointly
or separately. Your married client must meet specic eligibility rules to be
considered unmarried for HOH ling status.
• HOH claimed when a qualifying person did not live in your client’s home for
more than half the tax year. Note: There are specic rules for a dependent
parent living in a separate home.
Preparer continuing
education
Client interview tools
and tips
Answers to frequently
asked questions
Due diligence video
scenarios
Best practices for
challenging situations
News and Updates for
Paid Preparers
Form 8867 guidance
Educational letters,
phone calls and
compliance visits
Eligibility rules for
due diligence tax credits
The online Tax Return Preparer Toolkit at EITC.IRS.gov is your resource for information on meeting the
paid preparer due diligence requirements for the EITC, CTC/ACTC/ODC, AOTC, and HOH filing status.
Publication 4687 (Rev. 9-2022) Catalog Number 51636Y Department of the Treasury Internal Revenue Service www.irs.gov
